It took seven months after online ticketing firm Eventbrite went public before shareholders filed a class-action lawsuit against the company. For Lyft, the lawsuits came just 17 days after its IPO.
They aren't the only companies clashing with investors after their initial public offerings--Facebook, Twitter, Blue Apron, and Snap each were hit with shareholder lawsuits shortly after they went public too. According to litigation research firm ISS Securities Class Action Services, the number of IPO-related lawsuits have doubled since 2013, and data shows most of them are directed at high-priced tech company IPOs. With the spate of unicorn startups going public in 2019-- including Airbnb, Slack, and WeWork--experts are forecasting a surge in IPO litigation, and some worry it may deter companies from ringing the bell in the first place.
"IPOs by their nature tend to be more volatile than other types of stock, so it's a natural phenomenon that we would have suits against IPOs," says Priya Cherian Huskins, senior vice president at insurance brokerage firm Woodruff Sawyer. Under the Securities Act, shareholders can sue a company when a stock falls below its offering price (these are known as stock-drop lawsuits). "Right now, in addition, we are in a high valuation environment, which means more money is lost if an IPO stumbles," she adds, noting that larger losses generally lead to bigger settlements, an encouraging point for plaintiffs.
"I am seeing that companies are starting to question whether or not it makes sense to go public," she says.
It's an especially timely question for unprofitable startups to consider.
"Although IPO companies have always been a target of shareholder litigation, many of the companies that are going public now have characteristics that make them particularly vulnerable," says Kevin LaCroix, attorney and executive vice president at insurance brokerage RT ProExec. "For example, companies that are highly unprofitable and companies that have very high valuations."
Last year, 81 percent of the companies who had an IPO were unprofitable, up from 64 percent in 2013, according to historical data compiled by Jay Ritter, IPO scholar and professor at the University of Florida. The last time Wall Street saw ratios this high was in the year 2000.
Here come the lawsuits.
The lawsuits filed against Eventbrite and Lyft allege the San Francisco-based businesses made material omissions in documents related to their initial public offerings. Both companies declined to comment for this story.
In the case of Eventbrite, which debuted on the New York Stock Exchange in September 2018 at a $1.76 billion valuation, a purported shareholder named Michael Gomes claims the company failed to disclose material facts about issues concerning Ticketfly, which it acquired in 2017. During the company's fourth quarter earnings call in March 2019, Eventbrite's co-founder and CEO Julia Hartz revealed the integration between the two platforms was taking longer than anticipated and provided weaker than expected guidance for the following quarter. Shares started dropping immediately after the announcement and are now trading below $16, down nearly 31 percent from its $23 IPO price.
Eventbrite is part of the 81 percent of unprofitable companies that had an IPO in 2018, reporting a $38.5 million loss for 2017 in its SEC filings. Lyft also reported a $911 million loss the year before its IPO.
The ride-hailing company has already been named in at least four separate class-action lawsuits--three in state court and one in federal court. Plaintiffs claim the company, which started trading on the Nasdaq March 29, omitted material information about the safety of its e-bikes and misstated the size of its market share in the U.S. Lyft recalled 1,000 e-bikes two weeks after its IPO, around the same time a Guggenheim report said its market share could be smaller than advertised given Uber's disclosures. Its stock has tumbled to $55 per share as of press time, down 23 percent from its $72 IPO price.
The rise in IPO litigation coincides with another trend: Over the past two decades, researchers have found that startups looking to go public increasingly are bulking up their SEC filings in an attempt to ward off lawsuits.
"The very important thing that companies can do is ensure that they have robust disclosures, including their business [risk] factors, in their prospectus," says Huskins from Woodruff Sawyer, noting that disclosing risk factors help companies from a liability perspective. "It just makes good common sense."
That helps explain why the risk factors section for S-1 filings have grown larger in the last 20 years. Eventbrite devoted 34 pages of its prospectus to risk factors, while Lyft had 41 pages. For comparison, Facebook's risk factor section was 22 pages when it went public in May 2012; Amazon's was only eight pages in 1997. The language has changed in tone, too.
"The trend in IPO language since 1997 is for the S-1 to contain more negative and uncertain words," says Tim Loughran, finance professor at the University of Notre Dame. He has been conducting textual analysis on SEC filings since 2011. "Painting a pessimistic picture of what could happen in the future can only help in the event of a lawsuit," he adds.
To further complicate matters, a recent Supreme Court ruling may contribute to higher litigation rates, Huskins says. Today, shareholders can file securities lawsuits under the Securities Act of 1933 and the Securities Exchange Act of 1934. The latter contains a provision stating claims must be filed in a federal court, but that provision doesn't exist in the former, which governs how companies issue securities. Last year, the Supreme Court ruled that state courts have jurisdiction for '33 Act claims, which means plaintiffs can bring federal claims related to a company's IPO to state courts.
"Now courts in all 50 states are open for business of litigation," says Huskins, noting that state courts' dismissal rates are lower than those of the federal court. "If you're going public, now the potential cost is much higher because you can be sued in state court."