In recent months, IPO activity has reached levels “not seen since the dot-com era,” according to a recent report on the IPO market. On November 3, 2020, the IPO Tracker reported that October was the busiest month for IPOs in 20 years. As discussed below, all this IPO activity may foretell the possibility of increased IPO-related securities litigation ahead.
According to the IPO Tracker, there were 85 IPOs completed in October 2020, which is “the busiest single month for IPOs in 20 years” – surpassing even September 2020’s totals, which had been the busiest month in that period. The October surge brings the 2020 YTD total through year’s first ten months to 351 completed offerings, which surpasses “every yearly total since 2000.”
One factor driving this rise in IPO activity is the surge during 2020 in the number of offerings involving Special Purpose Acquisition Companies (SPACs), or as they are sometimes called, blank check companies (about which refer here). Blank Check companies are tracked under SEC Standard Industrial Classification (SIC) Code 6770. 169 of the 351 IPOs in the year’s first ten months have been in SIC Code 6770, representing nearly half (48%) of all 2020 IPOs through the end of October. The 2020 YTD total of SIC Code 6770 IPOs is nearly triple the total of 59 deals in that category during the full calendar year of 2019.
This level of IPO activity is extraordinary, given that we are both in the middle of a recession and in the middle of the most significant public health crisis in more than a century. There is always the concern when IPO activity reaches elevated levels that the IPO market has become frothy – and that concern may be particularly apt with respect to the recent flood of SPAC offerings. Indeed, the business press is full of stories actively questioning whether there is a “bubble” in the market for SPACs.
The increased level of IPO activity may also presage increased levels of IPO securities litigation activity in 2021 and beyond. As Cornerstone Research noted in its 2019 report on securities class action litigation (here), “heavier IPO activity appears to be correlated with increased levels of federal Section 11 and state 1933 Act filings in the ensuing years.” (Indeed, in the same report, Cornerstone Research suggested that there could be increased levels of Section 11 litigation in 2020 due to the deferred effects of increased IPO activity in 2017, 2018, and 2019, as well as to the plaintiffs’ lawyers increased willingness to test state venues to bring 1933 Act liability actions.)
The Cornerstone Research report shows that during the period 2009 to 2018, the likelihood of an IPO company facing a traditional securities class action lawsuit post-offering increased relative to earlier periods. (The term “traditional” here is used to distinguish away merger objection lawsuits). Thus, for the period 2009-2018, the chance of a IPO company getting hit with a traditional securities suit during the first three years following the offering date was more than 15% (that is, more than 15% of IPOs during that period were hit with a traditional securities suit within three years of the offering), whereas in the period 2001 to 2008, the chances were just above 10%, and in the period 1996-200 were very slightly below 10%. As the Cornerstone Research report puts it, “IPOs from 2009 through 2018 have been subject to litigation at a steadily higher rate than early cohorts in the years after the IPO.”
Just to illustrate what these figures might mean, a 15% litigation rate suggests that about 52 of the 351 companies that completed IPOs in the first ten months of 2020 will get hit with a traditional securities suit in the three years following their offering date.
Setting aside the precise metrics, it just stands to reason that more IPOs means more IPO litigation. It is commonly understood fact that recent IPO companies face a higher risk of securities class action activity than do more mature companies. This increased litigation rate is due to the IPO companies shorter operating history and the fact than many IPO companies are more entrepreneurial ventures subject to greater business risk. Liability actions under the ’33 Act also face a lower standard of liability than do ’34 Act lawsuits, making ’33 Act lawsuits more attractive to plaintiffs’ lawyers, all other things being equal.
In addition, as I noted in a recent post, we may already been seeing increased litigation activity related to SPACs.
All of this suggests to me that we can expect to see more IPO related litigation in 2021 and beyond, which in turn could have implications for the overall level of securities litigation activity next year.