In the latest SPAC-related securities class action lawsuit filing, a plaintiff shareholder has initiated a securities suit against Skillz, Inc., an online gaming platform that in December 2020 merged with Flying Eagle Acquisition Corp. (FEAC), a publicly traded special purpose acquisition company (SPAC). The share price of the post-merger publicly traded company declined after short sellers issued reports questioning the company’s revenue recognition practices and other financial details. The lawsuit followed after the share price decline. The individual defendants named in the securities complaint include the former President of FEAC, who became a director of Skillz following the merger. A copy of the plaintiff’s May 7, 2021 complaint can be found here.



FEAC, which was was formed in January 2020, completed its IPO in March 2020. In September 2020, FEAC announced its plans to merge with Skillz, an online gaming platform. The merger transaction was completed in December 2020 in a transaction that valued Skillz at $3.5 billion. In the subsequent securities class action complaint, the plaintiff alleged that the transaction overvalued Skillz because its reported revenue, the complaint alleges, was overstated as bonus incentive payments Skillz pays to users are “recycled” back to Skills in user fees, creating a cyclical flow of funds.


On March 8, 2021, Skillz was the target of a critical research report issued by Wolfpack Research that among other things said that the company’s revenue and user projections at the time of the merger were overstated because revenues from game developers and gaming downloads had declined prior to the transaction. According to the subsequent securities complaint, the company’s share price declined over 10 percent on this news.


Then on April 19, 2021, Eagle Eye Research published an anonymous report on Twitter raising questions about the bonus payments made to users, and the company’s revenue recognition practices, including a question whether the company was recognizing non-cash amounts as revenue. The report suggested that Skillz was effectively giving its users money to spend on the Skillz platform. The securities complaint alleged that the company’s share price declined over 6 percent on this news.


Finally, on May 5, 2021, the company issued its first quarter earnings statement, reflecting a $53 million loss. Among other things, the statement showed that the company’s payments to users had substantially increased. The company’s share price declined more than eight percent on this news.


The Lawsuit

On May 7, 2021, a plaintiff shareholder filed a securities class action lawsuit against Skillz; four of its directors and officers; as well as against Harry Sloan, who had been the President of FEAC prior to the merger, and who became a director of Skillz at the time of the merger. The complaint purports to be filed on behalf of a class of investors who purchased securities of Skillz between December 16, 2020 (the date the merger was completed) and April 19, 2021 (the date of the Eagle Eye Research Report). The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of the class.


The complaint quotes extensively from the Wolfpack Research and Eagle Eye Resources reports. Among other things, the complaint alleges that the company “failed to inform investors that downloads of the games that account for a majority share of its revenue have been declining since at least November 2020.” The complaint further alleges with respect to the company’s projections that the “prospects for attaining that revenue scale was far from realistic given its size, market share, reliance on third party app stores, declining downloads of its most popular games and, critically, the enormous amount of incentive Bonus Payments that Skillz routinely provides to its gamer customers, a fact that investors were misled about. These Bonus Payments are routinely provided to its customers, who are expected to use them for game entry fees, which, in turn, artificially inflates Skillz revenue.”



By my count, the new lawsuit filed against Skillz is the 11th SPAC-related securities lawsuit filed so far in 2021.


This latest lawsuit has several features in common with many of the prior lawsuits. As is the case with many of these lawsuits, the lawsuit was filed against the post de-SPAC merger transaction company, and like many of the prior lawsuits, this lawsuit involves allegations relating to the merger target operating company’s projections. And as has been the case with many of these lawsuits, the individuals named as defendants in this lawsuit include a former director or officer of the SPAC into which the target company merged. And finally, this lawsuit, like many of the prior SPAC-related securities suits, follows after the company was the subject of a critical short-seller report.


However, there are some important ways in which this lawsuit differs from the prior suits. Thus, for example, though the complaint quotes from pre-merger filings and documents, the start date of the class period is December 16, 2020, the date the merger was consummated. In other words, the plaintiff in this case is not seeking to recover on behalf of purchasers of the securities of the pre-merger SPAC; rather, the only claimants are purchasers of the post-merger publicly traded company.


For those readers who chart these things according to the way the allegations might line up with the typical insurance program, the allegations in this complaint would not seem to trigger the SPAC’s run-off D&O insurance program, and would not seem to trigger the target company’s pre-merger policy that was put into run-off at the time of the merger. The allegations would seem to only trigger the post-merger go-forward company’s public company D&O insurance policy (although given the allegations in the complaint relating to pre-merger disclosures, the run-off policies may not in the end prove to be entirely clear of this claim).


As has been the case with several of the 2021 SPAC-related securities suits, the merger transaction in which Skillz became a public company took place in late 2020, yet the company is already the target of securities litigation. If nothing else, the sequence of events involved in this lawsuit underscores the fact that recent SPAC merger companies are attracting critical attention and scrutiny from the short seller community, which in turn contributes the volatility surrounding these companies. As more of the SPACs from the SPAC IPO classes of 2020 and 2021 complete their intended mergers, the scrutiny is only likely to increase.