In the latest example of a company that went public through a recent merger with a SPAC getting hit with a securities class action lawsuit, a plaintiff shareholder has filed a securities suit against plastics recycler PureCycle Technologies, certain of its executives, and the former chairman of the company’s SPAC merger partner. Like many of the recent SPAC-related securities lawsuit filings, this new lawsuit followed shortly after the publication of a highly critical short-sellers report. A copy of the plaintiff’s complaint can be found here.
Roth CH Acquisition I Co. (ROCH) was incorporated on February 13, 2019. ROCH completed a $75 million IPO on May 4, 2020. On November 16, 2020, ROCH and PureCycle Technologies, a plastic waste feedstock recycler, announced their plans to merge, with PureCycle to be the surviving company. The merger was completed on March 18, 2021.
The subsequently filed securities lawsuit complaint alleges that in connection with the planned merger, PureCycle released revenue models that projected rapidly escalating revenues, with projected 2024 revenues of over $800 million.
On May 6, 2021, Hindenburg Research published a report about PureCycle entitled “PureCycle: The Latest Zero-Revenue ESG SPAC Charade, Sponsored by the Worst of Wall Street” (here). Among other things, the Hindenburg Research report raised questions about the prior public company experience of PureCycle executives; questioned PureCycle’s financial projections; highlighted the significant financial motivations of PureCycle executives to take the company public; highlighted the steep competition PureCycle was likely to face for adequate quantities of feedstock; and raised questions about the safety and scalability of PureCycle’s recycling process.
The Hindenberg Research report concludes by saying that “PureCycle represents the worst qualities of the SPAC boom; another quintessential example of how executives and SPAC sponsors enrich themselves while hoisting unproven technology and ridiculous financial projections onto the public markets, leaving retail investors to face the ultimate consequences.”
PureCycle issued a May 6, 2021 press release in response to the report which it questioned the financial motivations of the report’s authors and reiterated its commitment to its technology, its work force, and its strategy.
According to the subsequently filed securities lawsuit complaint, the price of PureCycle’s shares fell over 40% on the publication of the report.
On May 11, 2021 a plaintiff shareholder filed a securities class action lawsuit in the Middle District of Florida against Pure Cycle; certain of its officers and directors; and Byron Roth, the pre-merger Chairman and CEO of ROCH. The complaint purports to be filed on behalf of a class of investors who purchased securities of PureCycle (or of its predecessor in interest, ROCH) between November 16, 2020 (the date the merger was announced) and May 5, 2021 (the date before the publication of the Hindenburg Report), as well as of all holders of ROCH securities entitled to participate in the March 16, 2021 shareholder vote.
(A separate, second securities class action complaint was also filed against PureCycle in the Middle District of Florida on May 11, 2021, here.)
The complaint quotes extensively from the Hindenburg Research report, and alleges that during the class period the defendants made false and misleading statements or failed to disclose:
- that the management team bringing PureCycle public had previously brought six other failed business [sic] public only to have each implode thereafter;
- that the management team bringing PureCycle public had characterized rank speculation as financial projections to investors in the past;
- that the primary motivation of the management team bringing PureCycle public was to complete any transaction, good or bad, in order to obtain tens of millions of dollars in cash and tradable shares;
- that Pure Cycle faces competition for high quality feedstock than it has led investors to believe, materially undermining the management team’s financial projections;
- that PureCycle’s patent is nowhere as cogent or valuable as it has led investors to believe, and the technology underlying its business operations is unproven and presents serious issues even at lab scale;
- that, in reality, the Company’s flammable pressurized process is not yet functional, especially at scale, and is dangerous;
- that the Company purports to be advancing to commercial production scale despite still having operational issues at a lab scale; and
- that as a result of the foregoing, Defendants’ positive statements during the Class Period about the Company’s business performance, financial and operational metrics, and financial prospects were false and misleading and/or lacked a reasonable basis.
The plaintiff contends that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks damages on behalf of the class.
By my count, this latest lawsuit is the 12th SPAC-related securities lawsuit to be filed so far in 2021. Like many of the prior SPAC-related lawsuits, this new lawsuit names as defendants not only the post-merger operating company and certain of its executives, but it also includes as a defendant a former director and officer of the pre-merger SPAC. The complaint also quotes extensively from the pre-merger filings and other merger-related documents. In addition, like many of the prior SPAC-related securities suits, the lawsuit arises out of a SPAC’s merger with a private company with little or no revenue seeking to develop a new and undeveloped technology.
There is another important feature of this lawsuit that is similar to many of the prior SPAC-related suits – that is, the lawsuit was filed after the defendant company’s share price declined following a short-seller’s publication of a critical research report.
Of the 12 SPAC-related securities lawsuits filed in 2021, seven have been filed following publication of a short seller’s report. Indeed, including this latest lawsuit against PureCycle, three of the 2021 SPAC-related lawsuits have been filed following the publication of a report by Hindenburg Research. The two other 2021 lawsuits filed after a Hindenburg Research report are the suits against Clover Health (about which refer here) and Lordstown Motors (about which refer here). The SPAC-related lawsuit filed last September against Nikola Motors (refer here) also followed shortly after the publication of a Hindenburg Research report.
At a minimum, it is clear that the short sellers are watching the SPAC merger transactions closely, and are primed to try to attack low revenue companies with high hopes in unproven technologies.
Public companies complaining about short seller attacks is a long-standing tradition in the financial markets, but the reality is that short seller attention is part of the scrutiny that goes with being a public company. The current SPAC boom is a live, real-world experiment being conducted based on the premise that there are legions of private companies that are ready for the burdens, scrutiny, and responsibilities that go with a public listing. It is increasingly clear that one of the tests these newly public companies can expect is short seller scrutiny. The scrutiny is and will continue to be harsh. Some companies will withstand this scrutiny better than others.
For D&O underwriters thinking about the risks associated with SPAC merger transactions and the resulting post-merger company, the risk that the post-merger operating company could be subject to short seller scrutiny, and that a short seller attack could lead to a securities class action lawsuit, is part of the liability exposure that must be considered in the overall assessment of the post-merger company and its exposure profile. Yet another piece of an already challenging puzzle.