One of the most distinct securities litigation phenomena so far this year has been the increase in securities litigation involving post-SPAC-merger operating companies. In the latest example of this type of litigation, a plaintiff shareholder has filed a securities class action lawsuit against used vehicle consignment re-seller CarLotz, which became a public company through a January 2021 merger with a Special Purpose Acquisition Company (SPAC). As discussed below, CarLotz’s first financial reports as a public company disappointed investors and litigation has now ensued. A copy of the July 8, 2021 complaint against the company can be found here.
Acmar Partners Acquisition Corp. completed an IPO on February 21, 2019. On January 21, 2021, Acmar completed a merger with CarLotz, Inc. CarLotz is a consignment-to-retail used vehicle marketplace for corporate vehicle sourcing partners and retail sellers to sell vehicles. CarLotz was the surviving entity in the merger, and as a result of the merger CarLotz became a publicly traded company. The merger transaction and the plans for the go-forward company were described in a December 30, 2020 prospectus that was provided to Acmar investors prior to the shareholder vote on the merger.
On March 15, 2021, CarLotz announced its fourth quarter and full year 2020 financial results. Among other things, the company announced that its gross profit and gross profit per unit were “softer than expected” due to a “surge in inventory” that “created a logjam that resulted in slower processing and higher days to sell.” According to the subsequently filed securities class action complaint, the company’s share price declined over 15% percent over subsequent trading days.
On May 10, 2021, Car Lotz announced its first quarter financial results, reporting that gross profit per unit had fallen below expectations. On this news, the company’s share price declined a further 14%, with additional declines in subsequent trading days.
On May 26, 2021, CarLotz announced an update to its profit-sharing partner arrangement. The partner, which accounted for more than 60% of cars sold and sourced during the first quarter but only 50% of cars sold in the second quarter, had, in light of current wholesale market conditions, “paused consignments to the Company.” The company’s share price fell an additional 13.4% on the news.
On July 8, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against CarLotz, its CEO, and its CFO. The complaint purports to be filed on behalf of a class of investors who purchased securities CarLotz (or its predecessor in interest, Acmar) between December 30, 2020 (the date of the prospectus) and May 25, 2021 (the date CarLotz announced that its profit-sharing partner was pausing consignments).
The complaint alleges that during the class period the defendants made false and misleading statements or failed to disclose: “(1) that due to a surge in inventory during the second half of fiscal 2020, CarLotz was experiencing a ‘logjam’ resulting in slower processing and higher days to sell; (2) that, as a result the Company’s gross profit per unit would be negatively impacted; (3) that, to minimize returns to the corporate vehicle sourcing partner responsible for more than 60% of CarLotz’s inventory, the company was offering aggressive pricing; (4) that as a result, CarLotz’s gross profit per unit forecast was likely inflated; (5) that this Company’s corporate vehicle sourcing partner would likely pause consignments to the Company due to market conditions, including increasing wholesale prices; and (6) as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The complaint alleges 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 to recover damages on behalf of the plaintiff class.
By my count, the new lawsuit against CarLotz is the 16th SPAC-related securities class action lawsuit to be filed so far in 2021. Unlike many of the prior SPAC-related securities lawsuits, the suit against CarLotz does not follow the publication of a short-seller report. However, like several of the prior SPAC-related lawsuits, the suit against CarLotz arose after the company’s first financial reports as a publicly traded company disappointed investor. The prior SPAC-related lawsuits filed against Romeo Power (discussed here) and Canoo (discussed here) are other examples where the suits followed after the defendant companies released their initial financial reports as publicly traded entities.
Unlike many of the prior SPAC-related lawsuits, the individuals named as defendants in this lawsuit do not include former officers of the SPAC – by contrast to a number of the other prior lawsuits, in which former officers of the SPAC are named as defendants.
Indeed, though the class period in the complaint straddles the merger transaction date, including alleged wrongful acts both before and after the deal completion date, the complaint says relatively little about the SPAC itself. To be sure, the complaint does quote extensively from the pre-merger prospectus document, but the complaint itself makes few references to the SPAC.
The filing of the lawsuit against this company in the first few months of its life as a publicly traded company and after the company disappointed investors in its first public company financial reports underscores the extent to which the securities litigation risk of post-SPAC-merger companies in many way resembles the securities litigation risk of IPO companies.
In both cases, the companies short track record as a public company makes them vulnerable to the kinds of early slips that can attract the unwanted attention of plaintiffs’ attorneys. Sometimes these problems, both for IPOs and de-SPAC companies, reflect the fact that the companies are not in every instance ready for the scrutiny, burdens, and responsibilities that come with becoming a public company.
In that regard, one concern I have about the SPAC-merger target companies is that they may not always go through some of the steps that IPO companies typically do in order to become a public company. I have been assured by attorneys and others involved in de-SPAC transactions that the process for the target company is similar to what a prospective IPO company does in its pre-IPO phase. That may be so, and it may be the case that this circumstances of this lawsuit have to do more with the changing conditions in the wholesale used car marketplace than with anything CarLotz did or didn’t do, but I still have concerns in general that the SPAC target companies are not always prepped sufficiently for life as a public company.
One other concern I have about the current financial marketplace for SPAC mergers is that there are so many SPACs out there looking for merger partners. As a result of the flood of SPAC IPOs in the second half of 2020 and the first four months of 2021, there are literally hundreds of SPACs out there searching for a suitable target. The best prospective targets will of course be acquired first. Later acquired companies may have shorter operating histories, or unproven products or technologies, or other factors that could increase the likelihood that the company might stumble in its early days as a public company.
All of these considerations make me think that we are likely to see more securities class action lawsuits involving post-SPAC-merger transaction companies in the weeks and months ahead. If, as I noted at the outset, the onset of this kind of litigation is already an established phenomenon this year, it is likely to become an even more significant phenomenon as the year progresses.