In the latest SPAC-related securities class action lawsuit filing, a plaintiff shareholder has filed a class action lawsuit against Katapult Holdings, an ecommerce firm providing online financing and product purchase options for non-prime consumers. The defendants named in the complaint include two former officers of the SPAC with which Katapult merged in June 2021. A copy of the August 27, 2021 complaint can be found here.
FinServ Acquisition Corp., a special purpose acquisition company (SPAC), completed an IPO on October 31, 2019. On December 18, 2020, FinServ announced its plan to merge with Katapult. The merger was completed on June 9, 2021.
On August 10, 2021, Katapult issued a press release announcing its financial results for the second quarter of 2021. The results were, according to the subsequent complaint, “disappointing.” Among other things the company announced a net loss of $8.1 million, compared to net income of $5.1 million for the second quarter of 2020. The press release also stated that the company had “observed meaningful changes in both e-commerce and retail sales forecasts and consumer spending behavior” and retracted its full year 2021 guidance, stating that it could not “accurately predict our consumer’s buying behaviors for the remainder of the year.”
According to the subsequently filed securities class action lawsuit complaint, the company’s share price declined over 56% on the news.
On August 27, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Katapult; against the CEO and the CFO of Katapult, who both held the same respective positions for the pre-merger operating company; and against the former CEO and the former CFO of FinServ. The former CEO of the SPAC is also a director of the post-merger company.
The complaint purports to be filed on behalf of a class of persons who purchase the securities of Katapult or of the pre-merger SPAC between December 18, 2020 (the date the planned merger was announced) and August 10, 2021 (the date Katapult announced its disappointing financial results).
The complaint alleges that the defendants failed to disclose to investors: “(1) that Katapult was experiencing declining e-commerce retail sales and consumer spending, (2) that despite Katapult’s asserts that it was clear and compelling value proposition to both consumers and merchants, transforming the way nonprime consumers shop for essential goods and enabling merchant access to this underserved segment, Katapult lacked visibility into its consumers’ future buying behavior; and (3) that as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially false and 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 seeks to recover damages on behalf of the class.
By my count, this new lawsuit is the 21st SPAC-related securities class action lawsuit to be filed so far in 2021. Unlike many of the SPAC-related lawsuits, it does not involve a company in the electric vehicle industry and it does not involve a company that was the subject of a short-seller attack. However, like many of the other SPAC-related lawsuits filed this year, this lawsuit does involve a company that stumbled right out of the gate. Like many of the prior lawsuits, this lawsuit involves a company that announced disappointing financial results in its first financial reports after becoming a public company through a merger with a SPAC. The SPAC-related securities suit filed earlier this month against View, Inc. (discussed here) also involved a company that announced disappointing results in its first financial report as a public company.
Also is the case in many of the other SPAC-related securities suits filed this year, the complaint in this lawsuit names as defendants certain former officers of the SPAC. The former CEO of the SPAC is apparently named as a defendant in two capacities; one as a former officer of the SPAC, and the other as a director of the go-forward company. These types of dual capacity allegations can present challenging D&O insurance issues, each of the capacities in which the individual is named as a defendant triggers a different insurance program (here, the runoff program for the SPAC and the current insurance program for the go-forward company), and potentially sets up complicated allocation issues.
There of course have been many lawsuits filed against traditional IPO companies after the newly public companies stumble out of the gate. However, the number of lawsuits involving companies that stumble immediately after a SPAC merger raise at least two questions: first, about the readiness of the acquired company for the burdens and scrutiny of being a public company; and second, about the due diligence of the SPAC in agreeing to merge with the target company. All of these kinds of questions are relevant not only in connection with the SPAC-related lawsuits that have been filed, they are also relevant in connection with the search process in which over 400 SPACs who completed their IPOs in 2020 and 2021 are seeking to identify merger partners. Due diligence and public company readiness are going to be indispensable considerations for these SPACs as the move toward their intended business combinations.