One of the most substantial securities litigation phenomena so far in 2021 has been the rising tide of securities litigation relating to SPACs and SPAC-acquired companies. In the latest example of this type of lawsuit, a plaintiff shareholder has filed a securities class action complaint against Owlet, Inc., a company that sells baby health products and that was in July 2021 merged with a SPAC. The defendants named in the lawsuit include not only officers of Owlet itself but also include certain former directors and officers of the SPAC. A copy of the November 17, 2021 complaint against Owlet can be found here.

 

Background

Owlet Baby Care, Inc. previously was privately held company designing and selling baby healthcare and wellness products. Sandbridge Acquisition Corporation previously was a special purpose acquisition company (SPAC). Sandbridge completed an IPO on September 14, 2020. On February 21, 2021, the two companies announced their plans to merge, with the Owlet, Inc. to be the surviving company. The companies completed their business combination on July 15, 2021.

 

Owlet’s flagship product is a baby monitor called Smart Sock. The monitor allows parents to track an infant’s oxygen levels and other health indicators. On October 4, 2021, Owlet announced that it had received a letter from the FDA stating that “the Company’s marketing of its Owlet Smart Sock product … renders it a medical device requiring premarket clearance or approval from the FDA.” Owlet had not obtained the FDA’s approval. The FDA’s letter “requests the Company cease commercial distribution of the Smart Sock for uses in measuring blood oxygen saturation and pulse rate where such metrics are intended to identify or diagnose desaturation and bradycardia using an alarm functionality to notify users that measurements are outside of preset values.”

 

According to the subsequently filed securities class action complaint, Owlet’s share price declined 235 on this news, to close at $4.19 on October 4, 2021.

 

The Complaint

On November 17, 2021, a plaintiff shareholder filed a securities class action lawsuit complaint in the Central District of California against Owlet. The defendants named in the complaint included not only the company itself, but also included its CEO and CFO; the former Chairman and CEO of Sandbridge; and five other individual former directors of Sandbridge.

 

The complaint purports to be brought on behalf of two classes: investors who purchased the company’s securities between March 31, 2021 (the date the company issued its S-1 in connection with the business combination) and October 4, 2021 (the date the company disclosed its receipt of the FDA letter); and investors who held Sandbridge common as of June 1, 2021 and were eligible to vote at Sandbridge’s special meeting on July 14, 2021.

 

The complaint alleges that the defendants failed to disclose to investors: “(1) that Owlet was reasonably likely to be required to obtain marketing authorization for the Smart Sock because the FDA concluded ti was a medical device; (2) that, as a result, Owlet was reasonably likely to cease commercial distribution of the Smart Sock in the U.S. until it obtained the requisite approval; and (3) that, 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 seeks to recover damages on behalf of the two plaintiff classes.

 

Discussion

By my count, this new lawsuit is the 26^th SPAC-related securities class action lawsuit to be filed so far in 2021, representing about 15% of the securities class action lawsuit filed so far this year. Like many (but not all) of the SPAC-related lawsuits, the defendants named in the complaint include not only directors and officers of the post-transaction operating company, but also include former directors and officers of the pre-transaction SPAC itself. Unlike some other SPAC-related suits that have been filed, the complaint in this lawsuit does not name the SPAC’s sponsor as a defendant.

 

One interesting twist in this lawsuit is the fact that the complaint purports to be filed on behalf of two classes of investors; the more typical class identified in the complaint is the group of investors who purchased Owlet stock (or the stock of the SPAC) between the date of the company filed the S-1 and the date of the news about the FDA’s letter. The somewhat unusual class identified in the complaint is the group of SPAC investors who were eligible to vote in the special meeting at which the business combination was approved.

 

With respect to this second group, the complaint notes, concerning the stock price drop that followed the FDA news, that as a result of the stock price drop “Sandbridge investors who could have voted against the Business Combination and redeemed their shares at $10.00 per share suffered a loss of $5.81.”

 

One observation about this complaint is that the lawsuit involves a SPAC that completed its IPO in September 2020, during the period when the SPAC frenzy was really starting to take off. Most of the prior SPAC-related litigation has involved SPACs that completed their IPOs prior to the crescendo of the SPAC wave. As time goes by, new litigation is likelier to involve the SPACs that completed their IPOs later, and into the period of the huge SPAC wave. As we get into this period, when there was such a significant volume of SPAC IPOs, it seems likelier that we will see a correspondingly large number of SPAC-related lawsuits. The likelihood is that this litigation will at least carry well into next year, and likely beyond. We are going to be seeing a lot of SPAC-related litigation, for a long time.