On September 30, 2022, Judge Paul A. Engelmayer of the United
States District Court for the Southern District of New York
dismissed with prejudice a putative class action asserting claims
under the Securities Act of 1933 against an e-cigarette
manufacturer, certain of its officers and directors, and the
underwriters of the company's initial public offering in the
United States. Garnett v. RLX Tech., Inc., No. 21-cv-5125,
2022 WL 4632323 (S.D.N.Y. Sept. 30, 2022). Plaintiffs alleged that
the China-based company failed to disclose the likelihood of
increased e-cigarette regulations in China that would harm the
company's financial prospects. The Court held that plaintiffs
failed to adequately allege any actionable misrepresentation.
The Court first explained that the disclosures in the offering
documents, "taken together and in context," did not
misrepresent any facts relating to the likelihood of increased
regulation. Id. at *18. The Court emphasized that the
offering materials contained extensive disclosures regarding
existing regulations in China relating to e-cigarettes, the
prospect that additional regulatory measures could be adopted
— including potentially a total prohibition on e-cigarettes
— and the risks to investors from such measures. Id.
at *19. The Court rejected plaintiffs' argument that the
company should have disclosed that it was "inevitable"
that authorities in China would subject e-cigarettes to regulatory
scrutiny similar to traditional tobacco products, as regulators
ultimately proposed two months after the IPO. To the contrary, the
Court determined that plaintiffs' allegations were conclusory
and that prior to the IPO Chinese regulators had indicated
uncertainty as to future regulations. Id.
The Court further held that the challenged statements were not
actionable because the information allegedly omitted was
"already in the mix of public information" at the time of
the IPO and the company's cautionary statements were protected
under the "bespeaks caution" doctrine. Id. at
*22. While the Court emphasized that "[c]ontext matters"
in evaluating whether publicly available information might
nevertheless need to be disclosed, the Court rejected
plaintiffs' argument that regulatory efforts in China were
inherently difficult for investors in the United States to uncover.
The Court observed that English-language articles in the New York
Times and Wall Street Journal prior to the IPO had "revealed,
to varying degrees, the state of e-cigarette regulations in
China" and "put a member of the public with an interest
in investing in [the company] on clear notice that tightened
regulations were under active consideration and worth investigating
before investing." Id. at *23. Moreover, the Court
concluded that the IPO offering materials "repeatedly warn[ed]
of the specific contingency that lies at the heart of the alleged
misrepresentation" — the likelihood of future regulation
of e-cigarettes in China — and therefore the challenged
forward-looking statements were protected under the "bespeaks
caution" doctrine even if, as plaintiffs asserted, they lacked
certain details. Id. at *24.
The Court separately rejected plaintiffs' allegations that the
company presented financial information that was
"inaccurate" and "not indicative of [the
company's] future financial performance" because it did
not capture the financial impact of regulations that Chinese
regulators were "actively preparing" at the time of the
IPO. Id. at *24. The Court concluded that these
financial-related allegations were "derivative" of
plaintiffs' primary argument that the regulations ultimately
adopted were a "foregone conclusion" and failed for the
same reason. Id. at *25. The Court further noted that a
company's "presenting an unduly optimistic view of its
financial outlook" is typically mere puffery and not
actionable, and the Court emphasized that the IPO offering
documents here did not contain any actionable misstatement or
omission, particularly in light of their extensive risk
disclosures. Id.
The Court similarly rejected as "redundant"
plaintiffs' argument that the company had an independent duty
to disclose material information under Item 105 of SEC Regulation
S-K and a duty to disclose known trends and uncertainties under
Item 5(D) of Form 20-F. The Court explained that Item 105 and Item
5(D) "required nothing further" than the risk disclosures
contained in the company's offering materials. Id. at
*26.
Finally, the Court evaluated "[i]n the interest of
completeness" defendants' arguments regarding
plaintiffs' standing to bring a claim under Section 12(a)(2) of
the Securities Act. The Court concluded that plaintiffs lacked
standing to do so because their certifications showed that none of
them purchased their shares at the IPO price and two had purchased
after the IPO, and therefore they did not buy their shares directly
in the IPO. Id. at *28. However, the Court rejected the
argument that certain defendants — the company's
designated U.S. representative and its employee — were not
"statutory sellers" for purposes of Section 12; rather,
the Court determined that there were sufficient allegations at the
pleading stage that they solicited the purchase of securities in
the IPO and did not "merely sign a registration
statement." Id.
The Court dismissed the action with prejudice because plaintiffs
had already amended their complaint twice, plaintiffs had not
requested further leave to amend, and it did not appear that the
deficiencies identified by the Court could be remedied.
Id. at *29.
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