It seems that some people are having some buyers remorse after getting in on the Snap Inc., the Snapchat company after the stock failed to maintain its manufactured IPO bump. There is now a class-action lawsuit filed against Snap.
If only someone could have seen that a money burning company like Snap going IPO on the promise that more users would someone end the money burning with greater revenues but no extra expenses might not have been the best investment for anyone looking past the, “Hey my kid uses that!” buzz.
Oh wait… I might have said something like that.
Will Snap Lawsuit Work Against Snapchat Company?
Anyway, don’t get your hopes up. This whole thing rests on a former employee stating that Snap overestimated user numbers. The defenses against the suit are both easy and numerous.
- The company SAID in its pre-IPO docs that the user numbers were not precise and that estimating any number at all was “difficult.” – In other words, even if that employee saw one number, and we went with another number, we already disclosed that.
- Even if the number was different, the company can argue it isn’t material, so long as all the rest of the numbers like revenue and expense numbers were accurate. The case would have to prove that the difference in number of users made everything else not valid enough to make and investment decision on. In other words, investors knew that the company was losing millions, and that it would need several million more users to have any chance of being profitable under its current expense structure, but the small (as a percentage) difference in claimed users changes the distance from profitability enough to change the wisdom of the investment.
- Finally, courts HATE lawsuits filed over declining stock prices. Stock prices go up and down, it is your job as an investor to both understand and be prepared for that. The company will have to be shown to be more than a little misleading for this lawsuit to go anywhere.
Class action lawsuits these days are all about getting the class certified and then shaking down the company to make the lawsuit go away as part of a risk-mitigation strategy. Losing a class-action suit can be very expensive, so a (relatively) small settlement to make the risk go away is a wise business decision.
In other words, if the court fails to certify the class, then this all goes away. No harm. No foul.
If the court does certify the class expect a minor settlement that makes the lawyers millions and the actual investors a few dollars each, probably in the form of a few extra shares (or fractions of shares).