A registration statement's omission of impending ordinances choking the sale of e-cigs was not material when there were extensive warnings of regulatory risks.
A suit alleging that a distributor of vaping products failed to warn of impending bans was snuffed out by a district court because the omission was immaterial. The plaintiffs claimed that a tobacco distributor's registration statement failed to warn of proposed legislation to ban the sale of e-cigarettes in San Francisco; the ban was passed two months after the IPO, and stock prices declines. The court found that the omission was not material because the company extensively disclosed the numerous regulatory risks the products faced and, moreover, because the information about the proposed ban was widely available to the public. The court concluded that the plaintiffs' claims were meritless and dismissed the complaint with prejudice (In re: Greenlane Holdings, Inc. Securities Litigation, January 6, 2021, Altman, R.).
IPO. The plaintiffs are investors in Greenlane Holdings, Inc., a tobacco distributor that is also one of the largest distributors of e-cigarettes made by JUUL. Greenlane went public through an IPO in April 2019, issuing $110 million in common stock at $17 per share. The registration statement said that Greenlane was one of JUUL's largest distributors and touted the relationship, noting that JUUL's popularity led to a huge increase in Greenlane's sales during the previous year. The registration statement also contained a 36-page section on business risks that explained, among other matters, that the vape market was subject to uncertainty because of a "potentially fluctuating regulatory framework" on the federal, state, and local levels, and changes in the "perceived safety and efficacy" of the products. Greenlane specifically warned that JUUL's products were a key component of its revenue and that a decline in their sales would seriously impact its business.
Vaping under scrutiny. JUUL's products were controversial from their introduction in 2015, and the company came under the microscope as it was accused of targeting its marketing to minors. In March 2019, a month before the IPO, city officials in San Francisco announced an initiative to curb youth vaping that included proposed legislation barring the sale of e-cigarettes that had not been approved by the FDA (which JUUL had not yet been). Indeed, JUUL's marketing practices were under FDA scrutiny, and in response to an agency investigation, the company had already stopped selling most of its flavored tobacco products in the U.S.
Two months after the IPO, San Francisco approved the proposed ordinances, and Greenlane's stock price plummeted over the following days. At the time, Greenlane indicated that it did not foresee a material impact on either its business or its relationship with JUUL. In late 2019, Greenlane announced third-quarter results showing decreased sales of JUUL and other vaping products. Greenlane's CEO opined that sales had been impacted by the lack of clarity around regulatory actions and associated negative press. Greenlane's CFO followed up by predicting a 50% decline in JUUL sales.
Complaint stubbed out. The complaint alleged that Greenlane's offering documents failed to disclose San Francisco's proposed ordinances. The court rejected this assertion, stating that, as a matter of law, this information was not material because it was in the public domain and readily available to investors. First, Greenlane warned investors of the risks that regulation posed to its business, that restrictions were already in place in many areas, and that more restrictive regulations were likely. Plus, the regulations had not yet been promulgated at the time of the IPO, and their passage was not certain. The market, the court pointed out, took no notice of the ordinances until they were passed, and FDA approval was an additional contingency. Most importantly, the court said, all of the information about the proposed ordinances was widely circulated long before the IPO. And, while Greenlane mentioned proposed FDA regulations and other representative examples, this did not create a duty to disclose any and all proposed existing laws and regulations.
Even if this information were material, the court continued, the plaintiffs were unable to show that Greenlane had an affirmative duty to disclose it. The court pointed out that the plaintiffs, significantly, did not claim that Greenlane's statements about JUUL or its sales were false in and of themselves. And the lack of a description of the proposed ordinances made nothing in the registration misleading, especially when Greenlane engaged in otherwise-extensive risk disclosure. In short, the court concluded, the registration statement was not misleading—Greenlane provided accurate information and candid warnings while never underselling the degree of risk it faced.
The case is No. 19-81259.
Attorneys: Leo Wassner Desmond (Desmond Law Firm) for Chris Hammond. Jerry R. Linscott (Baker & Hostetler LLP) for Greenlane Holdings, Inc.
Companies: Greenlane Holdings, Inc.
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