Securities Regulation Daily The sun sets on IPO class action
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Friday, February 10, 2017

The sun sets on IPO class action

By R. Jason Howard, J.D.

The Northern District of California has dismissed an investor class action with prejudice, determining that Sunrun, Inc. did not make misrepresentations in its IPO offering documents that explicitly acknowledged that its business was "particularly susceptible" to adverse policy changes concerning net metering (Greenberg v. Sunrun, Inc., February 9, 2017, Breyer, C.).

Sunrun. Sunrun is a company that leases rooftop solar panels to homeowners, but after its IPO in 2015, a series of regulatory setbacks caused investors to incur heavy losses. Solar energy is highly subsidized in the form of federal tax credits, with some states incentivizing the installation of rooftop solar panels through a policy called net metering.

Net metering allows homeowners to sell their excess solar energy back to utility companies, often at full retail rates, but the arrangement imposes a burden on utility companies and states often cap the number of customers who may participate. In order to compete with conventional utilities, the companies that sell or lease solar panels to homeowners often rely on net metering.

Without favorable net metering policies, companies like Sunrun likely could not operate. So Sunrun operated in states with favorable policies, including: Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, South Carolina, and Washington, D.C.

Net metering. Despite lobbying efforts, net metering came under attack in Nevada, California, Arizona, and Hawaii. Nevada allowed net metering subsidies and even raised the cap from 1 percent to 3 percent but refused to go up to 10 percent. Ultimately Nevada passed a bill aimed at ending unreasonable subsidies for rooftop solar customers. The net metering subsidies were also at issue in other states as well.

Prospectus. Sunrun’s 2015 pre-IPO registration prospectus "included few specifics about these regulatory developments," but it did mention that Nevada would soon reach its net-metering cap and that new legislation required the state commission to approve "an uncapped program" by the end of 2015, but it said nothing about the particular provisions designed to curb unreasonable cost-shifting.

The prospectus also noted that Sunrun focused on markets with "favorable policy environments," and a graphic near the front of the Prospectus also boasted that Sunrun customers "lock-in Long-term savings," while its overview section touted "simple, predictable pricing for solar energy that is insulated from rising retail electricity prices." The prospectus did, however, warn that the "expiration, elimination or reduction of . . . rebates and incentives could adversely impact" Sunrun’s business. Sunrun also warned that the market price of Sunrun stock "may be volatile" and that investors could "lose all of part" of their investment. What followed were policy changes that caused Sunrun’s stock to plummet to less than half its IPO value.

Class action. The class action maintained that Sunrun misled investors by (1) telling them in its Prospectus that the company focused on "favorable policy environments," (2) omitting crucial details about Nevada’s SB 374, (3) glossing over high growth and increasing concentration in Nevada, (4) boasting about "long term savings" and "predictable pricing," and (5) failing to disclose ongoing legal proceedings as required by law.

Findings. The court noted that to state a claim under Section 11 of the Securities Act, the plaintiff’s needed to plausibly allege that the prospectus contained an untrue statement of material fact, or "omitted to state a material fact . . . necessary to make the statements therein not misleading." According to the court, however, the prospectus contained no "untruths or misleading omissions," and the prospectus stressed "time and again" that regulatory changes were a threat to Sunrun’s business and that investors had publicly available information to assess that risk.

Ultimately, the court determined that the investors were not misled and that leave to amend would be "futile" as the prospectus "says what it says."

The case is No. 16-cv-2480-CRB.

Attorneys: James Ian Jaconette (Robbins Geller Rudman & Dowd LLP) for Jackie Nunez. Anna Erickson White (Morrison & Foerster LLP) for Sunrun Inc.

Companies: Sunrun Inc.

MainStory: TopStory FraudManipulation IPOs PublicCompanyReportingDisclosure CaliforniaNews NevadaNews

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