On August 24, 2018, Judge Karen Gren Scholer of the United States District Court for the Northern District of Texas dismissed with prejudice a putative securities class action against an educational services company (“the Company”), certain of its officers and directors, and the underwriters of its November 2015 initial public offering (the “IPO”). David M. Stein v. Match Group Inc., No. 3:16-cv-00549 (N.D. Tex.). Plaintiffs—investors in the IPO—claimed that defendants violated Sections 11 and 15 of the Securities Act of 1933 because the offering documents for the IPO allegedly contained material misstatements and omissions concerning expected sales and revenues from one of the Company’s business segments and failed to disclose certain information as required by Items 303 and 503 of Regulation S-K. The Court held that plaintiffs had failed to plausibly allege any untrue statement of material fact because the alleged misrepresentations were accurate statements of historical results. The Court also held that plaintiffs failed to allege a known trend that was required to be disclosed under Item 303 and failed to allege a significant risk factor that was required to be disclosed under Item 503.
The Company divides its business into two segments: a dating segment and a non-dating segment, which includes educational services and test preparation services for the SAT and other tests. Before the Company’s IPO, the organization that administers the SAT, the College Board, revamped the test and announced a free test preparation program. Plaintiffs alleged that certain financial metrics in the offering documents for the IPO were materially misleading because they did not also disclose (i) changes to the SAT, (ii) the College Board offering free test preparation, (iii) the Company’s shift in focus from in-person training to online courses, and (iv) the delay of a large institutional contract. Following the IPO, the Company reported that its revenue for the non-dating segment of its business fell short of expectations and its share price declined from $12.82 to $9.30 per share.
The Court granted defendants’ motion to dismiss the Section 11 claim with prejudice, holding that plaintiffs failed to plausibly allege that the registration statement for the IPO contained untrue statements of material fact. The Court ruled that the allegedly misleading financial metrics were accurate reports of historical performance and that the offering documents included sufficient cautionary language that historical results are not indicative of future results.
The Court also rejected plaintiffs’ argument that defendants failed to disclose certain material information required to be disclosed under Item 303 of Regulation S-K. Item 303 requires an issuer to describe any known trends or uncertainties that may have a material favorable or unfavorable impact on the business. Plaintiffs alleged that defendants violated Item 303 because the offering documents allegedly did not disclose (among other things) the risks posed by the introduction of the new SAT and by the College Board’s provision of free test preparation services. The Court found that plaintiffs failed to plead sufficient facts to establish a known trend with respect to declining non-dating business revenue due to the SAT redesign and failed to establish how any impact on revenue would reasonably have been expected to persist after the new test went into effect.
The Court also ruled that plaintiffs failed to allege sufficiently how a proposed redesign of the SAT—only one of many standardized tests for which the Company offered test preparation services—would materially decrease the Company’s reported results. The Court also rejected plaintiffs’ argument that defendants failed to disclose certain information required by Item 503 of Regulation S-K. Item 503 requires a company to provide a discussion of the most significant factors that make the offering speculative or risky. Plaintiffs alleged that the Company violated Item 503 by failing to disclose the risks associated with shift in focus of the Company’s business and the risks associated with contract delays. The Court found that neither of these alleged omissions were violations of Item 503 because, according to the Court, they cannot be said to be the most significant factors that made the offering speculative or risky. The Court also ruled that similar to the Item 303 claims, plaintiffs failed to allege sufficient facts to quantify how the alleged shift in focus and delayed contract were material to the Company’s revenue.