(Article from Securities Law Alert, April 2022)
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On February 25, 2022, the Southern District of New York denied a motion to dismiss a claim under Section 11 of the Securities Act against a company and certain of its officers and directors alleging that the company’s IPO registration statement included materially misleading misstatements concerning the length of the company’s sales cycle. In re Tufin Software Techs. Sec. Litig., 2022 WL 596861 (S.D.N.Y. 2022) (Woods, J.).[1] The court held that plaintiff sufficiently alleged that defendants’ statements were false and materially misleading.
Following its IPO, the company reported lower revenue and profit than prior guidance, citing an inability to close a number of transactions as one reason for the results. The company’s share price fell 24% following these disclosures. After various lawsuits were consolidated, plaintiff alleged one cause of action against the company and the individual defendants for violating Section 11 of the Securities Act.[2] Plaintiff alleged that defendants’ statements that the company’s “sales cycle usually lasts several months from proof of concept to purchase order, and is often longer for larger transactions” were false and materially misleading. The company and the individual defendants moved to dismiss.
Plaintiff Sufficiently Alleged That Defendants’ Statements as to the Length of the Company’s Sales Cycle Were False and Materially Misleading
The court concluded that plaintiff sufficiently pleaded that defendants’ sales cycle statements were false and materially misleading. As to falsity, the court noted that three confidential witnesses stated that the sales cycle was not usually several months, but could take at least two years to close and “was typically at least a year,” and that a six-month deal was only achievable with luck. The court reasoned that if a six-month deal was only achievable with luck, then the statement that the sales cycle “usually” took only several months may have been false.
Defendants argued that there was no falsity because the registration statement adequately disclosed the length of the sales cycle by stating: “our sales cycle usually lasts several months from proof of concept to purchase order, and is often longer for larger transactions”; that the company’s transactions were “often even longer than several months, less predictable, and more resource-intensive for larger transactions”; and that “our sales cycle is long and unpredictable.”
The court stated that the term “usually” suggests that, more often than not, the sales cycle lasted only several months. The court explained that stating that a sales cycle was “often” longer would not, as a matter of law, preclude a reasonable investor from interpreting the statement to mean that the sales cycle usually lasted only several months instead of one to two years. Similarly, the court stated that the disclosure that the sales process is long and unpredictable “fails to sufficiently counteract [the] statement that the sales cycle ‘usually’ lasts several months.” The court pointed out that the terms “long” and “unpredictable” did not denote a specific amount of time and defendants did not provide “any compelling reason to suggest that a reasonable investor would interpret that statement to mean that the sales cycle in fact took one or two years.”
[1] The court granted the motion to dismiss as to the other bases for the Section 11 claim concerning the company’s salesforce training practices and customer education.
[2] Section 11 of the Securities Act provides for potential liability where “any part of the registration statement, when such part became effective, contains an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”