Former “Unicorn” Casper Sleep Faces Allegations of Misleading Investors

One of the year’s most anticipated IPOs was that of Casper Sleep, Inc., the direct-to-consumer mattress company that officially went public in February 2020. (Claire Roth, Bloomberg). Casper entered the market at $12 per share and closed its first day with shares trading at $13.50, not exactly the hottest start for one of Wall Street’s newest additions. (Id.) Since then, the mattress retailer now faces a lawsuit from its shareholders claiming that, among other things, Casper misled investors by claiming in its initial registration statement that its gross profit margins were improving. (Complaint, Lematta v. Casper Sleep, Inc., Docket No. 1:20-cv-02744 (E.D.N.Y. June 19, 2020)). In reality, as its first quarter filing states, the newly public company was subject to decreasing profit margins and a near 100% increase in net losses year over year. (Casper Sleep, Form 10-Q). The suit against one of Wall Street’s newest IPOs is set to continue its proceedings this fall.

Casper was one of many such “unicorns” – companies whose stock is not open to the public and whose market value exceeds $1 billion – who have recently found their way to the public markets. (“Unicorn,” Investopedia). In fact, 2019 has been compared to the “Dotcom” bubble of the early 2000s due to the amount of private companies that made their way into public markets; new household names like Uber, Lyft, Pinterest, and Beyond Meat have become some of the more recent listings on stock exchanges. (Lizzy Gurdus, CNBC). And while some newer public companies have faced capital raising and stock price struggles of their own (Id.), Casper’s alleged misstatements may have its stock trading at lows for quite some time.

In fact, after Casper’s first day of trading, its closing share price called into question whether the retail company should have been deemed a “unicorn” when private, with a closing market cap well below the “unicorn” threshold of $1 billion. (Claire Roth, Bloomberg). Casper even went so far as to cut the initial offering price of its shares from a range of $17 to $19 down to $12 or $13. (Id.). With its shares now trading around $7, the once supposed unicorn has a market cap of less than $300 million, over $800 million less than its privately funded market cap. (Casper Sleep, Inc. CSPR, Yahoo! Finance).

The shareholder complaint, filed in June of this year, alleges that Casper made material misstatements in its initial registration statement. (Complaint, Lematta v. Casper Sleep, Inc.). The plaintiffs allege that in the days preceding its IPO, Casper represented that its profit margins were steadily increasing; that its net revenues had increased 23% from the prior year; and that its gross profits had increased 36%. (Id.). Further, the registration statement also represented Casper’s continued growth efforts, with envisioned expansions of retail stores into twenty countries and stores showing profits across North America and Europe. (Id.).

However, as the complaint alleges, Casper’s future was in fact far less optimistic than its registration statement purported. As noted above, shortly after its IPO, Casper announced that it had seen a decrease in its profit margins on top of a huge increase in net losses for the first quarter of 2020. (Casper Sleep, Form 10-Q). The company also announced that it would be reducing the size of its global operations and would entirely wind down its operations across Europe, which ultimately led to a 21% reduction in its workforce. (Complaint, Lematta v. Casper Sleep, Inc.). Casper blamed its disappointing numbers on an increasingly dire cash flow situation. (Casper Sleep, First Quarter 2020 Results). However, as the complaint states, Casper managed to raise over $88 million in net proceeds as a direct result of its IPO, and despite this, Casper had over $40 million in negative cash flows from operating and investing activities in the first quarter alone, and at this rate is set to run out of money within a year. (Id.). Lastly, the plaintiffs point out that Casper also blamed its reduction in first quarter revenues on having to unload its older inventory to customers at steep discounts, a fact which was not disclosed in its registration statement. (Id.). As a result, the plaintiffs claim that Casper violated Section 11 of the Securities Act by omitting material information in its registration statement. (Id.).

For an omitted fact in a registration statement to give rise to a Section 11 violation, the omitted fact must be material. Courts define facts as “material” when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” (TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). In other words, if a reasonable investor might have decided another way to invest given the disclosure of the omitted fact, that fact is material.

To back up their claim, the plaintiffs argue that the facts omitted by Casper are material, and state in the complaint that “it was of the utmost importance to investors that: (1) Casper’s mature and stable retail store and e-commerce operations were, in fact, profitable; (2) the Company’s [profit] margins were, in fact, improving; and (3) the Company was, in fact, on a sustained path to profitability.” (Complaint, Lematta v. Casper Sleep, Inc.). Further, the plaintiffs allege that any business disruption risks, potentially alluding to COVID-19’s market disruption, that might threaten the company’s margins, cash flows, or operating activities significantly undermine Casper’s representations as a high-growth stock. (Id.). Simply put, the plaintiffs allege that Casper’s representations as a company with increasing profit margins and growth did not reflect reality.

Analyzing any misstatement or omitted fact becomes a lot more difficult with the add-on of COVID-19. But if the plaintiffs can convince a jury that the omitted facts alleged in the complaint were material, Casper and its directors may be liable for a substantial amount of money. Still, Casper represents just how much hype a “unicorn” can have prior to its Wall Street debut, and more importantly, just how easy it can be for any company to overlook specific factors of its financial condition before offering securities to public investors.