Panther Partners, Inc. v. Jianpu Technology Inc.

Background

Panther Partners, Inc. brought a proposed class action under the Securities Act of 1933 concerning Jianpu Technology Inc.’s November 16, 2017 initial public offering. Panther owned American Depositary Shares issued in connection with the offering. The defendants included Jianpu, its parent company Rong360 Inc., certain officers and directors, and the underwriters and related entities identified in the complaint.

The amended complaint asserted three causes of action. The first alleged that Jianpu’s registration statement contained misleading statements and omitted material information in violation of Section 11. The second made similar allegations concerning the prospectus under Section 12(a)(2). The third asserted control-person liability under Section 15 against specified defendants. Defendants moved to dismiss the amended complaint.

Alleged omissions

Jianpu operated an online platform that provided research and recommendations about financial products in China. Panther alleged that loan-recommendation services supplied about 80% of Jianpu’s revenue at the time of the IPO. The amended complaint identified two principal categories of omitted information.

First, Panther alleged that Jianpu failed to disclose the extent to which financial-service providers on its platform were not complying with China’s Interim Measures governing online lending, including licensing and custodial-bank requirements. Panther also alleged that the Interim Measures and related enforcement were contributing to a substantial decline in the number of online lending companies before the IPO.

Second, Panther alleged that Jianpu failed to disclose that a material portion of loans offered through its platform carried annualized interest rates above 36%, in violation of Chinese laws and regulations. The complaint relied in part on allegations that most loan products on the platform shortly before the IPO had annualized rates above 36%, including rates as high as 540%.

Jianpu’s registration statement contained general warnings about possible future regulation, stricter enforcement, licensing requirements, and the effects of regulatory violations. The court concluded that these warnings were framed as hypotheticals and did not disclose the alleged existing violations, the contraction of the online lending market, or the specific risks posed by the 36% interest-rate cap.

Court’s analysis

For a motion to dismiss, the court generally accepts well-pleaded factual allegations as true and asks whether they plausibly state a claim. The court does not resolve factual disputes at that stage.

Regarding the Interim Measures, the court held that Panther adequately alleged that a significant portion of the financial-service providers using Jianpu’s platform were violating those rules before the IPO. The complaint cited reports about widespread noncompliance and alleged that nonlicensed financial institutions accounted for approximately 12% of Jianpu’s total revenue in November 2017. The court found the alleged information material because a reasonable investor could consider significant both the providers’ noncompliance and the decline in the broader online lending market.

The court also held that Panther adequately alleged that the omitted information was subject to disclosure requirements under Items 303 and 503. Item 303 concerns known trends or uncertainties reasonably expected to affect revenue or income. Item 503 concerns the significant factors that make an offering speculative or risky. The court concluded that Panther adequately pleaded knowledge for purposes of Item 303 and that Item 503 did not require a separate showing of knowledge at the pleading stage.

Regarding the 36% annual percentage-rate cap, the court found that Panther plausibly alleged that the cap existed before the IPO and that many providers on Jianpu’s platform violated it. The court treated defendants’ contrary arguments as factual disputes that could not be resolved on a motion to dismiss. Because the complaint alleged that most loan products violated the cap, the court found the alleged risk potentially material. It further concluded that Jianpu’s general regulatory warnings did not disclose the existing cap, the alleged violations, or their significance to Jianpu’s business.

The court rejected defendants’ argument that the claims were barred by negative loss causation. Negative loss causation is a defense asserting that a security’s decline was caused by something other than the alleged disclosure failure. The court held that Panther plausibly alleged that post-IPO enforcement caused the risks from pre-IPO regulatory violations to materialize. It also stated that the timing and effect of the regulations presented factual disputes inappropriate for resolution on a motion to dismiss.

Finally, defendants argued that Panther’s Section 15 control-person claims failed because the underlying Sections 11 and 12 claims failed. Because the court rejected that premise, it also rejected defendants’ basis for dismissing the Section 15 claims.

Disposition

Judge Paul G. Gardephe denied defendants’ motion to dismiss. The ruling allowed Panther’s claims under Sections 11, 12(a)(2), and 15 of the Securities Act to proceed at that stage. The court did not enter a final merits judgment on liability or damages.