Willard v. UP Fintech Holding Limited

Background

This putative class action arose from UP Fintech Holding Limited’s March 2019 initial public offering in the United States. UP Fintech operates an online brokerage platform called Tiger Trade. The company’s revenues came primarily from customer trading commissions and interest or financing fees tied to margin financing.

UP Fintech filed its registration statement and final prospectus shortly before the end of the first quarter of 2019. The documents reported quarterly trading-volume and commission data through the end of 2018. They also disclosed January 2019 results and warned that trading volume, revenue, and profitability could fluctuate significantly because of market conditions and other factors.

After UP Fintech reported its first-quarter 2019 results in May 2019, the company disclosed that trading volume and commission revenue had declined from the previous quarter. The trading price of its American Depository Shares also fell. The plaintiffs alleged that, when the registration statement was filed, the defendants should have disclosed additional information about trading volume and commission revenue during the first quarter of 2019.

Claims and motion

Lead Plaintiff Jian Ren asserted claims under Sections 11 and 15 of the Securities Act of 1933 against UP Fintech, various Individual Defendants, and several Underwriter Defendants. Section 11 addresses material misstatements or omissions in a registration statement. Section 15 imposes control-person liability when there is an underlying Section 11 violation and the defendant controlled the primary violator.

The defendants that had been served and appeared moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss for failure to state a claim. The court accepted the complaint’s factual allegations as true for purposes of the motion but required the complaint to allege facts making liability plausible. The plaintiffs disclaimed fraud, recklessness, and intentional misconduct, so the court did not apply the heightened fraud-pleading standard.

Court’s analysis

The plaintiffs principally argued that Item 303 of Securities and Exchange Commission Regulation S-K, as applied through the disclosure requirements for UP Fintech’s filing, required disclosure of the first-quarter declines. Item 303 requires disclosure of a known trend or uncertainty that has had, or is reasonably likely to have, a material effect on financial condition or results of operations.

The court held that the complaint did not plausibly allege that the declines in trading volume and commissions constituted a reportable trend. The complaint did not identify a causal event or starting point for the alleged declines, and the historical information showed substantial quarter-to-quarter fluctuations. The court also noted that trading volume and commission revenue were not directly correlated in every quarter and that total revenue increased in the first quarter of 2019 despite the declines highlighted by the plaintiffs. The court therefore rejected the theory that Item 303 required real-time disclosure of results during an unfinished quarter.

The court separately held that the alleged omissions were not material. Reading the registration statement as a whole, the court found that it had already disclosed earlier declines and fluctuations, including a trading-volume decline in the second quarter of 2018 and commission declines in prior quarters. It also contained warnings that trading volume and revenue were volatile, affected by market conditions, and not necessarily predictive of future results. The registration statement disclosed January 2019 revenue and commission information as well.

Because the complaint did not plausibly allege an unlawful and material omission under Section 11, the Section 11 claims failed. The Section 15 claims also failed because Section 15 requires an underlying Section 11 violation.

Disposition

The court granted the served and appearing defendants’ motion to dismiss. It denied the plaintiffs’ request for leave to amend, finding amendment futile. AMTD Global Markets Limited and China Merchants Securities (HK) Co., Limited had not been served and did not join the motion. The court ordered the plaintiffs to show cause within two weeks why the complaint should not be dismissed as to those defendants for failure to serve or for the same reasons discussed in the opinion.