A Ninth Circuit panel revived part of an investor class action against Robinhood Markets Inc., finding the trading platform may have been obligated to disclose weakening revenues ahead of its $2.1 billion initial public offering.
The suit, originally dismissed by a lower court, alleged that Robinhood and its executives concealed a downturn in revenue during the second quarter of 2021. Investors claimed that the company knew its extraordinary first quarter profits, driven by heavy trading in meme stocks and Dogecoin, were unsustainable but failed to inform prospective investors before launching its IPO in July 2021.
Writing for the panel, U.S. Circuit Judge Milan Smith stated that companies preparing to go public could be required to disclose material financial information from recently concluded quarters. The ruling directed the district court to determine whether the plaintiffs sufficiently alleged that Robinhood’s omission was material. If so, Robinhood could have been found to have breached its disclosure obligations.
The panel, however, upheld dismissal of claims that Robinhood was required to provide a breakdown of its second-quarter revenue sources when discussing risk factors.
The investors alleged that Robinhood hid the revenue decline until after its IPO and revealed the impact only in its third-quarter results in October 2021, which coincided with a drop in the company’s stock price. Robinhood characterized the claims as “meritless” and noted it was pleased the Ninth Circuit affirmed dismissal of one of the plaintiffs’ theories. The case, Sodha v. Robinhood Markets Inc. et al., remains pending before the district court on remand.
Legal Perspective: Why It Matters
The decision underscored that disclosure obligations can extend to quarters that had just ended if the information was material to investors. For issuers, this ruling highlighted the heightened risks of withholding unfavorable financial results, even when those results covered a period that had only recently closed.
From a securities law standpoint, the case illustrated how courts interpret materiality in the context of IPO disclosures. Plaintiffs must demonstrate that the omitted information was significant to a reasonable investor and that the company had knowledge of it at the time of the offering.
For corporate counsel and executives, the ruling reinforced the importance of contemporaneous evaluation of financial performance when drafting offering documents. Even in fast-moving market conditions, issuers must ensure that prospectuses reflect recent developments and that internal reporting processes are robust enough to surface adverse financial data before an offering is finalized.
For more information, see: Sodha v. Robinhood Markets Inc. et al.
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Michael is a business attorney focused on delivering efficient and effective results to his clients. His experience includes both litigation and transactional representation for companies and governmental entities in aerospace, defense, securities, real estate, and general business matters. A former F-15 fighter pilot with over 1,500 flight hours, Michael served as an instructor pilot in the U.S. Air Force before joining the Air Force Reserve with the 701st Combat Operations Squadron in California. He dedicates pro bono efforts to helping veterans with compensation claims and startup guidance.