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Coinbase Hit With Class-Action Suit Over IPO Filing

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What You Need to Know

  • Coinbase's shares have fallen 34% since the company went public on April 14.
  • Its offering materials were false and misleading, the suit says.
  • Precipitous decline in the market value of Coinbase securities harmed investors, suit says.

Coinbase and several top executives were hit with a securities class-action suit Thursday over the company’s direct listing on the Nasdaq.

The suit, filed by Scott + Scott in the U.S. District Court for the Northern District of California, accuses Coinbase insiders of misleading investors regarding the company’s financial health and the resiliency of its cryptocurrency trading platform.

The suit brings claims against several Coinbase officers and directors, including Chief Legal Officer Paul Grewal, and its venture capital backers.

The suit, which makes claims under the Securities Act of 1933, was filed on behalf of those who invested in Coinbase when it went public on April 14.

Coinbase “powers the cryptoeconomy,” offering a “trusted platform” for sending and receiving Bitcoin and other digital assets built using blockchain technology to approximately 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries, the suit states.

For institutions, the suit states, “Coinbase offers ‘hedge funds, money managers, and corporations, a one-stop shop for accessing crypto markets through advanced trading and custody technology, built on top of a robust security infrastructure[,]’ and “a state of the art marketplace with a deep pool of liquidity transacting in crypto assets.’”

The suit maintains that Coinbase’s offering materials were false and misleading and omitted:

  • The company required a sizeable cash injection;
  • The company’s platform was susceptible to service-level disruptions, which were increasingly likely to occur as the company scaled its services to a larger user base; and
  • Defendants’ positive statements about the company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis.

“As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages,” the suit states.

According to the April 14 registration statement, the complaint explained, the resale of Coinbase’s stock “was not underwritten by any investment bank and the registered stockholders would purportedly elect whether or not to sell their shares. Such sales, if any, would be brokerage transactions on the Nasdaq Global Select Market …, and Coinbase would purportedly not receive any proceeds from the sale of shares of Class A common stock by the registered stockholders. Thus, Coinbase’s operations, including its liquidity and capital resources, would continue to be financed with cash flow from operating activities and net proceeds from the sale of convertible preferred stock.”

As of Dec. 31, 2020, Coinbase had cash and cash equivalents of $1.1 billion, exclusive of restricted cash and customer custodial funds, the suit states.

“Only a month later, the high-flying promise of Coinbase came to a screaming halt, as Coinbase conceded the need to raise capital and revealed performance issues that prevented users’ ability to trade cryptocurrencies. On May 17, 2021, Coinbase announced its plans to raise about $1.25 billion via a convertible bond sale …. Then, on May 19, 2021, Coinbase revealed technical problems, including ‘delays . . . due to network congestion’ effecting those who want to get their money out,” the suit states.

On this news, Coinbase’s “share price fell $23.44 per share, nearly 10% over two consecutive trading sessions, to close at $224.80 per share on May 19, 2021, thereby injuring investors,” according to the suit.

Shares traded at $224.20 Friday afternoon, down 34% from Coinbase’s IPO price.

(Photo: Bloomberg)