A shareholder lawsuit filed in a Delaware state court alleges that Coinbase executives failed to disclose negative information about the company before it went public in April 2021. As a result, these insiders reportedly became richer by $1.09 billion. The lawsuit, filed on behal...
A shareholder lawsuit filed in a Delaware state court alleges that Coinbase executives failed to disclose negative information about the company before it went public in April 2021. As a result, these insiders reportedly became richer by $1.09 billion.
“Project Fall Fruits” and the direct listing strategy
The lawsuit delves into the personal plan by Coinbase’s board to go public, internally dubbed “Project Fall Fruits.” Coinbase chose a direct listing of existing shares instead of a more common initial public offering (IPO), which would have involved issuing new shares and potentially diluting shareholder value. Additionally, an IPO typically requires a lockup period, preventing insiders from immediately selling their shares.
The direct listing approach allowed Coinbase executives and investors to sell pre-existing shares, directly benefiting them. Insiders allegedly sold their stock through a 10b5-1 trading plan, which automatically and frequently sells stock on a predetermined schedule. According to the lawsuit, these sales began on the first day of public trading.
According to the lawsuit: “Defendants were privy to material, non-public information about the health of the Company ahead of their multi-billion-dollar liquidity event. […] Delaware law does not permit, however […] fiduciaries trading based on and profiting from, such material, non-public information.”
Bad news allegedly withheld
The lawsuit claims that board members knew of two pieces of negative information that had not been made public:
#1: Coinbase’s revenue was under pressure as customers sought alternatives to the company’s transaction fees.
#2: The company planned a private sale of $1.25 billion in new convertible notes following the direct listing, diluting existing shareholders.
The lawsuit also alleges that the staged release of shares and negative information allowed Coinbase insiders to avoid $1.09 billion in losses as they sold $2.9 billion in shares.