Lawsuit Alleges The Honest Company Misled Investors in Lead-Up to May 2021 IPO

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A proposed class action claims The Honest Company, Inc., its top executives and a handful of underwriters for the company’s May 2021 initial public offering misled investors by misrepresenting or failing to disclose the extent to which business operations had been negatively impacted by the COVID-19 pandemic.

Per the lawsuit, investors who purchased The Honest Company stock during its IPO were harmed financially when the release of the company’s negative second quarter 2021 financial results caused stock prices to fall roughly 28 percent before they continued to decline until they reached an all-time low of $9.16 per share on August 19, 2021. The suit claims the registration statement issued in connection with The Honest Company’s IPO was “materially false and misleading” in that it failed to disclose that the company’s financial results had been “significantly impacted” by a multimillion-dollar stock-up as a result of the COVID-19 pandemic and would continue to be adversely impacted as demand for certain products decreased.

“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 complaint contests.

The Honest Company, founded by actress Jessica Alba, represents itself as a “digitally-native, mission-driven brand focused on leading the clean lifestyle movement creating a community for conscious consumers and seeking to disrupt multiple consumer product categories,” the suit explains. Per the complaint, the company’s three product categories include diapers and wipes; skin and personal care; and household and wellness.

According to the lawsuit, the registration statement and prospectus filed in connection with the company’s May 2021 IPO, which raised roughly $91.1 million to be used for “general corporate purposes,” was “negligently prepared” given it failed to disclose material facts and “was not prepared in accordance with the rules and regulations governing its preparation.” 

More specifically, the case claims the defendants understated “known trends, events or uncertainties” that would likely have an impact on the company’s business operations. Among the alleged non-disclosures, the suit says, was that the Honest Company had, prior to the IPO, already begun to be impacted by a “multimillion-dollar COVID-19 stock-up” for products in the diapers and wipes and household and wellness categories. Moreover, the defendants allegedly failed to inform investors that demand for such products was already decreasing due to rising vaccination rates and that, as a result, the Honest Company would likely take a hit to its 2021 financial results. Per the case, the omittance of these material facts rendered the positive statements in the company’s registration statement “materially misleading” or lacking a reasonable basis.

According to the suit, the Honest Company released its second quarter 2021 financial results on August 13, 2021, reporting a net loss of $20 million and only three-percent revenue growth as compared to Q2 2020. The company moreover revealed that its revenue growth had been hampered by “an estimated $3.7 million COVID-19 stock-up impact primarily in Diapers and Wipes in the prior year period,” and that demand for its sanitization products was decreasing due to rising vaccination rates and customers’ heavy inventory levels, according to the complaint.

This news, the lawsuit says, caused the Honest Company’s stock price to fall 28 percent “on unusually heavy trading volume,” thereby financially injuring investors. Over the next few days, the company’s stock price continued to decline to close at an all-time low of $9.16 per share on August 19, or nearly 43 percent below the $16.00 IPO share price, the case relays.

The lawsuit looks to represent anyone who purchased or otherwise acquired The Honest Company common stock “pursuant and/or traceable to” to the registration statement issued in connection with the company’s May 2021 IPO.

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