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I’ve always thought that one of the most interesting issues in securities litigation involves the circumstances under which an issuer has an obligation to disclose results for an incomplete quarter.  We’ve touched on this topic in prior blogs here and on DealLawyers.com, and now a recent decision by a Massachusetts federal court in Buathongsri v. Zenas Biopharma, (D. Mass.; 6/26), gives me an opportunity to revisit the topic.

The case involved Section 11 claims arising out of Zenas Biopharma’s IPO. The plaintiffs’ alleged that the company’s failure to disclose information about significant increases in its R&D spend and cash burn during its first two quarters and during its ongoing third quarter was a material omission. The plaintiffs’ also contended that the failure to disclose this information in the prospectus’s MD&A discussion violated Item 303 of Reg S-K’s “known trends” disclosure requirement.

The Court disagreed with both of these allegations. This excerpt from AO Shearman’s blog on the case discusses the Court’s reasoning:

The Court first addressed whether the alleged omission of quarterly and intra-quarter financial data rendered the registration statement misleading. The Court noted that plaintiff did not dispute that the disclosed financials were accurate, nor did plaintiff identify any provision requiring disclosure of quarterly or in-progress data. The Court found that plaintiff’s theory was belied by the registration statement itself, which disclosed that the Company spent more than $56 million on R&D in the first half of 2024—nearly double the prior six months—and that the Company repeatedly warned that its R&D spending and losses were high and expected to increase for the foreseeable future.

Thus, the Court reasoned that plaintiff’s contention rested on an unreasonable inference that spending had peaked in early 2024 and declined in the third quarter because the Company’s own disclosures did not support this inference. The Court held that requiring further disclosures under these circumstances would amount to an untenable across-the-board rule requiring clinical-stage biotechnology firms to disclose in-progress quarterly burn-rate data.

Turning to Item 303 of SEC Regulation S-K, the Court held that the registration statement did not fail to disclose a known trend or uncertainty. Specifically, the Court held that, even assuming the increased spending was a “trend,” the Company’s disclosure in the registration statement was adequate because the roughly 50% quarter-over-quarter increase in R&D spending was fully consistent with the disclosed first-half 2024 figures.

The Court further observed that, when assessing the ways that R&D spending could double from one six-month period to the next, a fifty-percent quarterly increase was “something like a straight line.” The Court explained that an issuer conducting a public offering is not obligated to disclose interim results for a quarter in progress whenever it perceives that those results may disappoint the market.

– John Jenkins