Robert Lowinger, V. Funko, Inc., 81811-2

Background

Funko conducted an IPO in November 2017 using a registration statement and prospectus that included historical financials and estimated Q3 2017 revenue.
On the IPO’s trading day a Bloomberg Gadfly article criticized Funko’s earnings presentation; Funko stock fell sharply on the same day.
Investors filed consolidated suit alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act, asserting material misstatements/omissions in the registration statement.
After an initial dismissal with leave to amend, plaintiffs filed an amended complaint alleging: a failed $1.4M e‑commerce project not written off, channel stuffing, inability to track obsolete inventory (dead stock), overstated IP valuation, and misleading risk disclosures.
The trial court dismissed the amended complaint with prejudice; the Court of Appeals affirmed in part, reversed in substantial part, and remanded for further proceedings.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
E‑commerce asset/write‑off (net revenue accuracy)	Funko failed to write off a failed $1.4M e‑commerce project, overstating net income/estimates.	Accounting judgments are subjective; later-reported actual sales show estimates were not misleading.	Reversed dismissal as to this claim: allegations plausibly show Funko lacked a factual basis for reported net revenues and survive Omnicare pleading inquiry.
Channel stuffing / Item 303 disclosure	Funko used channel stuffing to inflate pre‑IPO sales and failed to disclose the trend/risk under Item 303.	Statements about being “nimble” or “dynamic” are puffery; post‑IPO performance shows no actionable omission.	Reversed dismissal (Item 303 claim): puffery allegations dismissed, but allegations of undisclosed channel stuffing sufficiently plead knowledge and materiality to survive 12(b)(6).
Inventory valuation / obsolete inventory (GAAP)	Funko included dead/obsolete stock in inventory and lacked controls to track/write down obsolete inventory, overstating assets.	Inventory valuation is an accounting judgment and nonactionable opinion.	Reversed dismissal: allegations that internal reports showed obsolete merchandise and deficient tracking make opinion/valuation plausibly false at pleading stage.
Intellectual property valuation	IP and intangible asset values were overstated because valuations relied on inventory levels that included unsaleable stock.	Valuation is opinion; Funko disclosed reliance on third‑party licensors.	Reversed dismissal: alleged facts permit inference that the IP valuation lacked factual support and was misleading.
Risk‑factor adequacy (Item 503 / “risk already transpired”)	Risk disclosures warned of possible excess inventory and IT implementation problems, but those risks had already materialized and were undisclosed as actual conditions.	The registration contained cautionary language; bespeaks‑caution doctrine insulates statements.	Reversed dismissal: plaintiffs adequately allege risk had already transpired and that the cautionary language did not negate the omission at pleading stage.
Section 15 control claims (Venture capital firms)	VCs exercised control (ownership, board seats, governance rights) making them secondarily liable if primary violations proven.	Minority ownership/position does not as a matter of law equal control.	Reversed dismissal: control is intensely factual; plaintiffs sufficiently alleged facts to state Section 15 claims against the venture capital defendants.

Key Cases Cited

Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015) (standards for pleading falsity of opinion statements)
Pinter v. Dahl, 486 U.S. 622 (1988) (purpose of Securities Act: full and fair disclosure)
Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard)
Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (9th Cir.) (Section 11 materiality framework)
In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir.) (no scienter required for Section 11 liability)
Steckman v. Hart Brewing, Inc., 143 F.3d 1293 (9th Cir. 1998) (channel stuffing explained; Item 303 disclosure relevance)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (role of channel stuffing and pleading standards in securities claims)
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir.) (accounting method disputes generally inappropriate to resolve on motion to dismiss)
Brody v. Transitional Hosp. Corp., 280 F.3d 997 (9th Cir.) (circumstances in which statements create materially misleading impressions)
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality is fact‑specific and context dependent)