Tuesday, November 29, 2016

A Quick Peek -- At The Theranos Trainwreck -- Now Unfolding...

I just wrote this, overnight, for another blog property. Please forgive me. I am reposting it here, as the intersection of securities law and life science device regulation is a keen interest of mine. I hope the readership will forgive me for that, as well. Smile.

UPDATED -- 11.29.2016 @ 9:15 EST: Billy asks what form the various purchased securities took. In the case of Mr. Colman, it seems it was eventually delivered as straight voting equity (probably common) -- but perhaps only after he purchased in a "SAFE" type transaction (or a "simple agreement for future equity"). In SAFE offerings, the investor really only gets an "option" to get equity at some future date, and some future (usually "no worse than") price. In fact, most SAFEs simply kick the can of valuation/dilution (the hardest question in any early round). . . down the alley a bit -- rather than dealing with it, directly. And so, as a rule, I do not favor them. [As background, here is the original July 2010 SEC Form D (filing under Rule 506) -- disclosing that likely Colman purchase. It includes "options to buy", and $45 million of an expected $100 million had been raised -- to that point.]

Separately, in the case of Ms. Hilary Taubman-Dye, she purchased an odd-ball series of preferred (likely in the after-market -- at least nominally). I call it odd-ball, because Ms. Holmes kept an extraordinary amount of post sale control (in the form of multiple first refusal layers), on the preferred. From the complaint, then:

. . . .Plaintiff Hilary Taubman-Dye (Ms. Taubman-Dye) is a California resident. She purchased Theranos securities in August 2015 at $19.00 per share as Series B units of a SharePost affiliated fund, Celadon Technology Fund VII, LLC, whose purpose was to acquire Theranos shares of other investors or current or former personnel who held Series C Preferred shares, and hold Theranos stock. This transaction was managed and conducted by SharePost Financial Corporation (SharePost.com); a subsidiary of SharePost Inc. located in San Bruno, California, and was controlled by and occurred with the knowledge and consent of Defendants.

Ms. Taubman-Dye’s August purchase did not finalize until December 7, 2015, as Defendants imposed three separate rights of refusal on the sale. The first allowed Theranos to purchase Company stock on the same terms offered to SharePost; the second offered the same terms to Holmes; the third allowed Theranos to assign their right of first refusal to an undisclosed third party (an “Assignee”), pursuant to which such Assignee could purchase Theranos securities on the same terms previously offered to Theranos and Holmes. On August 19, 2015, SharePost successfully entered into a binding purchase agreement with a seller of Theranos securities. On August 21, 2015, the unidentified seller provided notice to Theranos of the proposed sale, triggering the relevant rights of refusal to Theranos Securities. On October 19, 2015, after the WSJ’s Theranos exposé, Ms. Taubman-Dye attempted to cancel the transaction (as did others); but SharePost informed investors that Theranos waived its right of first refusal, thereby triggering the rights of Holmes and, potentially, the Assignee. Neither Holmes nor any third party exercised their rights. Ms. Taubman-Dye’s purchase became final on or about December 1, 2015.

All aspects of this transaction took place in California as the offer to sell took place in California, and all documents were sent from and delivered in California. Ms. Taubman-Dye relied, at least in part, on Theranos’ representations herein, including that Theranos had developed a commercially ready groundbreaking blood test technology that was highly accurate, that involved drawing only a few droplets of blood, and was being successfully rolled out by Walgreens. Ms. Taubman-Dye was not aware of the material omissions alleged herein. . . .

Now, most of the above is why the usual suspects in the financial MSM are having a hard time describing the securities. The terms of Ms. Taubman-Dye's version of them were -- at best -- highly unfavorable to her, as an investor.  All investors as they invest need to see the exit -- and the bolded part above (an undisclosed parties' right to block the investors' exit -- or at least delay it, materially) is simply beyond the pale, in my experience. Ms. Holmes was (as alleged, at least) selling chunks of the pure Blue Sky. And that my friends is what led to the creation of the '34 and '34 Acts -- after the stock market crash of 1929. So the state versions were called "Blue Sky" laws. Now you know.

[End, Updated portion.]

This is -- strictly speaking -- off topic. But it is entertaining.

And Billy asked -- so here it is. A 57 page complaint at law -- just filed today, in San Francisco federal District Court. But this is no ordinary putative federal securities class action. And this is no ordinary lead plaintiff.

These are heavyweight Silicon Valley hitters -- and they are going to get Ms. Holmes. You heard it here first, Billy.

Her (alleged) deceptions look every bit as brazen as one Martin Shkreli's (in my humble opinion).

If there is anything left to take, these folks will be entitled to it.

Per Bloomberg, then a bit:

". . .Theranos Inc. was sued by a venture capital investor who claims Chief Executive Officer Elizabeth Holmes lied about its blood laboratory technology in which a pinprick of blood could be tested for hundreds of diseases.

The lawsuit, citing investigations by the U.S. Justice Department and the Securities and Exchange Commission, argues Holmes’s claims were overstated and the technology was flawed. Lead plaintiff Robert Colman, who bought shares through Menlo Park-based Lucas Venture Group XI LLC, seeks class-action status to represent investors in Theranos securities from July 29, 2013, to Oct. 2 of this year. . . ."

I will predict that while she may not ultimately see a criminal indictment -- she will be ruined, as a life science business leader of any sort, in the end. Theranos will be Turing -- and vice versa. Bank on it.

She sold sizzle -- and she allegedly knew long ago she had no steak, to back it up.

As goes Mr. Shkreli's story. . . End of story (both).

Now to walk over, on a flawless sunny morning -- expecting all the best. . . as ever.


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