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Northern District Of California Dismisses Class Action Against Social Media Company
06/03/2025On May 19, 2025, Judge Edward J. Davila of the United States District Court for the Northern District of California dismissed without prejudice a proposed securities fraud class action asserting claims against a social networking platform (the “Company”), certain of its executives, and the sponsor of a special purpose acquisition company (“SPAC”) with which the Company merged under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5 and 14a-9. Hollingsworth v. Nextdoor Holdings, Inc. et al., No. 5:24-cv-01213-EJD (N.D. Cal. May 19, 2025). Plaintiff, who allegedly purchased shares in the SPAC and then in the post-merger Company, averred that prior to the merger and, to a lesser extent, in the immediate aftermath, defendants made material misrepresentations and omissions regarding the Company’s user metrics and projected profitability. The Court principally held that plaintiff lacked standing under In re CCIV / Lucid Motors Sec. Litig., 110 F.4th 1181, 1185 (9th Cir. 2024) (“Lucid”), which we covered here previously, and that plaintiff failed to allege falsity for the lone alleged misstatement not felled by the purchaser-seller rule.
According to the complaint, the Company first launched its social media network in 2011 as a platform designed to connect people within specific neighborhoods. Beginning in approximately 2020, the Company allegedly reported in various filings an increase in user engagement, as demonstrated by a 37% growth in “active users,” and projected profitability, as reflected by a 10% increase in average revenue per user (“ARPU”). On November 5, 2021, the SPAC acquired the Company. Shortly thereafter, the Company allegedly disclosed a decline in ARPO and active user rates, and its stock prices allegedly dropped.
Plaintiff first purchased SPAC shares just before the merger on November 2, 2021, and in the post-merger Company on May 11, 2022. According to the Complaint, the Company allegedly inflated its user engagement and profitability metrics by defining “active users” to include not just those who engaged with the application and, thus, generated advertisement revenue, but also those who simply visited the application once by clicking a link in a marketing email. Plaintiff identified seven alleged misstatements between July 6, 2021 and August 9, 2022.
Relying principally on Lucid, the Court held that plaintiff lacked standing to pursue Exchange Act claims premised on any of the alleged pre-merger misstatements under the purchaser-seller rule because plaintiff had never invested in the legacy Company. The Court was unpersuaded that plaintiff had successfully distinguished this case from Lucid by naming the SPAC’s sponsor as a defendant on the theory it had repeated the Company’s misstatement. The Court opined that Lucid “did not rely on the speaker of the statements in finding the plaintiff lacked standing” but rather reiterated the bright-line purchaser-seller rule that forbids plaintiff from pursuing Exchange Act claims for securities he neither purchased nor sold. The Court also held plaintiff lacked standing to pursue alleged misstatements that occurred after his last purchase of Company stock in May 2022.
The Court next held plaintiff failed to allege falsity regarding the lone potentially actionable misstatement remaining—an alleged statement regarding active users by the post-merger Company in an investor call on May 10, 2022. The Court found it to be significant that the Company had disclosed its definition of “active user” in its public filings, and that definition explicitly covered those—users who visited the application once via a link in a marketing email—whose inclusion plaintiff claimed made the term misleading.
Because plaintiff failed to plead a primary violation, the Court also dismissed the derivative control person liability claims under Sections 14(a) and 20. The Court’s dismissal was without prejudice.
