Plaintiff Hobbs & Towne Capital III, LLC filed a complaint against Gadget Software, Inc. et al. for violating the Securities Exchange Act of 1934. Specifically, Hobbs & Towne allege that Gadget Software made false statements and misrepresentations, which influenced the plaintiff’s decision to invest in the company.
Hobbs & Towne has sought to recover the $570,000 it invested in Gadget Software for “2,749,639 shares of Series A Preferred stock and 2,749,639 shares of Common stock in Gadget.” Hobbs & Towne allege that its “decision to invest was made in strict reliance upon numerous material misrepresentations made by Gadget…regarding the proposed investment in their software company.” In particular, in 2017, defendants “represented that Gadget’s software product was already on the market; that it had secured several specific and significant customer contracts, and had numerous other customers ‘in the pipeline’; that Gadget had already secured $10 million in funding; and that HTC’s money would be used for sales and engineering and not existing debts.” It was also not revealed that “because [Gadget Software] would soon be opening up the Series B round of funding, their Series A investment would significantly increase in value.” It was later apparent that the statements were false and misleading. Specifically, HTC claims that “Gadget’s product was not market-ready; Gadget had not secured, nor was it close to securing, contracts with any customers; HTC’s funds were intended and needed to pay for outstanding payroll tax liabilities, not sales or engineering; and Defendants had only secured $8 million in initial funding.” As a result of these false and misleading statements, HTC accuses Gadget Software of violating the Securities Exchange Act of 1934 and the Pennsylvania Securities Act of 1972, along with common law fraud, negligent misrepresentation, and breach of contract.
HTC claims that Gadget violated Section 10(b) of the Securities Exchange Act because of its misrepresentations. Further, HTC states that the sale of Gadget’s stock “is subject to the anti-fraud requirement of Rule 10b-5.” These defendants serve as Board members, co-founders, and executives of the company, who each exert power in the company, which has led to this alleged securities violation. HTC claims that the defendants knew their statements were false, but did not make any attempts to correct such statements. HTC declares that defendants “lied to HTC in order to induce the company to invest in Gadget’s securities.”
At the time of investment, Gadget stated it was in the middle of “developing a new mobile device software technology,” which allegedly can turn a PDF document “into a more user-friendly, interactive format” and “offer a new medium for publishing the reformatted data on mobile devices.” Gadget sold securities to fund this endeavor. Gadget stated that 75 percent of future raised capital would be used for sales and 25 percent would be used for engineering. However, the plaintiffs allege this was not true. Gadget claimed it raised $10.69 million through the sale of its securities and was hoping to raise $20 million in the next round; this also proved to be false. HTC states that Gadget did not send it any Series A closing documents and consequently, HTC was not a party in the Series A closing documents; nor does HTC believe that Gadget obtained consent from the initial Series A investors to reopen the series for HTC to purchase these securities. Additionally, unlike the other Series A investors, HTC did not have the chance to appoint a Board member.
HTC states that after the transaction, Gadget did not provide HTC with updated financial and other documents, despite HTC’s request. A few months later, defendant Crain stepped down as CEO and noted that Gadget “was redirecting its sales focus from business-to-business markets in education and publishing to more revenue-driven content industries.” Crain remained on the Board and defendant Soni became the CEO. Soni also refused to provide HTC with the documents it requested. In March 2019, Soni asked HTC and the other Series A investors to invest in Gadget again, stating if it did not invest additional funds its original investment would become an investment in its common stock. Upon pressure from HTC, Soni “admitted…that Gadget’s misrepresentations made regarding the success of the product prior to HTC’s investment were patently false.” Specifically, Gadget did not secure some of the customers it claimed to have secured or in the process of securing. Additionally, Gadget’s stock value “had not increased as it should have; instead, Gadget has been unable to attach any value to the HTC’s shares.” HTC’s investment was not used for sales and engineering, instead, it was used to pay “outstanding payroll tax liabilities incurred in 2018, prior to HTC’s investment.” Further, Gadget never attempted to correct these misrepresentations prior to their discovery. After this discovery, HTC asked Gadget to return its investment, as these misrepresentations mean that “the securities are essentially worthless.”
HTC has sought judgment in its favor, an order rescinding its investment agreement with Gadget and for Gadget to repay its $570,000 investment with statutory interest, compensation for damages, fees, and costs, an award for punitive damages and other relief as determined by the court.
The suit is filed in the Eastern District of Pennsylvania. HTC is represented by Montgomery McCracken Walker & Rhoads.