Freshworks Faces Potential Class Action Lawsuits For Misleading Investors

In a major blow to Freshworks, US-based litigation firms Scott + Scott Attorneys and The Schall Law firm have invited applications from aggrieved investors to mount a class action lawsuit against the SaaS giant for providing ‘false and misleading’ documents at the time of its Nasdaq listing. 

The law firms have likely been tasked with bringing more plaintiffs to build the case against the listed company. This comes close after a complainant by the name of Mohan R Sundaram filed a case on Tuesday (August 1) in the US District Court for the Northern District of California.

A securities class action suit allows shareholders to collectively litigate against a company for violating securities norms and claim monetary compensation in lieu of those damages. Under this, a litigation firm takes the mantle and fights the case on behalf of aggrieved users, only after receiving the nod from a minimum threshold of affected customers.

Inc42 has reached out to freshworks for a comment. This story will be updated with the comment as and when it is received.

In a note, Scott+Scott said that Freshworks’ IPO documents omitted that the company’s business was encountering ‘obstacles.’ 

“As a result, Freshworks’ net dollar retention rate was plateauing, and its revenue growth rate and billings were decelerating.  As the truth about the company’s business reached the market, the value of its shares declined dramatically, causing Freshworks investors to suffer significant damages,” added the law firm. 

Training guns at top executives of Freshworks, the Scott+Scott statement said the lawsuit had been filed against Freshworks, and certain directors, officers at the company and underwriters of the September 2021 IPO. 

The Scott+Scott lawsuit has set January 3, 2023 as the deadline to seek details of users willing to mount a case against the giant. 

The law firm based its request on a complaint filed in the Northern District of California. Schall’s lawsuit also echoed similar points raised by Scott+Scott in its case.

Tables Turn For Freshworks

In what was touted as a game changing moment for Indian startups, Freshworks listed on the Nasdaq on September 22 last year. The startup raised $1.03 Bn via the IPO at a market capitalisation of $10.3 Bn. 

In total, Freshworks listed 28.5 Mn common shares to the investors at a price of $36 per share. The initial mania helped turn 500 of its shareholding employees into new crorepatis. It was said to be a big moment for the burgeoning Indian SaaS ecosystem as Freshworks became the first Indian enterprisetech company to list on US stock exchanges. While the euphoria did linger for some time, it did not last longer.

What followed since then has been a rout, as the shares have plummeted by more than 63% since making their debut on the bourses.

Over the course of its lifetime so far, shares have fallen from a record high of $53.36 to $13.20 currently, wiping off 75% of investor wealth in the process. 

The law firms have set the class period between its listing date of September 2021 and January 11, 2022. Class period refers to the timeframe when the alleged shareholder wealth erosion occurred

Founded in 2010 by Girish Mathrubootham and Shan Krishnasamy, Freshworks offers a suite of softwares for customer service and support, customer engagement, and IT service management.

This came on the same day as Freshworks reported its quarterly results. The US and Chennai-based SaaS major reported a loss of $58.3 Mn in the third quarter (Q3) of the calendar year 2022 (CY22), compared to $140.3 Mn in the corresponding quarter in the previous fiscal year. Revenue, however, rose 33% year-on-year (YoY) to $128.8 Mn during Q2 FY23