On August 29, 2024, a divided panel of judges for the United States Court of Appeals for the Ninth Circuit held that a company may violate the federal securities laws if the company’s IPO registration statement only discloses favorable, but older financial results, without also disclosing more recent, unfavorable results and trends. The opinion, written by Judge Milan D. Smith, Jr., vacated and remanded an order of the U.S. District Court for the Northern District of California, which granted defendants’ motion to dismiss the claims for failure to state a claim. The Ninth Circuit held that the plaintiffs plausibly alleged that Robinhood concealed negative information from its registration statement concerning the quarter ended just before the IPO, but for which final results had not yet been fully disclosed.

FACTUAL BACKGROUND
Note: some background information is sourced from beyond the Ninth Circuit’s opinion, for context.

                  Robinhood Markets Inc. (“Robinhood” or the “Company”) is an American financial services company headquartered in Menlo Park, California, co-founded in April 2013 by Vladimir Tenev and Baiju Bhatt. Invoking the popular folk hero’s stance of robbing the rich to give to the poor, Robinhood marketed itself as a haven for retail investors by offering fee-free trading in equities and other securities—i.e., not charging investors any commission fees for making trades, at a time when many competitor brokerages charged $7–10 per trade.[i] Instead, Robinhood employs a “payment for order flow” (“PFOF”) model, wherein market makers[ii] pay Robinhood for the opportunity to serve its many Monthly Active Users (“MAUs”), generating what the Company calls “transaction-based revenue.”[iii]

                  Prior to 2021, a majority of Robinhood’s transaction-based revenue came from customers’ conventional trading in stocks and options (specifically, over 90% of in 2020).[iv] In January 2021, an infamous “meme stock” event occurred, in which retail investors purchased vast numbers of shares in GameStop Corp. (NYSE ticker: GME), AMC Entertainment Holdings, Inc. d/b/a AMC Theaters (NYSE: AMC), and other companies—with large concentrations of such trading occurring on Robinhood.[v] GameStop in particular was the subject of a “short squeeze,” in which retail investors—many of whom organized and communicated via the Reddit forum /r/wallstreetbets (“Wall Street Bets”)—sought to coordinate a buying spree to force the price of GameStop stock, then heavily shorted by hedge funds, to rise sharply.[vi] The short squeeze was successful, causing the price of GME to double within a 90-minute period on February 24, 2021, and balloon nearly 200% in just one week. Robinhood, then preparing to IPO later that year, reacted on February 28, 2021 by, amongst other things, restricting and limiting trading on GameStop and nearly a dozen other stocks such that customers could only sell their holdings in the stocks, but not buy more.[vii] This move infuriated many Robinhood customers, who perceived the Company’s actions as favoring Wall Street over retail investors in contravention of Robinhood’s namesake’s ethos, causing significant numbers of customers to stop trading on the Company’s platform. In addition to increased equity trading in January 2021, Robinhood also allegedly observed a spike in users’ purchases of the meme cryptocurrency, Dogecoin, which similarly observed a significant drop-off in investor interest prior to the IPO.

                  As plaintiffs’ complaint alleged, Robinhood filed its registration statement for its initial public offering with the SEC, effective July 2, 2021, and filed a prospectus for the IPO on July 30 of that month. The two documents collectively formed the “offering materials” for potential investors to consider when weighing whether to invest in Robinhood’s IPO.[viii] These offering materials described massive year-over-year increases in Robinhood’s transaction-based revenue in its Q1 2021 (e.g., up 340%) and other metrics and key performance indicators (“KPIs”), including MAUs and cryptocurrency trading, but provided only partial, interim information for the Company’s Q2 2021 ended June 30, 2021 (shortly before the IPO). The offering materials also warned that Robinhood purportedly did not yet know whether the explosive growth and favorable metrics it had experienced in early 2021 would continue in post-IPO quarters. This came to a head on October 26, 2021, when Robinhood reported Q3 2021 financial results (and disclosed final results for Q2 2021), which revealed unfavorable, double-digit declines in performance and in most key metrics (including, notably, a jarring 61% decline in transaction-based PFOF revenue from equity trading).[ix] Upon this news, Robinhood’s stock price fell about 10%. Robinhood’s stock price continued to decline through the end of 2021 on related information.

                  On March 13, 2023, plaintiffs filed their Second Amended Complaint against Robinhood, certain of its executives including Tenev and Bhatt, and the underwriters of Robinhood’s IPO, which included Goldman Sachs, J.P. Morgan, Barclays, Wells Fargo, and more. The investors alleged that defendants had violated Sections 11, 12, and 15 of the Securities Act of 1933. 15 U.S.C. §§ 77k, 77l, 77o.  Specifically, plaintiffs alleged that defendants had caused Robinhood’s offering materials to be misleading to investors because they omitted material facts about Robinhood’s Q2 2021 financial results, KPIs, and other metrics, and negative trends therein (collectively, “interim” financial information), that were necessary to be disclosed to investors to make the offering materials not misleading.

THE NINTH CIRCUIT OPINION

                  The Ninth Circuit observed a split of opinion among the federal circuit courts of appeal concerning the issue of when IPO registrants have a duty to disclose financial information for an interim quarter (i.e., one that is either in progress, or one that has just ended but for which final results have not been disclosed). The First Circuit, in Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir. 1996), abrogated on other grounds by 15 U.S.C. § 78u-4(b)(2), held that such duty arose only if an “issuer is in possession of nonpublic information indicating that the quarter in progress at the time of the public offering will be an extreme departure from the range of results which could be anticipated based on currently available information[,]”[x] (emphasis added), whereas the Second Circuit has expressly rejected this reasoning, instead holding that the test for when the duty to disclose arises is the same as the test for “assessing the materiality of an omission of interim financial information”—i.e., whether “a reasonable investor would view the omission as significantly altering the total mix of information made available.” Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 36 (2d Cir. 2017).

                  The Ninth Circuit adopted the Second Circuit’s reasoning to “make the securities law in th[e Ninth c]ircuit clearer and more predictable[,]” noting that determining when an “extreme departure” had occurred was “far less” judicially administrable than the classic materiality standard for omissions, with which courts are familiar.[xi] The Ninth Circuit also noted that the case at hand involved Defendants’ failure to disclose actual, known interim results, distinguishing the situation from non-actionable cases that concerned undisclosed forecasts, plans, or projections made in the interim between quarters. As Judge Smith summarized:

Plaintiffs' theory concerns a prior time period (i.e., the time period during which Robinhood suffered from the risks that had allegedly come to fruition) and some subsequent event (i.e., the later time period during which the risks falsely portrayed as contingent actually came to pass).[xii]

                  The Ninth Circuit majority also noted that the First Circuit’s test caused counterproductive analysis by the district court, because the district court evaluated each of Robinhood’s metrics individually to see if there was an sufficiently extreme departure, rather than focusing on the “total mix” of the metrics, which is a more appropriate lens to determine a statement’s materiality.

                  The Ninth Circuit also held that the district court erred in applying the First Circuit’s “extreme departure” test in the context of plaintiffs’ allegations that Robinhood violated Item 303 of Regulation S-K, which requires registrant companies to provide “discussion and analysis” of the company’s “financial condition and results of operations,” 17 C.F.R. § 229.303(a), including specifically to “[d]escribe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 17 C.F.R. § 229.303(b)(2)(ii). Rather, the Ninth Circuit directed that Item 303 has its own, lower bar for when the duty to disclose arises, which is when it is “reasonably likely” that the relevant, known trend, event, or uncertainty would occur.[xiii] The Ninth Circuit vacated the district court’s conclusion that Item 303 does not require disclosure of the interim results, but expressed no view on how plaintiffs would fare under this legal standard. However, the Ninth Circuit affirmed the district court in dismissing plaintiffs’ claims based on violations of Item 105 of Regulation S-K.

                  Thus, given the district court had applied the wrong legal standard to evaluating whether offering materials are “misleading” under Section 11, the Ninth Circuit vacated the district court’s dismissal of the case in part, and remanded the case to the district court to re-evaluate under the clarified materiality standard.

IMPLICATIONS FOR THE FUTURE

                  The Ninth Circuit’s holding in this case clarifies precedent in the circuit, by appearing to provide clearer pathways for IPO investors to hold companies and executives accountable when there is undisclosed, negative interim financial information being hidden during the IPO. Litigants in the Ninth and Second Circuits are likely to benefit from the predictably of a legal regime that aligns closer to the traditional concepts and tests for materiality than the First Circuit’s outlier approach.

[i] Stephanie Guild, 10 years and counting, Robinhood Markets Inc., Investors Guild, Dec. 20, 2023, https://robinhood.com/us/en/learn/weekly-rundown/5rbiv0URCXdKT8aaveaEbH/ (last accessed Oct. 22, 2025).

[ii] Andrew Bloomenthal, Understanding Market Makers: Roles, Profits, and Their Impact on Liquidity, Investopedia, https://www.investopedia.com/terms/m/marketmaker.asp (last updated Aug. 19. 2025).

[iii] Sodha v. Golubowski, No. 24-1036, 2025 U.S. App. LEXIS 22270, at *8, 2025 WL 2487954, at *3 (9th Cir. Aug. 29, 2025).

[iv] Id. Robinhood’s fiscal quarters match calendar quarters.

[v] Id.

[vi] Rob Davies, GameStop: how Reddit amateurs took aim at Wall Street’s short-sellers, The Guardian, https://www.theguardian.com/business/2021/jan/28/gamestop-how-reddits-amateurs-tripped-wall-streets-short-sellers (Jan. 21, 2025); see also GameStop short squeeze, Wikipedia, https://en.wikipedia.org/wiki/GameStop_short_squeeze (last edited Aug. 10, 2025) (last accessed Oct. 22, 2025).

[vii] Maggie Fitzgerald, Robinhood restricts trading in GameStop, other names involved in frenzy, CNBC, https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html (Jan. 28, 2021).

[viii] Sodha v. Golubowski, No. 24-1036, 2025 U.S. App. LEXIS 22270, at *10-11, 2025 WL 2487954, at *4 (9th Cir. Aug. 29, 2025).

[ix] Id., 2025 U.S. App. LEXIS 22270, at *23-24, 2025 WL 2487954, at *7.

[x] Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1210 (1st Cir. 1996).

[xi] Sodha v. Golubowski, No. 24-1036, 2025 U.S. App. LEXIS 22270, at *34, 2025 WL 2487954, at *11 (9th Cir. Aug. 29, 2025).

[xii] Id., 2025 U.S. App. LEXIS 22270, at *30, 2025 WL 2487954, at *10.

[xiii] Id., 2025 U.S. App. LEXIS 22270, at *45, 2025 WL 2487954, at *15.