Known for its "bed-in-a-box" concept, Casper Sleep Inc. was considered a so-called unicorn company leading up to its initial public offering (IPO). Unicorns are privately held companies valued at more than $1 billion. Casper seemed to be a good investment with its unique mattress concept, but things took a noticeable turn when Casper slashed its IPO price from $17 to $12. Within a few months of the IPO, investors filed a lawsuit against the company for allegedly misleading them and not disclosing material information prior to the IPO. Leading up to the IPO, Casper's revenue was up 20 percent from the year prior, but losses were also up 5 percent. Additionally, focused on stealing business from traditional mattress brands, the company spent more than $400 million in less than three years on marketing alone. The bigger issue was that Casper's true value was much less than $1 billion. Some say Casper intentionally duped investors, knowing its growth potential and financial prospects were much lower than the company promised. The disgruntled shareholders specifically claimed that in the days leading up to the IPO, Casper maintained in its registration statement that its profits were steadily increasing with net revenues and gross profits increasing over 23 and 36 percent, respectively. In reality, Casper had been seeing decreasing profit margins and a 100 percent increase in net losses year after year. Furthermore, Casper's registration statement detailed growth efforts with the introduction of retail stores in 20 countries; however, not long after the IPO, the company stated that it would reduce the size of its global operations and wind down its European operations. This ultimately led to a reduction of its workforce by 21 percent. Lastly, Casper also failed to disclose that it was having to unload large amounts of old inventory to customers at steep discounts. Casper blamed its disappointing numbers on an increasingly dire cash flow situation. Shareholders were quick to point out that the company was able to raise more than $88 million in capital from the IPO but still had over $40 million in negative cash flows from the first quarter alone. The CEO and co-founder of Casper, Philip Krim, has maintained enthusiasm about the future of the company. Krim claims that by opening more stores and initiating more retail partnerships, the company could spend less on sales and marketing. Some believe that is extremely optimistic. Not only are there more than 175 competitors in the mattress market now, but this flub has also caused Casper's marketing tactics to become more expensive due to the higher demand. In the lawsuit, shareholders claimed that Casper violated Section 11 of the Securities Act by omitting facts that were material (i.e., information that would have potentially made an investor decide another way to invest) in the registration statement. Analyzing whether a material fact was omitted became much more difficult considering the impact of COVID-19 on the company's financial statements in 2020. Should the shareholders prove to a jury that Casper is at fault, the company would be liable for a significant amount of money.

Questions:

Why do you think a company would mislead investors?

Why do companies file initial public offerings?

Explain why Casper's IPO got a lower valuation than initially expected.