Freshworks faces class action lawsuit in US for false statements during IPO

One of the two law firms suing Freshworks is urging investors who have incurred losses of $100,000 to join the litigation, asserting that the company has violated federal security laws

The poster boy of India’s software-as-a-services (SaaS) success story, Freshworks is facing a class action lawsuit filed by Schall Law Firm and Scott + Scott Attorneys at Law. Both the US-based law firms have alleged that the company made false and misleading statements to the market.

The lawsuit claims that Freshworks was facing considerable business difficulties at the time of the IPO. “The company’s net dollar retention rate had plateaued, and both the revenue growth rate and billings were slowing down. Based on these facts, the company’s public statements were false and materially misleading throughout the IPO period. When the market learned the truth about Freshworks, investors suffered damages,” stated the Schall Law Firm in a statement.   

Schall Law firms' litigation is urging investors in Freshwork, who have losses of $100,000, to join the litigation, asserting that the company has violated the federal security laws.

Last year Freshwork filed its IPO on Nasdaq, offering 28.5 million shares in common stock to the investing public at a price of $36 a share. On listing day, Freshwork’s stock closed at $47.55 apiece. Since then the stock price has fallen by as much as 73 per cent to $12.49.

The Scott + Scott press statement said: “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. Indeed, by the commencement of the action, Freshworks’ shares traded as low as $10.51 per share, representing a decline of over 70% from the Offering Price.”  

When contacted Freshwork said in a statement, “We don't comment on pending litigation and intend to defend this and any similar case vigorously.”

Freshwork’s listing on the Nasdaq was seen as the coming of age and success story of the Indian SaaS startup ecosystem. While competitor Zoho, which has been in the business for many years has chosen to remain a private company, Freshwork’s successful listing was seen as a venue for Indian startups to list in the US market.

Rehan Yar Khan, managing partner, Orios Venture Partners, said in a note on LinkedIn that Freshworks is a cautionary tale of why Indian founders should incorporate in India and look to list in India.  

“Taken in by the "glamour" of overseas incorporation whereby founders believe, those are easier operating environments, that customers (for SaaS) will be more attracted to them, they will be able to raise more capital and they will IPO there to do much better than in India,” he further added.

Khan points out that the US market or for that matter any business environments are equally challenging.  “IPOs in India can happen at lower toplines than in the US. Even at $300 million ARR, a US SaaS company, valued at $2-3 billion is a small cap and will struggle to get a great IPO reception and subsequent coverage. That is because the markets there are very large. In India, a $50-100 million top line company can expect a good reception and good continuing coverage on the public markets” added Khan.