Garnett v. RLX Tech.

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Parties: ALEX GARNETT, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. RLX TECHNOLOGY INC., YING KATE WANG, LONG DAVID JIANG, YILONG WEN, YUEDUO RACHEL ZHANG, COLLEEN A. DEVRIES, COGENCY GLOBAL INC., CITIGROUP GLOBAL MARKETS INC., and CHINA RENAISSANCE SECURITIES HONG KONG LIMITED, Defendants.
• Docket Number: 21 Ci 5125 (PAE)
• Decision Date: 30 September 2022

ALEX GARNETT, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
RLX TECHNOLOGY INC., YING KATE WANG, LONG DAVID JIANG, YILONG WEN, YUEDUO RACHEL ZHANG, COLLEEN A. DEVRIES, COGENCY GLOBAL INC., CITIGROUP GLOBAL MARKETS INC., and CHINA RENAISSANCE SECURITIES HONG KONG LIMITED, Defendants.

No. 21 Ci 5125 (PAE)

United States District Court, S.D. New York

September 30, 2022

OPINION & ORDER

Paul A. Engelmayer United States District Judge

In this putative class action, plaintiffs bring strict liability claims under federal securities law against China-based e-cigarette^[1] company RLX Technology Inc. ("RLX"), certain RLX officers and directors, the financial services companies that served as underwriters for RLX's January 22, 2021 initial public offering ("IPO"), and RLX's United States representative (collectively, "defendants"). They challenge a range of representations made in the prospectus and registration statement that RLX issued in advance of its IPO. They primarily allege that defendants failed to disclose the likelihood of forthcoming enhanced regulations of e-cigarettes in China that would tend to harm RLX's financial prospects. Based on these alleged misleading statements and omissions, plaintiffs, on behalf of all purchasers of RLX securities in connection with its IPO, claim violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the

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"Securities Act"), codified at 15 U.S.C. §§ 77k, 771(a)(2), and 77o. Pending now is a motion, brought by a subset of defendants (the "moving defendants"), to dismiss plaintiffs' Second Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). For the reasons that follow, the Court grants the motion and dismisses the complaint with prejudice.

I. Background

RLX manufactures and sells e-cigarette products in the People's Republic of China ("China"). Dkt. 58 ("Second Amended Complaint" or "SAC") ¶ 21. On January 22, 2021, RLX conducted its IPO in New York City, securing gross proceeds of about $1.4 billion. Id.¶ ¶ 3,12, 67. Approximately two months later, on March 22, 2021, two Chinese government bodies posted, before the market's opening, draft regulations that proposed an amendment under which e-cigarettes would be subject to the same regulations as traditional tobacco products. Id. f¶ 14, 80. That day, the value of RLX's shares dropped to $10.15 per share, marking a 48% decrease from the closing value of $19.46 per share on March 19, 2021, the previous trading day. Id. at ¶14.

Lead plaintiffs are individual purchasers of RLX's American Depositary Shares ("ADS") "pursuant or traceable to" RLX's F-l registration statement (required for foreign issuers of securities), amendments to that statement, and RLX's prospectus on Form 424B4 (together, the "Offering Materials"), each issued in connection with RLX's IPO. Id. ¶¶ 1, 20. They bring claims on behalf of all persons or entities who purchased or otherwise acquired RLX's shares pursuant to the Offering Materials and were damaged as a result. Id. at ¶ 1. As developed below, the SAC principally alleges that the Offering Materials made misrepresentations about, and/or omitted to reveal, plans by Chinese regulators to issue national regulations that would treat e-cigarettes akin to traditional tobacco products. Id. ¶¶ 4, 5,14. These, the SAC alleges,

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inhibited plaintiffs from adequately assessing the fair value of RLX's shares. Id. ¶ 9. Plaintiffs bring claims against RLX, certain RLX officers and directors, the IPO's underwriters, and RLX's U.S. representative. Id. ¶¶21-29,108-25.

A. Factual Background^[2]

1.September 2017-August 2020: Chinese Government Entities Issue Statements and Regulations Regarding E-Cigarettes Prior to RLX's IPO

Since e-cigarettes and other "new tobacco" products were first introduced in the Chinese market, the popularity of such products among Chinese consumers has grown "exponential[ly]." Id. ¶ 32. RLX^[3] purports to be the "No. 1 branded e-vapor company" in China-which RLX terms its "largest potential market." Id. ¶ 3. According to a survey that predated RLX's IPO,^[4]RLX ranked first in brand awareness among e-vapor product users in China, with a mindshare of

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67.6% at the time of the survey. Id. ¶ 32. In advance of the IPO, RLX accounted for a large share of sales of closed-system e-vapor products, drawing 48% and 62.6% of retail sales of such products in 2019 and the first nine months of 2020, respectively. Id.

Two government bodies-the State Tobacco Monopoly Administration ("STMA") and the China National Tobacco Corporation ("CNTC")-regulate or otherwise guide China's tobacco industry, including its staff, finances, properties, products, supply, distribution, and domestic and foreign trade. Id. ¶ 33. The STMA is responsible for tobacco regulation. Id. The CNTC is a state-owned manufacturer of tobacco products operated by China's Ministry of Industry and Information Technology ("MIIT"). Id.

Before RLX's IPO, Chinese officials became "increasingly concerned" about the rise in popularity of e-cigarettes and other new tobacco products and "sought to bring e-cigarettes in line with traditional tobacco products from a regulatory perspective." Id. As detailed below, during the three years before the IPO, Chinese regulators took various actions to enhance the country's regulation of e-cigarettes, including prohibiting the sale of e-cigarettes to minors, urging the closure of e-cigarette sales on certain online channels, and issuing administrative replies and updates regarding the regulatory outlook for the e-cigarette industry. See generally Id. ¶¶ 34-68.

a. September 18, 2017 Reply to the National People's Congress

On September 18, 2017, the STMA issued a reply to Proposal No. 4237 of the Fifth Session of the 12th National People's Congress, a Chinese legislative body, urging strengthening the supervision of new tobacco products such as e-cigarettes (the "September 2017 Reply"). Id. ¶ 34. The reply stated that the STMA "exercise[s] monopoly management on the production, sale, import and export of monopolized tobacco products on behalf of the state according to law" and "participate[s] in China's implementation of the Framework Convention on Tobacco

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Control." Id. at Ex. B (certified English translation); see also Id. ¶ 35. As to "incorporating Electronic cigarettes into the management of tobacco products," the STMA stated:

In order to standardize the market order of new tobacco products such as Electronic cigarettes and safeguard consumers' rights and interests according to laws and regulations, we are actively studying and formulating a feasible scheme to strengthen the supervision of new tobacco products such as Electronic cigarettes, coordinating with legislative departments to formulate effective supervision policies and measures, and promoting the establishment and improvement of general technical standards, product launch rules and marketing rules for new tobacco products such as Electronic cigarettes...,

In the future, we will strengthen the supervision of new tobacco products such as Electronic cigarettes within the scope of our authority and powers.

Id. at Ex. B (certified English translation); see also Id. ¶ 35.

b. August 28, 2018 Ban on E-Cigarette Sales to Minors

On August 28,2018, the STMA and State Administration for Market Regulation ("SAMR") issued a notice prohibiting RLX and all other market entities from selling e-cigarettes to minors (the "Minor Sales Ban").^[5] Id.¶ [38. Chinese regulators had previously banned the sale of traditional tobacco products to minors. Id.

On September 19, 2018, the Library of Congress published a post that summarized the ban. Dkt. 61 (Decl. of Robert Fumerton ("Fumerton Decl.")) at Ex. D. It stated that "China has not yet passed a comprehensive tobacco control law on the national level," and that "[t]he manufacture, sale, and use of e-cigarettes in China have largely been unregulated, despite the rapid growth of the country's e-cigarette industry and the rising popularity of e-cigarettes in recent years." Id. The post noted that "[b]efore the circular [concerning sales of e-cigarettes to minors] was issued, relevant government agencies appeared to be reluctant to take the lead in regulating e-cigarettes." Id.

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c. October 16, 2018 Reply to the National People's Congress

On October 16,2018, the STMA issued another reply to the National People's Congress, this time to Proposal No. 6801 of the First Session of the 13th National People's Congress (the "October 2018 Reply"). SAC ¶ 40. As to the "management of new tobacco products as tobacco products," the STMA stated:

We fully agree that heated cigarettes, Electronic cigarettes and other new tobacco products shall be managed as tobacco products.

In respect of heated cigarettes. As its tobacco stick is mainly made of cut tobacco wrapped with cigarette paper and other auxiliary materials, it can produce smoke for smoking or sniffing after heating, which fully meets the basic criteria of traditional cigarettes. Therefore, it is essentially a cigarette stipulated in the Tobacco Monopoly Law and shall be managed as tobacco products. At present, we have provided clear supervision opinions on heated cigarettes in the market, and requires all law enforcement units to carry out market investigation and punishment of heated cigarettes in accordance with various supervision regulations of traditional cigarettes.

In respect of Electronic cigarettes. We believe that although Electronic cigarettes containing nicotine is different from traditional cigarettes in appearance, it also takes nicotinamide as the main consumption component and leads to addiction and health risks. Therefore, we believe that Electronic cigarettes containing nicotine shall also be included in the supervision of tobacco products. As

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