A Dublin startup has sued the law firm that prepared its "mini-IPO," blaming it for subsequent state investigations and fines that led to suspending the campaign for several months.
ReAlpha Tech Corp. raised $9.1 million of a $75 million goal once the campaign restarted in a changing economy. The state regulatory dustups also caused an institution to back out of a $20 million investment in the startup, according to the lawsuit.
ReAlpha's complaint against Buchanan, Ingersoll & Rooney PC said all the trouble would have been avoided if the Pittsburgh-based firm had filed so-called "blue-sky" notices of upcoming securities offerings in states that require them.
"ReAlpha has been subject to penalties and has lost business opportunities due to the Buchanan Legal Counsel’s breach of its duty to reAlpha and failure to timely file the necessary blue-sky notices," the complaint said.
The law firm in late June asked to dismiss the case, filed in U.S. District Court in Columbus, saying that it belongs in state court.
Although the dismissal motion rests on procedural grounds, the firm noted it would "strenuously dispute" the allegation about filing the notices.
Besides damages, the company is seeking a refund of fees it paid the firm, cancelation of outstanding invoices and reimbursement for the cost of this lawsuit.
ReAlpha disclosed the litigation in a recent update to its prospectus seeking direct listing on the Nasdaq, skipping an IPO. The company would not get any proceeds; the initial move is for certain existing owners to resell their shares.
One of Columbus Inno's Startups to Watch for 2023, ReAlpha seeks to democratize investing in real estate. It plans to buy short-term rental properties and offer fractional shares to everyday investors.
The 'mini-IPO' ended in January, one of several ways the startup has raised outside capital.
Through a subsidiary, ReAlpha Asset Management Inc., it had filed the offering for the maximum $75 million allowed using Regulation A of the 2012 Jobs Act to sell to everyday, non-accredited investors. Shares were $10 each with a minimum investment of $1,000. There's no guarantee how much any such campaign raises.
ReAlpha hired Buchanan to advise it on the regulatory process and draft and review the various filings and notices, according to the lawsuit, "as ReAlpha had never previously sold securities."
The U.S. Securities and Exchange Commission approved the offering in September 2021. Three months later, Massachusetts regulators notified ReAlpha that it had not filed the required "blue sky" notices, according to the complaint, which was the first time the startup was aware of the requirement.
The law firm did not start preparing the required notices until January, the complaint said.
ReAlpha had paid $228,000 in legal fees before firing the firm in May 2022. The company refused to pay an additional $378,000 the firm says it owes for what ReAlpha calls " legal services performed below the standard of care."
ReAlpha paid a $375,000 fine to Massachusetts under an April 2022 consent order and offered refunds to the 14 state residents who had invested $1,000 to $2,500 each. Half took the offer.
Following that and settlements in other states, the startup could no longer sell securities in Massachusetts, Maryland or Hawaii, according to regulatory filings. Ohio also has opened a securities investigation, which is pending, according to the latest prospectus.
The Massachusetts consent order cited other reasons for the state's investigation besides the blue sky issue. Buchanan's motion to dismiss the case pointed out those omissions from the complaint.
The state had also accused ReAlpha of being deceptive by using stock photos of properties that it did not own in advertising how its software scores properties for investment value.
Also, the first versions of the offering prospectus said no executive officers were subject to any "material" legal proceedings. In an update in November 2021, ReAlpha disclosed that a court in CEO Giri Devanur's home country, India, had issued a criminal summons stemming from a complaint by an investor in an earlier company he owned that was damaged by the 2008 collapse of Lehman Bros.
However, a higher court had stayed all proceedings in the case. In March this year, the higher court quashed the criminal summons, according to its latest filing.
The Massachusetts consent order called that a misrepresentation. ReAlpha did not admit or deny any of the state's allegations in reaching the agreement.
