Shareholders filed a class-action suit against online marketplace Etsy last week for allegedly failing to disclose in its initial public offering documents that millions of items for sale on the site were either counterfeit or potentially infringing trademarks and copyrights.  Etsy is a peer-to-peer e-commence website that allows artists to create their own stores and sell their creations for a small listing fee and a percentage of their sales revenue.  It provides an important platform for artisans without the following or the means to market and sell their works independently.

The suit, filed in the Eastern District of New York, Altayyar v. Etsy, Inc. at al., 1:15-cv-02785, comes after a May 11, 2015 revelation that as many as two million items on the retailer were either counterfeit or constituted trademark or copyright infringement.  The complaint alleges that before the market opened on May 11, numerous media outlets reported that Etsy had been downgraded by an analyst to an “underperform” status.  Etsy was also described as a “go-to destination for counterfeits.”  After the report was released, Etsy stock fell over 8% in one day, or $1.86, closing at $20.85.

The complaint alleges that Etsy’s April 16, 2015 prospectus filed with the SEC contained “materially false and/or misleading” statements because the company failed to disclose that (i) more than 5% of all merchandise for sale on the site may be either counterfeit or constitute trademark or copyright infringement; and (ii) brands are increasingly pursuing sellers on Etsy for trademark or copyright infringement, jeopardizing listing fees and commissions.

The suit names Etsy, as well as CEO Chad Dickerson and CFO Kristina Sale, alleging violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as well as control person claims in violation of Section 20(a) against the individual defendants.

This suit is just one of the many publicized copyright and trademark infringement issues facing the site and its sellers in recent months, including cease-and-desist requests sent from Taylor Swift to many Etsy sellers for use of lyrics off her 1989 album and those from Beyoncé for the use of “Feyoncé” on mugs.  The implications of the recent upswing in legal threats and this recent class-action suit could be huge for the site and for its sellers, who depend on the site (and its success) to market and sell their work to the general public.