SmileDirect Investors Sue Banks Over Teledentistry Startup's Collapse

Investors who lost money on SmileDirect are now suing the banks that took the startup public, according to a Reuters report examining whether their legal argument can survive in court.

The question at the center of the litigation, as Reuters frames it, is blunt: "SmileDirect investors are suing banks over the startup's collapse. But does their legal argument have any teeth?"

The case puts the underwriting banks in the crosshairs of shareholders who watched their investment in the once high-flying direct-to-consumer dental company evaporate. SmileDirect built its business on selling clear teeth aligners remotely, bypassing traditional orthodontist visits, and rode the teledentistry boom to a public listing before its collapse.

Investment banks that shepherd a company to an initial public offering carry underwriting duties. Plaintiffs in cases like this typically argue that the banks failed in due diligence — that they either missed or ignored problems in the issuer's business that a reasonable underwriter should have caught and disclosed.

Reuters's skeptical headline signals the obstacle the plaintiffs face. Claims against underwriters are notoriously hard to win. Courts generally require plaintiffs to show that the banks knew, or should have known, about specific misstatements or omissions in the offering documents — not merely that the business later failed.

A startup's collapse, on its own, does not establish wrongdoing. Companies fail for many reasons that were fully disclosed at the time of the offering: execution risk, competitive pressure, unproven unit economics. The line between a risky investment and a fraudulent one is where these cases are won or lost.

For SmileDirect, the investor lawsuits arrive after the company's downfall wiped out shareholders. The banks, as defendants, will argue that the risks of the direct-to-consumer aligner model were visible in the prospectus and that no disclosure obligations were breached.

The plaintiffs bear the burden of proving otherwise. Reuters's reporting suggests the outcome is genuinely uncertain — hence the question of whether the argument has "teeth."

The stakes extend beyond this case. A win for the investors would tighten the legal exposure of underwriters broadly, giving banks a stronger incentive to police the companies they bring to market. A loss would reaffirm the existing standard, under which underwriters answer for what they knew and disclosed, not for the fate of the businesses they underwrote.

For now, the investors' recovery hangs on a question courts will have to answer claim by claim: did the banks mislead the market, or did the market simply misprice the risk?