Could the investigation lead to a material adverse change (MAC) event that triggers a stock price decline? | SLP (Aug 08, 2025) | Candlesense

Could the investigation lead to a material adverse change (MAC) event that triggers a stock price decline?

Short answer:

Yes – the securities‑fraud investigation announced by the Law Offices of Howard G. Smith could plausibly constitute a material adverse change (MAC) event, and, if it leads to a public finding of wrongdoing, regulatory action, or a settlement, it would likely trigger a downward pressure on Simulations Plus Inc.’s (NASDAQ: SLP) share price.


1. Why an investigation can be a MAC event

Factor Explanation
Materiality – The investigation is directed at possible violations of federal securities laws, which are core to the company’s ability to raise capital, maintain its public‑company status, and avoid civil or criminal penalties. Any adverse finding would be “material” to a reasonable investor.
Regulatory exposure – Federal securities‑law violations can result in enforcement actions by the SEC, FINRA, or the Department of Justice, which often bring fines, disgorgement, or even a forced delisting.
Financial impact – Potential costs (legal fees, restitution, possible class‑action settlements) can be sizable and would affect earnings, cash flow, and balance‑sheet metrics.
Reputational risk – A public fraud finding can erode confidence among existing customers, partners, and the broader market, leading to a loss of future revenue.
Disclosure requirements – Public companies must promptly disclose material events that could affect the price of their securities (SEC Rule 10‑5, Form 8‑K). The investigation therefore triggers a filing obligation, which itself can move the market.

Because MAC clauses in loan agreements, credit facilities, or bond covenants are typically triggered by “a material adverse change in the business, operations, properties, assets, liabilities or condition of the Company,” an investigation that may culminate in a negative finding fits squarely within that definition.


2. How the MAC could translate into a stock‑price decline

Step Mechanism
1. Public disclosure – Simulations Plus will have to file a Form 8‑K or a press release announcing the investigation. The market reacts instantly to new “bad news.”
2. Analyst re‑rating – Equity analysts often downgrade a stock or cut price targets after a securities‑fraud probe is announced, widening the bid‑ask spread and prompting sell‑offs.
3. Investor sentiment – Institutional investors (e.g., mutual funds, pension plans) have internal risk‑limits that may force them to sell if a MAC event is triggered.
4. Potential covenant breach – If Simulations Plus has existing debt facilities with MAC clauses, a breach could lead to accelerated repayment demands, liquidity strain, or even default, which further depresses equity value.
5. Settlement/fine risk – Even before a final ruling, the market prices in the expected cost of a settlement or fine (e.g., $10‑$50 million for a mid‑cap biotech). The higher the expected out‑lay, the larger the downward pressure.

3. Historical precedents (for context)

Company Issue Outcome
Theranos Inc. (2016) SEC fraud investigation → public disclosure Stock fell >90%; later delisted.
Nikola Corp. (2020) Hindenburg “short‑and‑distort” report alleging fraud → SEC inquiry Shares plunged ~30% on the day of the report; later MAC clause triggered debt covenant breach.
Sorrento Therapeutics (SRNT) (2022) SEC investigation into accounting irregularities → Form 8‑K filing Stock dropped ~25% within two days; bond covenant breach led to covenant waivers.

These cases illustrate that securities‑fraud investigations, even at early stages, are often treated by the market as MAC events.


4. Likelihood and timing considerations

Consideration Impact on probability of MAC
Scope of the investigation – If the law firm is only representing a subset of investors, the investigation may be limited. However, the press release frames it as a company‑wide possible securities‑law violation, which broadens the scope.
Regulatory involvement – No SEC or DOJ statement is included in the news release. If the SEC decides to open its own parallel inquiry, the MAC risk escalates dramatically.
Company’s response – Simulations Plus has not issued a rebuttal or “no wrongdoing” statement. The absence of a defensive narrative can be read by investors as a tacit acknowledgment of risk.
Time to resolution – Securities‑fraud investigations can take months to years. In the interim, the company must keep the market informed, creating a prolonged period of uncertainty that depresses valuation.

Given these factors, the probability that the investigation will be deemed a MAC event is moderate to high—especially if the investigation uncovers material misstatements, insider trading, or other violations that could lead to enforcement actions.


5. Potential quantitative impact on the share price

Scenario Assumed cost/impact Estimated price impact
Minimal finding (no material violation) Legal fees $2‑3 M, minor settlement ≈ ‑2% to ‑4% (short‑term dip, quick recovery)
Moderate finding (material misstatement, $10‑$20 M fine) One‑time charge, possible restatement of earnings ≈ ‑8% to ‑12% (mid‑term decline)
Severe finding (significant fraud, $50‑$100 M fine, possible delisting) Large cash outflow, covenant breach, liquidity strain ≈ ‑20% to ‑35% (potential long‑term depressed valuation)

These ranges are based on historical market reactions to similar biotech‑/software‑company investigations.


6. Bottom‑line take‑aways for investors

  1. Disclosure is imminent – Expect a Form 8‑K or press release within the next few weeks.
  2. Monitor covenant language – Review any existing credit agreements for MAC clauses; a breach could force accelerated debt repayment.
  3. Watch for SEC filings – A subsequent SEC “investigation” filing would dramatically increase MAC risk.
  4. Prepare for volatility – The stock is likely to experience heightened bid‑ask spreads and may be targeted by short‑sellers.
  5. Risk‑management – Consider hedging or reducing exposure if you cannot absorb a potential 10‑20% draw‑down.

Conclusion

Based on the news information, the securities‑fraud investigation announced by the Law Offices of Howard G. Smith is highly likely to be treated as a material adverse change (MAC) event by the market and by any existing debt covenants. The combination of potential regulatory penalties, required public disclosure, and the inherent reputational and financial risks creates a clear pathway for a stock‑price decline—ranging from a modest dip if the investigation yields no substantive findings, to a steep decline if material violations are uncovered. Investors should therefore anticipate heightened volatility and consider the MAC implications in their risk‑assessment and portfolio‑management processes.