What the former CEO did amounted to a form of fraud on the investors. They thought they were investing in a company they thought was worth x but whose real value was less than half the value of x. The company had actual or constructive knowledge of the facts underlying the fraud, to wit, that there was in place an automated program that facilitated and attempted to cover over blatant regulatory violations. This was a material fact known to the then CEO and the company, legally speaking, is charged with his knowledge. Therefore, it constructively knew the truth as well and failed to disclose it to investors when they invested in the prior round (Series C). Since this was highly material to their investment, the sale of securities to such investors without such disclosure amounted to securities fraud.
Now, when something like this has happened, people can sometimes let it slide but the impact here was huge and the investors have easily lost at least half the value of their investment.
So what does new management do? With the historic problem cleaned up, it reprices the shares in the previous round to set the valuation at the level it should have been (or least much closer to it) had all facts been known and disclosed to investors. This is speaking hypothetically, of course, because investors of this type do not invest in a company that is committing serious legal wrongs and they would not have actually invested here had they known all the facts at the time of their original investment. But, given that the damage had already been done, the proposal made to investors gives them the chance after-the-fact to affirm their investment, release their legal claims, and take the hypothetical value that presumably would have more accurately reflected the real value of the company at the time of their investment had all facts been known and disclosed to them.
Is this a perfect solution? No, of course it cannot be. This is a real mess and the wrongs committed were serious. But it gives investors a path through repricing to get more than double the shares they had bought at the prior pricing. The trade-off: they must release all legal claims against the company.
Now the carve-outs: if any given investor sees this as an imperfect solution, they can always just say no and file suit against all parties, including the company; and, even for investors who take the deal, there is no absolving of the former CEO in that the release of claims does not extend to him - hence, they reserve all rights to sue him if they like.
On top of all this, employees are given RSUs that help minimize the effect of the dilution that is built into this for the benefit of investors. Again, not perfect but another indicator that this has been carefully thought out. If the company revives and its stock value goes up, the employees will essentially be paid bonuses via the RSUs to help make up the difference.
This is actually a pretty elegant attempt to salvage what must have been seen by many as a situation beyond repair, first (and formally), by setting up a mechanism to prevent the company from being swamped by lawsuits and, second (and much more importantly) by taking a good faith (and, for the company, painful) step in order to save its relations with its key investors.
People should not flippantly dismiss this action just because it is unusual. It may wind up being right or it may wind up being wrong but it clearly is a carefully thought-out attempt to deal with an exceedingly difficult set of circumstances in a creative and constructive way. If it does work, it will be because the investors perceive the business model of the company as fundamentally sound in spite of the earlier illegality and corner-cutting. It is their opportunity to register a vote of confidence for new management to give it another try, this time with an honest respect for the relevant regulatory environment even as the company attempts to disrupt its target market.
Whether it works or not, only time will tell.