The U.S. Supreme Court has issued a unanimous decision in Slack Technologies, LLC v. Pirani, holding that, under Section 11 of the Securities Act of 1933, plaintiffs must plead and prove that they purchased securities that were traceable to the registration statement that plaintiffs claim contained a material misstatement or omission.
At issue in this case was whether a plaintiff who purchased shares of a company through a direct listing, in which shares that were registered under the alleged misleading registration statement were sold alongside unregistered shares, had standing to bring a Securities Act claim when plaintiff had not adequately pleaded that the shares it purchased were registered under the misleading registration statement.
Slack Technologies went public through a direct listing – the company filed to allow existing shareholders to sell their shares directly to the public instead of through a bank or third-party. As part of the registration for the direct listing, there was no lock-up agreement restricting the sale of unregistered shares. Both registered and unregistered shares were made available for public trading on the same day following the direct listing.
A few months after Slack’s direct listing, the company’s stock price declined, and stockholder Fiyyaz Pirani filed a putative securities class action lawsuit against the company, some its officers and directors, and some venture capital firms that sold stock in the direct listing. Pirani alleged he purchased shares on June 20, 2019, (the first day of Slack’s direct listing) and that he purchased additional shares over the following months.
When the stock price dropped, Pirani filed a class-action lawsuit against Slack alleging Slack violated Section 11 of the 1933 Securities Act by filing a materially misleading registration statement.
Slack moved to dismiss, arguing the complaint failed to state a claim under Section 11 because Pirani had not alleged that he purchased shares traceable to the allegedly misleading registration statement, leaving open the possibility that he purchased shares not registered by means of the registration statement.
The district court denied the motion to dismiss but certified its ruling for interlocutory appeal. The Ninth Circuit accepted the appeal, and a divided panel affirmed the district court’s decision.
Section 11 provided, in relevant part: “In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue [certain enumerated parties].”
The Ninth Circuit held that “all of Slack’s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration,” such that “any purchaser of Slack’s shares in this direct listing [would be] a ‘person acquiring such security’ under Section 11.”
The Supreme Court ultimately disagreed with this interpretation of Section 11.
In its consideration of Section 11, the Supreme Court agreed with Slack that this section of the Securities Act does require that a plaintiff pursuing a Section 11 claim be able to trace its securities to the alleged misleading registration statement, reasoning “the statute imposes liability for false statements or misleading omissions in ‘the registration statement,’ not just a registration statement or any registration statement” and that the statute “uses the definite article to reference the particular registration statement alleged to be misleading, and in this way seems to suggest the plaintiff must ‘acquire such security’ under that document’s terms.”
The Supreme Court expressly declined, however, to extend its standing analysis to Section 12 of the 1933 Act. Instead, the court observed that Sections 11 and 12 do not “necessarily travel together,” and “caution that the two provisions contain distinct language that warrants careful consideration.”
This holding offers a significant standing defense to defendants facing a Section 11 claim following a direct listing. It remains to be seen whether this will encourage companies to engage in direct listings rather than traditional IPOs.