By: Carlos E. Juarez, Class of 2025
On June 1, 2023, the Supreme Court of the United States resolved a matter of first impression when ruling on the traceability requirements of a claim brought under Section 11 of the Securities Act of 1933 (“Securities Act”) that relates to purchased securities of a company that underwent a direct listing.
In Slack Technologies, LLC v. Pirani, the Court overturned a Ninth Circuit decision and ruled that in order to bring an action under Section 11, an investor must “plead and prove that [they] purchased shares traceable to the allegedly defective registration statement.”[1] Section 11 of the Securities Act allows for recourse if a purchaser of securities relied on a registration statement that contained material misstatements or omissions.[2] The purchased securities in Slack were those of Slack Technologies (“Slack”), which undertook a direct listing in 2019.[3] The Court held the plaintiff’s purchased Slack securities could not be traced to a specific registration statement and, therefore, Section 11 liability did not attach.[4]
Background
In recent years, companies seeking to go public have sought out alternatives to the traditional initial public offering (“IPO”), such as special purpose acquisition company (“SPAC”) mergers, reverse mergers, or direct listings.[5] In a direct listing, a company registers its securities without undertaking an IPO.[6] Investors holding pre-existing shares can directly sell their shares on a stock exchange, taking advantage of first-day trading prices.[7] Slack became one of the first companies to directly list its shares on the New York Stock Exchange.[8]
In both a traditional IPO and a direct listing, an issuer registers its securities by filing a registration statement with the Securities and Exchange Commission.[9] In a traditional IPO, where one of the main purposes is to raise capital, investment banks underwrite the offering.[10] Common market practice, often required by underwriters, is to incorporate a “lock-up” provision when undergoing an IPO.[11] The lock-up provision prevents investors from selling their shares in a particular company for a specific period of time, commonly for 180 days.[12] By contrast, some companies undertake direct listings in order to avoid lock-up provisions.[13]
The Litigation
In its direct listing, Slack registered 118 million shares and offered its registered shares along with 165 million shares exempt from registration for sale.[14] With no underwriters or lock-up provision, holders of the exempt securities, consisting of pre-existing securities held by early investors in Slack, were not barred from selling their shares to the public at the time of the direct listing.[15] Mr. Fiyyaz Pirani, the plaintiff in Slack, owned 250,000 shares of Slack, 30,000 of which he bought on the day Slack went public.[16] Slack’s share price dropped between 33-38% during the month Mr. Pirani commenced his suit compared to the date of its direct listing.[17] Mr. Pirani filed a class-action lawsuit in the Northern District of California on behalf of all shareholders of Slack that relied on its registration statement.[18] He alleged that Slack violated Section 11 and Section 12 of the Securities Act by filing a materially misleading registration statement.[19]
Slack moved for summary judgment, which the district court dismissed.[20] On appeal, the Ninth Circuit affirmed the district court judgment, creating a circuit split on the matter.[21] The Supreme Court subsequently granted certiorari.[22]
The Decision
The Court’s decision rested on how Section 11’s language “trains our view on particular things or statements.”[23] Section 11 allows an individual to bring a suit for a registration statement that contains a material misstatement or omission when the individual has acquired “such security.”[24] Further, Section 11 imposes liability for false statement or misrepresentations in “the registration statement.”[25] The Court identified that the use of the definite article “the” indicates that a plaintiff must have acquired “such security” from a specific registration statement.[26] Further narrowing the definition, the Court also identified that Section 11(e) imposes a cap on damages against an underwriter that is tied to the value of registered shares.[27]
Based on this analysis, the Court reinforced that in order to bring a Section 11 claim, “the securities held by the plaintiff must be traceable to the particular registration statement alleged to be false or misleading.”[28] In his suit, Mr. Pirani did not allege that he acquired securities directly traceable to the allegedly misleading registration statement.[29] Slack contended, and the Court agreed, that it would not be possible to know whether Mr. Pirani purchased shares that were not registered or not connected to Slack’s registration statement and its representations.[30] The Court thus vacated the Ninth Circuit’s judgment.[31]
The Court also vacated Mr. Pirani’s Section 12 claim but expressed no view on whether there was proper interpretation of Section 12.[32]
Practical Considerations
As post-COVID volatility, interest rate hikes, and inflation peaks subside, the IPO and equities market have begun to normalize, and companies have once again begun to consider their options to go public. Observers argue Slack will encourage more direct listings, removing tight pricing restrictions imposed by traditional IPOs.[33] The Court’s decision in Slack will likely prevent most plaintiffs from pursuing Section 11 actions relating to securities of a company that has undergone a direct listing. However, issuers should continue to ensure their registration statements contain accurate information, as the risk of other claims relating to false or misleading statements in the registration statement may arise. Slack also left the question of Section 12 liability open for the lower courts to determine. It is also worth noting that issuer resistance to lock-ups and the prevalence of alternative lock-up structures[34] in traditional IPOs may allow for unregistered securities to be traded as soon as the first day of trading, therefore potentially avoiding Section 11 liability based on the Court’s decision in Slack.
[1] Slack Techs., LLC v. Pirani, 143 S. Ct. 1433, 1442 (2023) (alteration in original). [2] 15 U.S.C. § 77k (2023). [3] Slack, 143 S. Ct. at 1438. [4] Id. at 1440. [5] Charles J. Johnson, Joseph McLaughlin & Anna T. Pinedo, Corporate Finance and the Securities Laws 3-8 (6th ed. 2023 & Supp. 2022). [6] Id. at 3A-3. [7] Id. [8] Id. at 3A-12. [9] 15 U.S.C. § 77e (2023). [10] See Johnson, supra note 5 at 3-12. [11] Id. at 2-43. [12] Id. [13] Id. at 2-44. [14] Slack Techs., LLC v. Pirani, 143 S. Ct. 1433, 1438 (2023). [15] Id. at 1438. [16] Id. [17] Pirani v. Slack Techs., Inc., 445 F. Supp. 3d 367, 375 (N.D. Cal. 2020). [18] Id. at 372. [19] Slack, 143 S. Ct. at 1439. [20] Id. [21] Id. [22] Id. [23] Id. at 1440. [24] 15 U.S.C. § 77k(a) (2023). [25] Slack, 143 S. Ct. at 1436 (quoting 15 U.S.C. § 77k (2023)) (emphasis added). [26] Id. [27] Id. at 1440. [28] Id. at 1440–41. [29] Id. at 1439. [30] Id. [31] Slack, 143 S. Ct. at 1442. [32] Id. at 1442 n.3. [33] See Diccon Hyatt, Supreme Court Ruling Makes it Harder to Sue Over Direct Listing Stock Offerings, Investopedia (June 1, 2023), https://www.investopedia.com/supreme-court-ruling-direct-listings-7507074. [34] See Johnson, supra note 5 at 2-45.
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