Supreme Court to Weigh in on Securities Act of 1933 Standing in Slack Technologies Direct Listing Appeal

On December 13, 2022, the U.S. Supreme Court granted certiorari in Pirani v. Slack Technologies, Inc., a case with potentially far-reaching implications for claims brought under Sections 11 and 12(a)(2) of the Securities Act of 1933. The question at issue is one that has sharply divided litigants: whether stockholders pursuing these Securities Act claims must establish that they bought shares registered under the registration statement they claim is misleading.

Slack went public in June 2019 through a direct listing of its shares rather than through a traditional IPO. In a traditional IPO, a company raises capital by offering “new” shares to the public. Underwriters generally require pre-IPO stockholders to agree to a temporary “lockup” during which they are not permitted to sell their shares. A direct listing, by contrast, permits insiders and certain early investors to sell their already outstanding shares. As a result, there is no lockup period and all registered, as well as some unregistered, shares are immediately tradeable on a stock exchange.

In its direct listing, Slack offered 118 million registered shares for resale. In addition, 164 million unregistered shares also became available at the same time in accordance with certain exemptions to the registration requirements under the Securities Act. Shortly thereafter, a stockholder commenced a securities class action against Slack and certain of its officers and directors, alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Defendants moved to dismiss, arguing, among other things, that the plaintiff lacked standing because he could not trace his shares back to the registration statement that he claimed was misleading. 

The district court for the Northern District of California rejected the defendants’ standing arguments and the Ninth Circuit granted Slack’s subsequent request for an interlocutory appeal. 

On September 20, 2021, the Ninth Circuit issued a split decision, affirming the district court. The majority held that the plaintiff’s shares, even if unregistered, conferred standing under Section 11 because the registered and unregistered shares, which were sold simultaneously, could “be traced to [one] registration.” The majority reasoned that “requiring plaintiffs to prove purchase of registered shares pursuant to a particular registration statement” would “create a loophole large enough to undermine the purpose of Section 11 as it has been understood since its inception.” Basically, the majority believed that companies that choose to go public via direct listing should not be able to avoid Section 11 liability for false statements in a registration statement even if they could still be held liable under other sections of the federal securities laws. For similar reasons, the court also affirmed standing for the plaintiff’s Section 12(a)(2) claim against the individual defendants.

The dissent, which took issue with the majority’s policy-driven logic, and its departure from established precedent, explained that Congress provided for strict liability for issuers in Sections 11 and 12(a)(2) (“strong medicine” in the words of the dissent) but tempered that by “limiting the class of plaintiffs who can sue.” The dissent thus opined that Sections 11 and 12(a)(2) confer standing only on those purchasing securities issued pursuant to the registration statement containing the allegedly false or misleading disclosure.

With its grant of certiorari, the Supreme Court is poised to address this burgeoning standing debate. Given the relatively few securities cases the Supreme Court reviews, its grant of certiorari is itself noteworthy. Whether the Court’s decision will significantly alter the scope of Section 11 and 12 liability, though, remains to be seen. If the Court limits its decision to standing in the direct listing context, the outcome likely affects a small number of investors as there have been only 14 companies that have gone public via a direct listing. However, in the unlikely event the Court views the issue of standing more broadly, it could potentially impact other offering structures in which the registration statement containing the allegedly false or misleading disclosure does not apply to all shares. Regardless, the Court’s decision to hear this case promises to provide long-awaited guidance on the standing question that has occupied securities litigators for years.