In Slack Technologies, LLC v. Pirani, 2023 WL 3742580 (June 1, 2023), a unanimous Supreme Court held that in order to state a viable claim under Section 11 of the Securities Act of 1933 (the “Securities Act”), a shareholder must plead (and ultimately prove) that the purchased shares can be traced back to a specific registration statement of the issuer. The Court rejected the Ninth Circuit’s recent attempt to create an exception to what had previously been considered a fairly settled tracing requirement for unregistered shares purchased as part of direct listings. In light of the Court’s insistence that Section 11’s tracing requirement is equally applicable whether an issuer conducts a traditional IPO or a listing that includes both a registered offering and a direct listing of previously issued unregistered shares, this decision will make it more difficult for shareholder plaintiffs to establish their standing to bring a Section 11 claim against an issuer that has gone public via a direct listing that encompasses both registered and unregistered shares.

I. Background

In 2019, Slack, a workplace messaging company, went public on the New York Stock Exchange via a direct listing instead of a traditional IPO. Unlike in a traditional IPO, where all of the shares are registered pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act, Slack’s direct listing simultaneously offered 118 million newly issued shares being registered under the Securities Act and 165 million unregistered shares, which had been issued pursuant to exemptions from registration or in private offerings to Slack’s pre-IPO shareholders. All 283 million shares were offered together as part of the direct listing, which the district court noted would make tracing of any particular shares impossible due to the simultaneous listing of registered and unregistered shares. Pirani v. Slack Tech., Inc., 445 F. Supp. 3d 367, 379 (N.D. Cal. 2020). In other words, purchasers of Slack shares after the direct listing event would have significant difficulty in determining whether the particular shares they purchased were newly registered or purchased from the unregistered pool of pre-IPO shares being listed simultaneously with the registered shares.

Plaintiff Fiyyaz Pirani purchased 30,000 Slack shares on the day Slack went public and an additional 220,000 shares over the next few months. After Slack’s share price dropped, Mr. Pirani filed a putative shareholder class action lawsuit alleging that Slack’s registration statement in connection with its direct listing was materially misleading in violation of Sections 11 and 12 of the Securities Act. Slack moved to dismiss, arguing that Mr. Pirani had no standing to sue because he “had not alleged that he purchased shares traceable to the allegedly misleading registration statement” as opposed to unregistered shares.

The district court denied Slack’s motion to dismiss but certified its ruling for interlocutory appeal. A divided Ninth Circuit panel affirmed the district court’s decision. In dissent, Circuit Judge Eric D. Miller explained that although “the factual setting of the case may be novel, the legal issues it presents are not.” Pirani v. Slack Techs., Inc., 13 F.4th 940, 950 (9th Cir. 2021). Citing Judge Friendly’s decision in Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967), the dissent explained that for more than fifty years it has been settled law that shareholders lack statutory standing to pursue Section 11 claims if they cannot prove that the shares they purchased had been issued under the particular Securities Act registration statement being challenged. The Ninth Circuit also concluded that there was statutory standing under Section 12 “to the extent [Section 12] parallels Section 11.” Pirani v. Slack Techs., Inc., 13 F.4th at 950.

II. The Decision

The Supreme Court made short shrift of the lower court’s novel holdings.

Focusing on the Section 11 claim, the opinion began with an analysis of the text of Section 11 (15 U. S. C. § 77k(a)), which provides:

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….

The Court explained that the plain text of the statute makes clear that the only individuals who are authorized to bring suit under Section 11 based on a material misstatement or omission in a registration statement are individuals who acquired “such security.” 2023 WL 3742580, at *4.

The key question before the Court was whether the “term ‘such security’ refer[s] to a security issued pursuant to the allegedly misleading registration statement” or whether that term can “also sometimes encompass a security that was not issued pursuant to the allegedly misleading registration statement.” Id. The Court determined that the first possibility was correct:  the term “such security,” as used in Section 11, refers only to a security registered pursuant to the allegedly misleading registration statement. Id. at *5. The Court discussed four context “clues” from the text of Section 11 as support for its interpretation:

1. First, the Court highlighted that “the statute imposes liability for false statements or misleading omissions in ‘the registration statement.’” The Court explained that the statute’s use of “the definite article to reference the particular registration statement alleged to be misleading…seems to suggest the plaintiff must ‘acquir[e] such security’ under that document’s terms.”
2. Second, the Court explained that “the statute repeatedly uses the word ‘such’ to narrow the law’s focus” and determined that this “suggests that, when it comes to ‘such security,’ the law speaks to a security registered under the particular registration statement alleged to contain a falsehood or misleading omission.”
3. Third, the Court found that, as used in other provisions in the Securities Act, the term “such security” refers to “shares subject to registration.”
4. Finally, the Court explained that Section 11(e) “caps damages against an underwriter” to “the value of the registered shares alone,” a damages measure that would “make little sense” if “liability extended beyond registered shares.”

Id. Based on this analysis, the Court reached the same conclusion that Judge Friendly and the Second Circuit drew decades ago and that multiple decisions from other Circuits had followed: “the better reading” of Section 11 “requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement.” Id. The Court then rejected the purchaser’s broader policy arguments, which the Court found flawed for multiple reasons, not the least of which was that they were not grounded in the statutory text. Id. at *6.

The Court carefully limited its analysis to the meaning of Section 11 and remanded the case for the lower courts to decide whether this particular shareholder plaintiff’s pleadings can satisfy Section 11.

While the Court specifically declined to offer any view as to the requirements for statutory standing pursuant to Section 12 of the Securities Act, vacating the Ninth Circuit’s determination and remanding for further consideration on that interpretation issue, it pointedly noted that it did not “endorse the Ninth Circuit’s apparent belief that § 11 and § 12 necessarily travel together” and cautioned that “the two provisions contain distinct language that warrants careful consideration.” Id. at *6 n.3.

III. Practical Implications

This decision may have two practical impacts on Section 11 claims:

First, issuers conducting direct listings may be shielded from Section 11 liability if some of the shares subject to the direct listing are not being offered pursuant to a Securities Act registration statement. However, in footnote 1 to the opinion, the Court noted that the parties had “litigated this case on the premise that Slack was not required to register all of the shares sold in its direct listing” and that “[f]or the first time before this Court, Mr. Pirani challenges that premise, suggesting that it was incumbent on Slack to register all the securities sold in its direct listings on the NYSE.” Id. at *4 n.1. The Court did not address this argument because the issue was “not properly presented for decision.” Id. In light of this footnote, shareholder plaintiffs in future cases may seek to challenge the premise that issuers are not required to register under the Securities Act all of the securities sold in connection with the direct listing.

Second, the Slack decision should have broader application to the more common fact pattern where an issuer conducts both an IPO and a later follow-on offering. In that scenario, unhappy shareholders sometimes bring Section 11 claims based on purchases on or after the date of the follow-on offering even if they cannot trace whether their shares were originally sold in the IPO or in the follow-on offering. The Court’s decision not only makes clear that tracing is mandatory but also, by making this ruling in the context of a motion to dismiss and couching it in the context of who has statutory standing to bring suit (id. at *4), may help issuers push back against plaintiffs who try to defer this important gating issue from the pleading stage to the class certification stage of the case.