On June 20, 2019, Slack Technologies, Inc. (Slack), a technology company that offers an instant messaging platform, went public via direct listing, offering 118 million shares pursuant to a registration statement and another 165 million unregistered shares. Direct listings enable a company’s existing shareholders to sell their shares – both registered and unregistered – directly to the public without the need for a traditional initial public offering. Plaintiff Fiyyaz Pirani (Plaintiff) purchased 250,000 shares of Slack, including 30,000 shares the day Slack went public.

Shortly after going public, Slack’s share price plummeted. Plaintiff filed a class action lawsuit under the Securities Act of 1933 (the ’33 Act), alleging that Slack’s registration statement contained material misstatements and omissions regarding the value of the company. Slack moved to dismiss the complaint, arguing that the ’33 Act only permits a cause of action for “such security” traceable to the registration statement and that Pirani never alleged that he purchased shares traceable to the registration statement as opposed to the unregistered shares Slack offered the same day.

In the courts below, Plaintiff argued that the term “such security” should be interpreted to include untraceable shares in direct listings. Going against longstanding and widely accepted precedent, the U.S. District Court for the Northern District of California agreed with Plaintiff and denied Slack’s motion to dismiss, but certified its opinion for interlocutory appeal. On appeal, a divided panel of the Ninth Circuit agreed with the Northern District of California and Plaintiff.

The U.S. Supreme Court sided with Slack and reversed the Ninth Circuit’s decision. The Supreme Court employed several principles of statutory construction to interpret the phrase “such security” in concluding that the term referred to a security that is traceable to a specific registration statement. The Supreme Court considered the dictionary definition of “such” as well as the use of “such” elsewhere in the ’33 Act, noting that throughout the ’33 Act, “such” is consistently used to “narrow the law’s focus.” For example, the Supreme Court noted that Section 5 of the 1933 Act provides that “‘[u]nless a registration statement is in effect as to a security,’ it is unlawful ‘to sell such security.’” The Supreme Court reasoned that in that provision, “the term ‘such security’ clearly refers to shares subject to registration.” The Supreme Court also noted that the ’33 Act limits possible recovery for a claim under Section 11 to the total value of the registered shares, making it illogical to extend Section 11 liability to unregistered shares without also extending the possibility of damages to unregistered shares as well.

In reaching its conclusion, the Supreme Court rejected Plaintiff’s arguments that “such security” should be read more broadly because Plaintiff offered no suggestion of the limit of his broad reading or explanation of how the broad reading could “be squared with the various contextual clues” in the ’33 Act. The Supreme Court also rejected Plaintiff’s policy argument that “a broader reading of ‘such security’ would . . expand liability for falsehoods and misleading omissions and thus better accomplish the purpose of the ’33 Act,” finding instead that the ’33 Act – in contrast to the more expansive Securities Exchange Act of 1934 – was designed to be a more limited statute.

Ultimately, the Supreme Court noted that its opinion was not “particularly novel” and that many prior cases also had concluded that 1933 Act liability extends only to “securities . . . traceable to the particular registration statement alleged to be false or misleading.” The Supreme Court remanded the matter to the lower court for a determination of whether Plaintiff can establish traceability.