On June 1, 2023, in Slack Technologies, LLC, et al., v. Pirani, the Supreme Court unanimously held that plaintiffs alleging a violation of Section 11 of the Securities Act of 1933 (“Securities Act”) must plead and prove that the plaintiffs’ purchased shares are traceable to an allegedly misleading or defective registration statement.[1] In so doing, the Supreme Court vacated and remanded a contrary decision of the Court of Appeals for the Ninth Circuit. Justice Gorsuch authored the opinion.
In general, the Securities Act requires a company to register any securities it intends to offer to the public with the Securities and Exchange Commission (“SEC”). To do so, a company files a registration statement disclosing detailed information about the company’s financial performance and other key considerations. Registration statements help inform prospective investors about the status of the company and whether they should purchase shares. Companies face various forms of liability if they publish misrepresentations in or omit material facts from registration statements.
When privately held companies offer shares for sale to the public, they often proceed through an initial public offering (“IPO”), in which the company issues new shares pursuant to a registration statement. In IPOs, investment banks underwrite the offering by buying the newly registered shares and selling them to investors (typically at a higher price). By doing so, investment banks bear the risk of loss should the shares fail to sell at a profit. As a result, investment banks often require pre-existing shareholders to agree not to sell their unregistered shares for a given period after the public offering, in an effort to avoid a drop in the share price on the public market immediately after an offering occurs.
By contrast, a direct listing permits companies to simply offer shares for sale to the public— including shares of pre-existing shareholders— without an underwriter and without restrictions on pre-existing shareholders’ ability to sell. Therefore, in a direct listing, sales of new shares issued pursuant to a registration statement and sales by pre-existing shareholders occur concurrently. As noted in the Court’s opinion, the SEC approved this use of direct listings only within the last several years.[2]
Pirani arose from the 2019 direct listing of Slack Technologies, LLC (“Slack”), a company that created a popular “productivity platform,” i.e., a messaging and collaboration application. When Slack went public, it filed a registration statement for 118 million shares, but because there was no underwriter and no restriction on sales of pre-existing, unregistered shares, 165 million unregistered shares were also offered for purchase in connection with Slack’s direct listing. Plaintiff Fiyyaz Pirani bought 30,000 shares of Slack on the day of Slack’s direct listing and 220,000 additional shares over the next few months. Eventually, Slack’s share price dropped, and Pirani filed suit, alleging that Slack violated Sections 11 and 12 of the Securities Act by making misleading statements in its registration statement.
Slack moved to dismiss Pirani’s complaint for failure to state a claim, arguing in part that Section 11 only authorized suit for those who purchased shares issued pursuant to a false or misleading registration statement. Because Pirani had not alleged that he purchased shares “traceable” to the allegedly misleading registration statement, he could not allege a Section 11 claim. The district court in the Northern District of California denied Slack’s motion to dismiss, but certified the ruling for interlocutory appeal. The Ninth Circuit affirmed by a divided panel. The Supreme Court granted certiorari to resolve the circuit split created by the Ninth Circuit’s holding.
The Court began its analysis by emphasizing the key language of Section 11 of the Securities Act: “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 . . . may . . . sue.”[3] The phrase “such security” played a critical role in the Court’s analysis. Observing that the statute “repeatedly uses the word ‘such’ to narrow the law’s focus,” the Court concluded 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.”[4] The Court also observed that Section 11(e) of the Securities Act “ties the maximum available recovery” of damages against an underwriter “to the value of the registered shares alone,” providing additional support for a narrow reading of Section 11.[5]
The Court emphasized that its narrow reading of liability under Section 11 was not “particularly novel,” even though the concept of direct listings is a relatively new one.[6] The requirement that a Section 11 plaintiff trace their purchase back to “the particular registration statement alleged to be false or misleading” has existed for decades, including in precedent from the Ninth Circuit.[7] Noting that Pirani failed to provide any limiting principles supporting his argument that the clause “such security” should apply to any security that “bear[s] some sort of minimal relationship to a defective registration statement,” the Court refused to depart from what it viewed as a longstanding traceability requirement for Section 11 claims.[8]
Pirani resolves an important legal question regarding how share purchases through direct listings—a relatively new method of offering shares on a public exchange—interact with private securities claims under the Securities Act. The holding appears to confirm the SEC’s predictions that direct listings may “exacerbate existing challenges investors face in recovering losses for false or inaccurate statements made in public offerings.”[9] However, it is important to note that, despite reaffirming the traceability requirement in Section 11 cases, the Court did not resolve whether Pirani’s pleading in fact satisfied the requirements of Section 11. That question was remanded to the Ninth Circuit.
Moreover, the Court emphasized that, unlike the Securities Act, the Securities Exchange Act of 1934 (“Exchange Act”) provides broader liability for stating falsehoods or omitting material information in connection with the purchase or sale of “any sale of a security,” regardless of whether it is registered, as long as the misstatement or omission was made with scienter.[10] The Court noted that it is plausible that, by creating two acts with two different scopes, “Congress sought a balanced liability regime,” where a narrow class of claims—those that can be traced to a registered security— “may proceed on lesser proof,” but a “broader set of claims”— any sale of a security— “requires a higher standard of proof,” i.e., scienter.[11] Pirani did not bring a cause of action under the Exchange Act, so the Court did not need to address its applicability to direct listings. The Court also pointed out that, if necessary, Congress has the power to “revise the securities laws at any time,” including to “address the rise of direct listings.”[12] But the Court itself was unwilling to depart from what it seemed to view as a relatively straightforward reading of the existing statute.
[1] Slack Technologies, LLC, et al. v. Pirani, —S. Ct. —, 2023 WL 3742580 (June 1, 2023), available at https://www.supremecourt.gov/opinions/22pdf/22-200_097c.pdf.
[2] See id. at *3.
[3] 15 U.S.C. § 77k(a) (emphasis added).
[4] Pirani, 2023 WL 3742580, at *5.
[5] Id. (emphasis added).
[6] Id.
[7] Id.
[8] Id. at *6.
[9] Statement on Primary Direct Listings, Securities & Exchange Commission (Dec. 23, 2020), available at https://www.sec.gov/news/public-statement/lee-crenshaw-listings-2020-12-23.
[10] Pirani, 2023 WL 3742580, at *3, *6.
[11] Id. at *6.
[12] Id.
