Many law firms will undoubtedly publish alerts on yesterday's decision by the Ninth Circuit Court of Appeals in Pirani v. Slack Techs., 2021 U.S. App. LEXIS 28319. The court held that arose from the New York Stock Exchange's rule allowing companies to go public through a direct listing process by which existing shareholders are allowed to sell their shares on the exchange. The NYSE requires a company to file a registration statement under Securities Act, but because there is no underwriters' lock up, shares that are not covered by the registration may be sold if the conditions of Rule 144 are met. On June 20, 2019, Slack a direct listing, thereby releasing 118 million shares and 165 million unregistered shares into the public market for purchase. The plaintiff, Fiyyaz Pirani, purchased 30,000 Slack shares that day and went on to purchase another 220,000 shares over several months. When the Slack's price dropped, Pirani sued alleging that Slack's registration statement was false and misleading.
Pirani sued under Section 11 of the Securities Act, 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 . . . may, either at law or in equity, in any court of competent jurisdiction, sue- (1) every person who signed the registration statement.
Pirani's had a problem, however. He had no idea whether the shares that he purchased were registered or unregistered. The Ninth Circuit decided that this was no problem because Slack's unregistered shares sold in a direct listing are "such securities" within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence.
I agree with Judge Eric D. Miller's dissent that the majority's decision is at odds with both precedent and a natural reading of the statute.
But why is it important that Pirani be able to sue under Section 11? Isn't Section 10(b) of the Securities Exchange Act and Rule 10b-5 adequate vehicles for pursuing a securities fraud claim? Section 11 eliminates two important elements of a Rule 10b-5 claim. First, it does not require that plaintiff show scienter, a common rock on which many a Rule 10b-5 claim has foundered. Second, it does not require that a plaintiff show reliance. Therefore, a plaintiff's burden is considerably lighter in proceeding under Section 11.