On June 1, 2023, the U.S. Supreme Court issued its decision in Slack Technologies, LLC v. Pirani¹ vacating a Ninth Circuit decision² that had extended the scope of Section 11 of the Securities Act of 1933, which provides a cause of action for material misstatements or misleading omissions in a registration statement. A divided panel of the Ninth Circuit had held that standing to bring a claim was not limited to those who could trace the shares they had purchased to those that had been registered as part of a direct listing. In a unanimous opinion, the Supreme Court vacated the Ninth Circuit’s decision, holding that Section 11 requires a plaintiff to plead and prove that the purchased securities are traceable to the challenged registration statement.

Background

Slack Technologies went public in June 2019 through a direct listing, not an initial public offering (IPO). In a traditional IPO, a company’s shares (whether newly issued or resold on behalf of existing shareholders) are sold to underwriters, who then resell them to their customers. The underwriters typically require the company’s employees and early investors who hold shares acquired in unregistered transactions before the IPO to enter into “lock-up agreements” that commit them not to sell those shares for a period of time following the IPO. Unlike in an IPO, a direct listing does not involve underwriters and typically facilitates the direct sale of shares held by preexisting shareholders, whether or not such sale is registered. Because there was no lock-up agreement, Slack’s direct listing facilitated the immediate sale of 118 million shares pursuant to a registration statement and 165 million shares that were exempt from registration.

The plaintiff, Pirani, purchased 30,000 Slack shares on the day that Slack went public, and he purchased an additional 220,000 shares over the next few months. After Slack's stock price declined, Pirani filed a class action lawsuit, alleging that Slack's June 2019 registration statement was materially misleading and asserting claims under Sections 11 and 12 of the Securities Act of 1933. Slack moved to dismiss, arguing, among other things, that Pirani lacked standing to assert a Section 11 claim because Pirani did not allege facts showing that the shares he purchased were traceable to the challenged registration statement. The district court rejected Slack's argument,³ but certified its ruling for interlocutory appeal.⁴ A divided panel of the Ninth Circuit affirmed, finding, among other things, that so-called "unregistered shares sold in a direct listing are... within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence."⁵ The Ninth Circuit’s decision was the subject of an earlier Wilson Sonsini Alert, found here. Because the Ninth Circuit’s interpretation of Section 11 created a split of authority in the courts of appeals, the Supreme Court granted certiorari.⁶

Holding

Section 11 provides that "[i]n case any part of the registration statement,... 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," among others, "every person who signed the registration statement...."⁷ The Supreme Court's holding turned on the meaning of "such security."⁸ Slack argued that the phrase "such security" refers to a security offered and sold pursuant to the allegedly misleading registration statement, while Pirani argued for a broader interpretation that would also extend to “other securities that bear some sort of minimal relationship” to the registration statement.⁹

Interpreting the "context and circumstances" of the statute, the Supreme Court held that “the better reading” is that Section 11 requires a plaintiff to plead and prove that the plaintiff purchased shares traceable to the allegedly misleading registration statement, vacating the Ninth Circuit's contrary holding.¹⁰ In so holding, the Court noted that every court of appeals that had considered the issue, including the Ninth Circuit prior to its Pirani decision, had reached the same conclusion.¹¹ The Court reserved the question of whether Pirani’s allegations sufficed to satisfy Section 11 as “properly construed” for determination on remand.¹²

The Supreme Court declined to reach the parties’ disputes with respect to Pirani’s claim under Section 12 of the Securities Act of 1933, instead vacating for reconsideration the Ninth Circuit's decision to permit the claim to proceed since the Ninth Circuit's Section 12 analysis "follow[ed] from" its analysis of the Section 11 claim, which was "flawed."¹³ In doing so, the Court noted that it did not "endorse" the Ninth Circuit’s "apparent belief that § 11 and § 12 necessarily travel together" and "caution[ed] that the two provisions contain distinct language that warrants careful consideration."¹⁴

Key Takeaways

1. Although the Slack case arose in the context of a direct listing, the Ninth Circuit's decision had broader implications, including for traditional IPOs, and threatened to significantly expand the scope of potential liability under Section 11 to unregistered shares if those shares bore some supposed "but for" connection to the challenged registration statement. The Supreme Court eliminated that risk by making clear that Section 11 liability does not extend to: (i) unregistered shares, or
   (ii) shares sold pursuant to a registration statement other than the challenged registration statement.
2. The Supreme Court’s ruling confirms that Section 11’s tracing requirement is not affected by the particular method the issuer uses to list its stock and, in particular, that it applies to a direct listing.
3. The Supreme Court’s ruling reaffirms the long-standing body of law that plaintiffs must plead and prove the traceability of their shares to the challenged registration statement. It also supports the commonsense defense often asserted by defendants that Section 11 liability cannot attach to shares purchased in a mixed market comprised of registered and unregistered shares.
4. For traditional IPOs, the existence of tradeable pre-IPO shares not subject to the IPO registration statement or a lock-up agreement will limit Section 11 liability to those shares actually purchased from the underwriters and therefore traceable to the IPO registration statement. Indeed, market practice for traditional IPOs has evolved to allow for some early investors or employees to not be subject to lock-ups or to provide for early release of lock-ups under some circumstances. Of course, a claim under Section 10(b) of the Securities Exchange Act of 1934 would still be available to purchasers of untraceable post-IPO shares so long as they can plead and prove scienter, i.e., an intent to deceive, manipulate or defraud.
5. The Supreme Court declined to directly address the Section 12 claim, leaving it open to interpretation with respect to tracing, but also noted that Section 11 and Section 12 have “distinct” language that warrants separate consideration.

^[1] No. 22-200, 598 U.S. ___, slip op. (June 1, 2023).

^[2] Pirani v. Slack Techs., Inc., 13 F.4th 940 (9th Cir. 2021).

^[3] Pirani v. Slack Techs., Inc., 445 F. Supp. 3d 367 (N.D. Cal. 2020).

^[4] Pirani v. Slack Techs., Inc., No. 19-cv-05857-SI, 2020 WL 7061035 (N.D. Cal. June 5, 2020).

^[5] Pirani, 13 F. 4th at 947.

^[6] Slack, slip op. at 5.

^[7] 15 U.S.C. §77k(a) (emphasis added). 

^[8] Slack, slip op. at 5.

^[9] Id. at 8.

^[10] Id. at 6-7, 9-10.

^[11] Id. at 7-8.

^[12] Id. at 10.

^[13] Id. at 10 n.3 (citation omitted). 

^[14] Id.