Ninth Circuit Affirms Standing to Bring Securities Act Claims in Connection With Direct Listing Despite Tracing Difficulties

Simultaneous sale of unregistered and registered shares after filing of a company's sole registration statement found to confer standing for Section 11 and Section 12(a)(2) claims relating to direct listings.

On September 20, 2021, the Ninth Circuit ruled on standing to bring misstatement claims under Section 11 and Section 12(a)(2) of the Securities Act of 1933 in connection with a direct listing—a recently adopted alternative to a traditional underwritten IPO that allows a company's shares to be sold directly to the public in connection with an initial stock exchange listing.

In Pirani v. Slack Technologies, Inc., a divided court held that in the case of a direct listing, a plaintiff had standing to bring claims under Section 11 and Section 12(a)(2) alleging misstatements in a registration statement and prospectus, respectively, regardless of whether the plaintiff's shares were "registered"—shares that could be traced back to a share offering registered with the U.S. Securities and Exchange Commission ("SEC") pursuant to a registration statement. According to the court, "[b]ecause this case involves only one registration statement, … [a]ll of [the] shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration." 

On June 20, 2019, Slack became one of the first companies to go public through a direct listing, releasing 118 million registered and 165 million unregistered shares on the New York Stock Exchange. Plaintiff Pirani purchased 30,000 shares that day, but could not establish whether they were from the registered or unregistered offering. He later filed a class action lawsuit alleging misrepresentations in the registration statement and prospectus filed with the SEC for Slack's direct listing, and brought claims under Section 11 and Section 12(a)(2) of the Securities Act. To have standing, a plaintiff must have purchased a security pursuant to a registration statement to assert a Section 11 claim, and by means of the prospectus accompanying an offering to assert a Section 12(a) claim.  

In a split opinion, the Ninth Circuit held that Pirani's shares, even if unregistered, provide standing under Section 11 because the purchase of Slack's unregistered securities could only occur "because of the effectiveness of its registration statement." The court reasoned that, because the registered and unregistered shares were sold simultaneously upon the effectiveness of a single registration statement, all of the shares "can be traced to that one registration." According to the court, were directly listed unregistered shares not to be considered "such securit[ies]" under Section 11, companies would be allowed to "avoid any risk of Section 11 liability by choosing a direct listing," and thereby "create a loophole large enough to undermine the purpose of Section 11." 

For similar reasons, the court also found standing for the plaintiff's accompanying Section 12(a) claims against individual defendants, without disturbing the district court's finding that the plaintiff lacked standing under Section 12(a) to sue Slack itself.

The dissenting opinion argued that the text of Sections 11 and 12 limits standing to purchasers of registered shares, and that the majority's broad policy-driven interpretation of "such security" defies decades of precedent in the Ninth Circuit and from every circuit court to consider the issue in other contexts. In the dissent's view, the majority went astray by treating the statute as "'a chameleon, its meaning subject to change' based on the varying facts of different cases."

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