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John blogged last week about Robinhood’s “non-lockup” – allowing up to 15% of shares held by employees, officers & directors to be sold immediately upon commencement of trading. Tulane Law prof Ann Lipton has now taken a deeper dive into what this could mean for Section 11 liability. Here’s an excerpt:

Section 11, of course, permits purchasers of registered securities to sue when the security’s price drops below the offering price, if the registration statement contains false or omitted information. Section 11 claims don’t require a showing of scienter, but there’s a catch: the plaintiff must be able to show that his or her shares were, in fact, issued pursuant to the defective registration statement; unregistered shares, or shares issued pursuant to some other registration statement, won’t qualify. Which means, if there’s a “mixed” pool of shares trading – some of which were issued on the defective registration statement, and some of which were not – an open-market purchaser will have trouble establishing that his or her shares were part of the registered group, which could bar Section 11 claims no matter how deceptive the registration statement may turn out to have been.

As I previously posted, this requirement has already created some havoc in the context of direct listings – and the Slack case, described in my blog post, has been pending before the Ninth Circuit basically forever – but most traditional IPOs require that pre-IPO shares be locked up at least for 180 days after the offering. The lockup means that at least for the first 180 days, all shares available to trade are registered shares, and anyone who buys in that period will be able to show that their shares were traceable to the registration statement. If there’s a problem with that registration statement, those early purchasers will be able to advance Section 11 claims.

Currently, the law isn’t clear on whether – or to what extent – Section 11 claims will be barred by the mixing of unregistered shares along with registered shares in an offering, or at what stage of litigation plaintiffs have to prove “traceability.” One reason Robinhood’s IPO is interesting is because it may give courts a chance to weigh in.

– Liz Dunshee