September 21, 2021

Direct Listings: 9th Cir Says Purchasers May Bring Section 11 Claims

Some commenters have suggested that one of the advantages of a direct listing might be the ability to insulate companies & other potential IPO defendants from Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. Last year, a California federal court rejected that argument and the 9th Circuit has affirmed the lower court’s ruling.

Section 11 provides that if the registration statement for a security contains an untrue statement or omission, any person acquiring “such security” may bring an action against the parties enumerated in the statute. Courts have generally interpreted the “such security” language to mean the securities issued under the particular registration statement, and have thus imposed an obligation on plaintiffs to “trace” their securities to those issued in the offering.

In Pirani v. Slack Technologies, (9th Cir.; 9/21), the 9th Circuit observed that the case involved an issue of first impression – “what does ‘such security’ mean under Section 11 in the context of a direct listing, where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time, based on the existence of that one registration statement?” It concluded that the term encompassed both the securities that were registered in connection with the direct listing and those that were unregistered:

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. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement. Because this case involves only one registration statement, it does not present the traceability problem identified by this court in cases with successive registrations. . . All of Slack’s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration.

In her Twitter thread about the decision, Prof. Ann Lipton suggests that the case could have implications for Section 11 claims that go beyond direct listings. For instance, she says that “the same logic could equally be applied to companies that release shares from lockup early; those shares, too, are only trading on the exchange because of the earlier-filed registration statement.”

John Jenkins