TheCorporateCounsel.net

This Paul Weiss client alert highlights a recent decision by a federal district court in Colorado, Cupat v. Palantir Technologies, Inc. (D. Colo.; 4/25), that dismisses a Section 11 claim arising out of a direct listing after applying the strict tracing requirement from SCOTUS’s Slack decision. The Slack decision required that a plaintiff plead and prove that it purchased shares traceable to the registration statement it claims was materially misleading when making a Section 11 claim.

[The court] noted that the Supreme Court “did not assess whether any specific allegations were sufficient to plead traceability, nor what evidence is sufficient to prove it.”

Plaintiffs sought to satisfy the tracing requirement by alleging that (i) the probability that plaintiffs “purchased at least one registered share is so high as to constitute a legal certainty”; (ii) they would be able to prove traceability with appropriate discovery; and (iii) “any unregistered shares they purchased should be deemed registered on an integrated offering theory.”

[But] the district court held that plaintiffs could not plausibly allege that the shares they purchased were issued pursuant to the allegedly deficient registration statement because both registered and unregistered shares of the issuer’s stock were available at the time of the direct listing.

The alert continues with these implications, which are similar to those Liz had highlighted when Slack was released:

– The decision confirms that Slack’s strict tracing requirement may effectively insulate companies that go public through a direct listing from Section 11 liability.

– The decision further suggests that nothing short of chain-of-title allegations will suffice to plead traceability, posing a significant challenge to plaintiffs seeking to plead a Section 11 claim arising out of a direct listing.

– The decision may also have implications in other circumstances where tracing shares to a particular registration statement is difficult, such as where unregistered shares enter the market after an IPO lockup period expires, or where there have been multiple offerings pursuant to multiple registration statements. Ultimately, this decision and others interpreting Slack may make direct listings a more attractive avenue for companies that are looking to go public, as a direct listing may reduce associated litigation exposure.

– Meredith Ervine