Ninth Circuit Addresses Section 11 Standing in the Context of Direct Listings

Section 11 of the Securities Act of 1933 contains a strict liability cause of action for violation of certain securities registration requirements. Pursuant to longstanding case law, plaintiffs seeking to assert a Section 11 claim were required to “trace” their shares back to a relevant registered offering in order to establish Section 11 standing. This generally meant establishing that a plaintiff purchased shares directly in an offering related to a misleading registration statement or, if the shares were purchased in the aftermarket, prove that the shares could be traced back to the offering in question. In a recent case of first impression, Pirani v. Slack Technologies, Inc., 13 F.4th 940 (9th Cir. 2021), the Ninth Circuit was asked whether a plaintiff can establish Section 11 standing in the context of a novel form of direct offering involving registered and unregistered shares.   

The Pirani case centered on a direct offering by Slack Technologies, Inc. (“Slack”), a San Francisco-based software company. Slack began trading publicly on the New York Stock Exchange (“NYSE”) on June 20, 2019. Unlike many companies, Slack did not go public through a traditional Initial Public Offering or “IPO.” Instead, Slack took advantage of a recent change to NYSE rules allowing companies to enter the public market without issuing any new shares (as they would in an IPO). In this form of offering, Slack insiders and early investors were able to sell their pre-existing shares directly to the public. In preparation for this offering, Slack filed a registration statement with the Securities and Exchange Commission (“SEC”). The materials filed in preparation for the offering noted that Slack would also be selling unregistered securities as part of the offering. In a typical IPO, registered shares are sold first, with unregistered shares being available after a “lockup” period. The direct offering allowed Slack to avoid this lockup period. 

After the public listing, a proposed class action was filed alleging, among other things, violation of Section 11 of the Securities Act related to alleged misstatements or omissions in Slack’s SEC filings related to the offering. Slack moved to dismiss the putative class action complaint alleging that lead plaintiff, Fiyyaz Pirani, lacked Section 11 standing because he could not trace his shares to a defective registration statement as both registered and unregistered shares were offered at the same time. The District Court, noting that this was a case of first impression, rejected Slack’s argument that Pirani lacked standing, holding that because the unregistered securities were of the same nature as those issued pursuant to the registration statement, Section 11 applied. Slack appealed. 

On appeal, a divided panel of the Ninth Circuit upheld the District Court’s ruling on Pirani’s Section 11 standing. The Court noted that, in contrast to a traditional IPO, the direct listing at issue imposed no lockup period keeping unregistered securities off of the market. Instead, a single registration statement allowed for the simultaneous sale of registered and unregistered securities. The Court reasoned that because the sale of unregistered securities could not have occurred without the operative registration statement for registered securities, that the unregistered securities were covered by Section 11. In other words, because the case involved only one registration statement, there was not traceability problem such as would be present in successive offerings because all securities sold in the offering could be traced to a single registration statement, including the unregistered securities. The Court went on to note that to apply Section 11 only to registered shares in a listing of this type would eliminate liability for false or misleading statements in associated registration statements. 

The Court’s decision in Pirani may have broad implications for companies seeking alternatives to the traditional IPO and their potential liability under Section 11. This broad view of the tracing requirement has the potential to expand remedies available to aggrieved shareholders. It is unclear whether Slack will seek further appellate review of this novel issue.