Pirani v. Slack Technologies Inc.: The Ninth Circuit Extends The Tracing Requirement

Companies that issue false and misleading statements in support of their public stock offerings face penalties  under Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “1933 Act”). 

Section 11 of the 1933 Act imposes civil liability for misstatements or omissions contained in registration statements.  Section 12(a)(2) of the 1933 Act does the same but for misstatements or omissions in prospectuses or “oral communications.” Both sections of the 1933 Act are considered “strict liability” statutes meaning that a plaintiff need not prove the issuer acted with intent to deceive.

A shareholder bringing a private claim against a company under Sections 11 or 12 must be able to show that he purchased his shares in reliance on the false or misleading statements in the registration or offering documents. The concept is known as “tracing.” While shareholders bringing Section 11 and/or 12 claims do not need to meet the burden of establishing scienter in these cases, they face the difficult burden of establishing that their purchases may be “traced” to the false and misleading statements in the registration statements.   

The stringent and oft-difficult to prove tracing requirements were loudly reaffirmed in the Supreme Court case:  Slack Techs., LLC v. Pirani, 598 U.S. 759, (2023).  There, a plaintiff brought claims under Sections 11 and 12(a)(2) in the Northern District of California against Slack Technologies LLC (“Slack”) for statements in a registration statement and prospectus issued in connection with its direct listing.[1]  Because Slack went public through a direct listing and not an initial public offering,  it did not engage an underwriter and its preexisting shareholders were not subject to lockup agreements, which in turn allowed the shares Slack sold pursuant to the registration statement and the shares Slack insiders sold that were exempt from such requirements to enter the market simultaneously.  As a result, plaintiff could not say by what means he purchased Slack shares.

Initially, plaintiff did not claim he bought the shares traceable to the registration statement or prospectus he argued was misleading.  Rather, he challenged “the concept of tracing” a share of stock as “a concept that no longer exists in today's market and is not possible.” As relevant here, the district court accepted this argument, and the 9th Circuit affirmed, finding that Section 11 and Section 12(a)(2) liability did not extend “only to shares directly traceable to those registered under the prospectus.”  Pirani v. Slack Techs., Inc., 445 F. Supp. 3d 367, 383 (N.D. Cal. 2020), aff'd, 13 F.4th 940 (9th Cir. 2021).

However, when the case reached the Supreme Court, the court disagreed and found that a Section 11 and 12(a)(2) plaintiff must “plead and prove that he purchased shares traceable to the allegedly defective registration statement.”   Pirani, 598 U.S. 759 at 770.  Ultimately, the case was remanded back to the Ninth Circuit where the court just recently held that a plaintiff must be able to trace its purchase of the relevant security back to a prospectus or oral communication in order to prove its Section 11 and 12(a)(2) claims.  Pirani v. Slack Techs., Inc., 127 F.4th 1183 (9th Cir. 2025).[2] Because of the circumstances of Slack’s direct listing, the court found that the plaintiff had not satisfied this standard. Id.

This progeny of the Slack cases leaves open the possibility that a company who goes public through a “direct listing”  will be immune from liability under of Section 11 and 12(a)(2) of the 1933 Act.