The Supreme Court Solidifies The Securities Act's Tracing Requirement For Section 11 Plaintiffs

• Jurisdiction: United States,Federal
• Law Firm: Mintz
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Securities
• Author: Mr Douglas P. Baumstein, Jason C. Vigna, Ellen Shapiro and Aaron R. Megar
• Published date: 15 June 2023

Last week, the U.S. Supreme Court solidified the "tracing" requirement for private plaintiffs to be able to assert Section 11 claims pursuant to the Securities Act of 1933, holding that plaintiffs asserting such securities fraud claims must show that they own stock that was issued pursuant to an allegedly misleading registration statement'even though such tracing may be impossible in the context of a direct listing. In effect, the decision likely protects future direct listings from Section 11 liability so long as the direct listing does not involve a "lock-up period" pursuant to which unregistered and registered shares enter the market at different times.

Case Background

On June 20, 2019, Slack Technologies, Inc. ("Slack") went public by conducting a direct listing on the New York Stock Exchange. In doing so, Slack offered 118 million new shares to the market pursuant to a registration statement, together with 165 million shares that had previously been issued without a registration statement. While in an initial public offering ("IPO"), unregistered shares are typically prevented from entering the market for a "lock-up period" of 90 to 180 days, a direct listing allows previously private shareholders, such as employees and initial investors, to sell their shares on the market at the same time as the newly issued registered shares (if any newly-issued shares are offered at all). One major benefit of direct listings is they carry lower transaction costs, as no underwriters are involved. Direct listings are most likely to make sense for a company that is looking to become public but does not have the capital needs of a typical IPO candidate. In order to become public via a direct listing, the private company must be in a financial position that it does not need the assistance of investment bankers to raise capital or assurances that a certain amount of capital will be raised. For this reason, direct listings are relatively unusual.

Fiyyaz Pirani, who bought 250,000 shares of Slack following its direct listing, later sued the company under Sections 11 and 12 of the Securities Act of 1933, alleging that Slack's registration statement downplayed the competition it was facing from Microsoft Teams and the difficulty Slack faced in scaling its operations internationally, and failed to disclose the frequency of its service disruptions or its policy to pay its customers service credits whenever their service was disrupted.

Section 11 of the Securities Act provides...