United States Supreme Court Holds That Section 11 Plaintiffs Must Purchase Securities Issued Under The Registration Statement They Seek To Challenge

• Jurisdiction: United States,Federal
• Law Firm: Sheppard Mullin Richter & Hampton
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Securities
• Author: Mr John Stigi and John Landry
• Published date: 12 June 2023

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In Slack Technologies, LLC v. Pirani, No. 22-200, 2023 U.S. LEXIS 2301 (U.S. June 1, 2023), the Supreme Court of the United States (Gorsuch, J.) held that Section 11 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. ' 77k, requires plaintiffs to show that they purchased securities registered under the registration statement they seek to challenge, a requirement the Supreme Court referred to as "tracing." In Slack, the public offering occurred under circumstances that did not allow the plaintiff or other purchasers to trace any security to the challenged registration statement. As a result, the Court vacated the decision of a panel of the United States Court of Appeals for the Ninth Circuit that had relieved plaintiff of a tracing obligation. The Supreme Court's unanimous opinion confirms that courts must strictly enforce Section 11's tracing requirement even when doing so precludes all purchasers in an offering from accessing Section 11's liability provisions.

Slack Technologies, LLC's ("Slack") conducted a new type of public offering known as a "direct listing" whereby its securities would trade on the New York Stock Exchange ("NYSE"). Slack filed a registration statement for the 118 million registered shares it intended to offer. This was not an initial public offering ("IPO"), so no lock-up period (typically demanded in IPOs by underwriters) precluded Slack's founders and early employees, who held 165 million pre-existing unregistered shares, from also selling their shares on the NYSE, including on the very first day of public trading.

Plaintiff purchased his Slack shares on the first day of trading, as well as over the next few months. After Slack's stock price dropped, plaintiff filed a Section 11 claim alleging that Slack's registration statement was materially misleading. Slack moved to dismiss the claim, arguing that plaintiff could not allege that any share he purchased was among those that were registered as opposed to unregistered. The United States District Court for the Northern District of California denied defendants' motion (Pirani v. Slack Technologies, Inc., 445 F. Supp. 3d 367 (N.D. Cal. 2020), and, on interlocutory appeal, a 2-1 majority of a panel of the Ninth Circuit affirmed, holding that a Section 11 plaintiff may sometimes recover under the statute even when shares are not traceable to the allegedly defective registration statement. Pirani v. Slack Technologies, Inc., 13 F.4th 940 (9th Cir. 2021)...