Practitioners should be aware that on September 20, 2021, the Ninth Circuit Court of Appeals issued a decision in Pirani v. Slack Techs., Inc., No. 20-16419 (9th Cir. Sept. 20, 2021), holding that an individual investor had standing to sue under Section 11 and Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§77k(a), 77l(a)(2), based on shares issued under the New York Stock Exchange’s new direct listing rule despite the fact that the investor was unable to determine if he had purchased registered or unregistered shares in the direct listing. See Order Granting Accelerated Approval of NYSE Proposed Rule Change Relating to Listing of Companies, Exchange Act Release No. 34-82627, 83 Fed. Reg. 5650, 5653-54 (Feb. 2, 2018) (the “Direct Listing Rule”). This opinion is the first circuit-level decision concerning the new Direct Listing Rule.
In general, the Direct Listing Rule permits companies to file a registration statement with the Securities and Exchange Commission to allow existing shareholders to sell their shares on an exchange without a related underwritten offering from an investment bank. See 83 Fed. Reg. 5651.
The corporate defendant in this case, Slack Technologies, went public through a direct listing on June 20, 2019, releasing 118 million registered shares and 165 million unregistered shares into the public market. Plaintiff Pirani purchased 30,000 Slack shares that day and subsequently purchased 220,000 additional shares over several months. Three months later, on September 19, 2019, Pirani filed a complaint against Slack (and several other defendants) alleging violations of section 11, section 12(a)(2), and section 15 of the 1933 Act on behalf of a putative class of investors who acquired Slack stock pursuant and/or traceable to the registration statement and prospectus issued in the direct listing.
In the district court, Slack moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) on the basis that Pirani lacked standing to sue under the 1933 Act. The district court held that Pirani did have standing because “he could show that the securities he purchased, even if unregistered, were ‘of the same nature’ as those issued pursuant to the registration statement.” Opinion at 9.
On appeal, the Ninth Circuit explained that the panel’s decision turned on the meaning of the phrase “such security” contained in §11 where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time. Opinion at 12. The panel further explained that in a direct listing, “the same registration statement makes it possible to sell both registered and unregistered shares to the public.” Id. at 13. Further, the panel held that “Slack’s unregistered shares sold in a direct listing are ‘such securities’ within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence.” Id. Stated differently, “[a]ny person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement.” Id. at 13–14. Furthermore, the Ninth Circuit explained that because there was only one registration statement at issue, the case “does not present the traceability problem identified by this court in cases with successive registrations.” Id. at 14. As such, the Ninth Circuit panel held that the “connection between the purchase of the security and the registration statement is clear” because “both the registered and unregistered Slack shares sold in the direct listing were sold ‘upon a registration statement’ because they could only be sold to the public at the time of the effectiveness of the statement.” Id. at 15.
In so holding, the Ninth Circuit panel rejected Slack’s contention that prior authority limited the meaning of “such security” in section 11 to only registered shares, such that the Court should limit standing to plaintiffs who can prove a purchase of registered shares pursuant to a particular registration statement. In doing so, the panel explained that “interpreting Section 11 to apply only to registered shares in a direct listing context would essentially eliminate Section 11 liability for misleading or false statements made in a registration statement in a direct listing for both registered and unregistered shares.” Id. at 15–16. In short, this “interpretation would create a loophole large enough to undermine the purpose of Section 11 as it has been understood since its inception.” Id. at 16.
As this is the first known precedential decision concerning the standing of an investor to bring 1933 Act claims in connection with a direct listing when that investor cannot ascertain whether the shares were registered or unregistered, practitioners should watch Slack closely for potential en banc review, a cert petition to the Supreme Court, and future circuit splits.
Danielle S. Myers is a partner with Robbins Geller Rudman & Dowd LLP in San Diego, California.
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