April 18, 2023
Yesterday the United States Supreme Court heard oral argument in a case raising questions of when investors have standing to sue under Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “Securities Act”). Slack Technologies, LLC, et al., v Fiyyaz Pirani, No. 22-200. While the case arises out of a direct listing, the Court’s anticipated ruling may have significant impact on standing issues in the context of traditional public offerings.
Slack Technologies (the “Company”) went public through a direct listing in which, unlike in a traditional initial public offering, a company does not issue new shares and files a registration statement for the purpose of allowing existing shareholders to sell their shares directly to the public on an exchange. Because of applicable exemptions, both registered and unregistered shares are available for public trading from the first day of a direct listing and are intermixed in the market. The Company argued that this prevented investors from showing that they had standing to sue under the Securities Act, which generally allows suits brought only by those who purchase “such security” issued pursuant to an allegedly misleading registration statement (Section 11) or by means of a misleading prospectus (Section 12(a)(2)).
The Ninth Circuit, on an interlocutory appeal from the district court’s denial of the Company’s motion to dismiss on standing grounds, had held that purchasers of either registered or unregistered shares sold in the direct listing had standing. The Ninth Circuit’s decision is covered in more detail here. The Company, supported by several amici, argued that the Ninth Circuit’s decision contradicted the statutory text and, if allowed to stand, would significantly expand the scope of Securities Act liability. The Supreme Court granted the petition for certiorari as discussed here.
As expected, the Supreme Court argument (transcript available here) focused heavily on the statutory text. Questioning by the justices appeared to be favorable to the Company’s position that “such security” in Section 11 refers to registered shares (and not unregistered shares). If that is the prevailing view, however, it was not entirely clear whether the Court would reverse the denial of the motion to dismiss or vacate and remand for the lower court to consider whether the plaintiff adequately alleged standing as compared to what could be proven later in the case. At least some of the justices also seemed unconvinced that the standing requirement of Section 12(a)(2) is necessarily co-extensive with that of Section 11. As a result, there appeared to be interest in the possibility of vacating the ruling on Section 12(a)(2) and allowing the lower courts to consider whether that claim can proceed with the benefit of the Court’s ruling on Section 11 and more focused briefing.
The outcome of the Supreme Court’s decision and its reasoning could have significant implications for Securities Act liability in the context of traditional public offerings as well as direct listings. If the decision blurs the lines between registered shares and unregistered shares (as the lower court rulings did), that could be viewed by some plaintiffs as expanding Section 11 liability for traditional public offerings. For example, at least some of the justices expressed the view that the status quo in traditional public offerings is that Section 11 liability is cutoff when the lock-up period expires and unregistered shares enter the market. That status quo could be undermined by a decision agreeing that the purchasers of both registered and unregistered shares have standing under Section 11 in the context of a direct listing. Alternatively, a ruling in favor of the Company that distinguishes between Section 11 and Section 12(a)(2) standing requirements could cause plaintiffs to focus more attention on Section 12 claims.