Supreme Court: Even in a Direct Listing, Section 11 Requires Plaintiffs to Trace Shares to Registration Statement

A unanimous Supreme Court has confirmed that a claim brought under section 11 of the Securities Act of 1933 ("1933 Act") requires that a plaintiff plead and prove that the shares purchased were issued pursuant to an allegedly false or misleading registration statement. Under the Court's ruling, companies that issue shares via a direct listing cannot be strictly liable under section 11 unless purchasers of the securities can prove that the shares they bought are traceable to a materially misleading registration statement. Slack Technologies LLC fka Slack Technologies, Inc. et al. v. Pirani, ___ U.S. ___ (2023). A plaintiff who purchased unregistered shares through a direct listing that are not traceable is instead limited to claims under the Securities Exchange Act of 1934, and must meet the enhanced pleading requirements applicable to those claims. 

As part of a direct listing of both registered and unregistered shares, Slack offered for sale 118 million shares that were subject to the registration statement, as well as 165 million unregistered shares. Following a drop in Slack's stock price, the plaintiff filed a putative class action alleging that the defendants had disseminated a materially false or misleading registration statement in violation of section 11 of the 1933 Act. The defendants moved to dismiss, arguing that the plaintiff had not pled that the shares he purchased were from the shares registered under the allegedly misleading registration statement, as opposed to the 165 million preexisting and unregistered shares that were sold in the direct listing. The district court denied the motion, and the Ninth Circuit affirmed over a dissent, creating a split with every other circuit to address the question. 

In reversing the Ninth Circuit, the Court concluded that language in section 11(a) that "authorizes an individual to sue for a material misstatement or omission in a registration statement when he has acquired 'such security'" referred to "a security registered under the particular registration statement alleged to contain a falsehood or misleading omission." That conclusion was supported by language in section 11, as well as other provisions of the 1933 Act and other "contextual clues." The Court rejected the plaintiff's contention that the phrase "such security" should refer to "other securities that bear some sort of minimal relationship to a defective registration statement." Ultimately, the Court reasoned that the "better reading of the particular provision … requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement." The Court's ruling makes clear that the traceability requirement applies to all lawsuits under section 11, including suits involving shares purchased in direct listings.