Direct Listing Dilemma for Pension Funds: Understanding the Impact of Slack Technologies v. Pirani on Liability under Section 11
By: Robert C. Finkel and Karine Malina, Wolf Popper LLP
Pension funds that have invested in direct non-registered initial offerings should understand that when initial offering shares are not issued pursuant to a registration statement, investors lack the same legal protections for shares that were purchased pursuant or traceable to a registration statement. Consequently, the recent Supreme Court decision in Slack Technologies v. Pirani poses a challenge in pleading and proving claims under Section 11 of the Securities Act for shares acquired through non-registered direct listings.
This is an excerpt from NCPERS Summer 2023 issue of PERSist, originally published July 18, 2023.
On June 1, 2023, the United States Supreme Court issued a unanimous decision in Slack Technologies v. Pirani.1 Slack held that Section 11 of the Securities Act of 1933 requires all plaintiffs asserting a claim under the statute to plead and prove the shares they purchased through a direct listing are traceable to an allegedly defective registration statement.2 However, in a direct listing, unregistered shares are sold into the market, and even if accompanying registered shares are sold at the same time, it is challenging to trace whether the shares purchased by a particular plaintiff are subject to the registration statement, unless those shares were purchased directly from an underwriter.
In 2019, Slack went public on the New York Stock Exchange through a hybrid direct offering, rather than a traditional IPO.3 118 million of the total shares offered by Slack were registered pursuant to a Registration Statement and 165 million shares were unregistered.4 The Plaintiff Fiyyaz Pirani purchased shares on the NYSE the day the company went public.5 After the price dropped, he filed a class action lawsuit under Sections 11 and 12 of the 1933 Securities Act alleging that the registration statement filed was “materially misleading.”6
The Supreme Court vacated the Ninth Circuit's decision denying the Defendant's motion to dismiss and remanded the case for the court to decide whether the pleadings satisfy Section 11 in light of the Supreme Court's construction of the statute.7 The Court's analysis focused on the ambiguous language in Section 11(a) which “authorizes an individual to sue for a material misstatement or omission in the registration statement when [they] acquire ‘such security.'”8 The issue for the Court was to decipher the meaning of “such security” and whether Congress intended liability under the statute to extend to unregistered shares acquired in a direct listing.9 Through various “contextual clues,” the Court concluded that “such security” refers to a “security registered under the particular registration statement that allegedly contains a falsehood or misleading omission.”10
As a result of the Slack decision, it will be difficult for plaintiffs to prove a Section 11 claim for shares purchased on the open market as a consequence of a direct listing. In the future, companies may prefer direct listings over IPOs due to the advantage of avoiding strict liability under Section 11. Correspondingly, pension funds in direct offerings should understand that they may not be able to hold the issuers of the IPO shares to the same standard of liability as in a traditional offering. However, direct listing claims for misleading registration statements can still be brought under Section 10(b), though proof of scienter and loss causation must be shown and plaintiffs must meet a higher pleading standard of pleading fraud with specificity. In a footnote, the Court discussed Section 12 of the 1933 Act, which allows an individual to sue for a security acquired based on false or misleading statements communicated by the company orally or in a prospectus.11 The Court chose not to rule on the proper interpretation of Section 12(a), but recommended the Ninth Circuit vacate its judgment and reconsider its holding sustaining the complaint under Section 12(a) based on the Supreme Court's Section 11 holding.12
About the Author: Robert C. Finkel is a senior partner and member of the executive committee at Wolf Popper LLP. Robert is a graduate of the Columbia Law School, Class of 1981 (where he was a Harlan Fiske Stone Scholar), and the University of Pennsylvania, Class of 1978, where he obtained a B.S. in accounting from the Wharton School of Business and a B.A. in history from the College of Arts and Sciences. Robert began his employment in the 1980s with two large New York City defense firms. Robert became a partner at Wolf Popper LLP effective January 1, 1992. He has been repeatedly designated a Super Lawyer® in Securities Litigation.
Robert has written for The New York Law Journal on subjects including shareholder voting rights and ERISA class actions. He can be reached at email@example.com or (212) 451-9620.
3. Id. at 1.
5. Id. at 2.
7. Id. at 18.
8. Id. at 12.
10. Id. at 4.
11. Id. at 18-19.