January 30, 2023
By William Wilder
Shareholder Advocate Winter 2023
This term, the Supreme Court will hear oral arguments in Slack v. Pirani, a case that could have major implications for investors in companies that go public via direct listings.
The Supreme Court recently agreed to hear Slack Technologies v. Fiyyaz Pirani, a federal securities class action case arising from Slack Technologies’ (“Slack”) 2019 direct listing on the New York Stock Exchange. The case presents novel questions about standing under the Securities Act of 1933 (“Securities Act”) and could have significant ramifications for investors who purchase securities through direct listings and other alternative forms of public offerings by creating a dangerous loophole in the Securities Act.
Unlike companies that go public via initial public offerings, a privately held company that undertakes a direct listing does not issue new shares. Instead, it files a registration statement to allow existing shareholders to sell their shares directly to the public on an exchange. By filing the registration statement, a direct listing also creates a market for existing holders to resell unregistered shares in the company that meet the SEC holding requirements for exempt securities. Slack, a technology company that offers a popular instant messaging platform for businesses and organizations, opted to go public through a direct listing on the New York Stock Exchange in June 2019.
By going public through a direct listing, Slack simultaneously offered a mix of registered and unregistered securities to the public on the New York Stock Exchange. Plaintiff Fiyyaz Pirani bought shares in Slack through the direct listing on the day it went public and throughout the next few months. Pirani alleges that Slack’s registration statement was misleading because it failed to disclose important information about its service disruption policy. In a motion to dismiss, Slack argued that Pirani lacked standing to sue under Section 11 of the Securities Act because he could not “trace” the shares he purchased back to the shares offered through the misleading registration statement—and further, because the registered and unregistered shares were identical, Pirani could not definitively prove that the shares he purchased were registered shares subject to liability under Section 11.
The district court found that Pirani had standing, and the Ninth Circuit affirmed. The Ninth Circuit concluded that because the unregistered shares could not have been publicly sold without the registration statement for the registered shares to create the market, the “traceability” rule was inapplicable, and both the unregistered and registered shares were “such securities” subject to Section 11 of the Securities Act. In support of this finding, the Ninth Circuit looked to the Securities Act’s legislative history and the federal securities laws’ underlying purpose of protecting investors and preventing fraud.
In their petition to the Supreme Court for a writ of certiorari, Slack argued that the Ninth Circuit opinion is not supported by the text of the Securities Act or precedent and significantly expands Securities Act liability for unregistered shares. They argue that allowing investors to sue on this type of direct listing for shares that may not have been registered could extend liability to almost any sale of an unregistered security, such as a sale made by a corporate insider after an IPO “lockup” period, which would disincentivize companies from going public.
Slack v. Pirani could have significant ramifications for investors. While fewer than 20 companies have gone public through a direct listing since they were authorized in 2018, a December 2022 SEC rule change relaxing opening auction price restrictions is expected to increase their popularity. In addition, a Supreme Court ruling for Slack in this case could essentially shield companies going public through a direct listing from any Section 11 liability, as many shareholders would not be able to prove that the shares they purchased were registered. This would create a dangerous loophole in the Securities Act that could further incentivize companies to go public through direct listings and skirt Section 11 liability.
The case could also have potential ramifications beyond the direct listing context. The Supreme Court hears relatively few securities cases and has not heard any cases arising from the Securities Act since the confirmation of Justice Amy Coney Barrett cemented a 6-3 conservative majority on the Court. The Court could use this case to change standing requirements under the Securities Act in other ways that could affect shareholders in more traditional public offerings like IPOs and Special Purpose Acquisition Companies, or SPACs.
The Supreme Court will hear oral arguments in Slack v. Pirani sometime later this year. Since the case could disrupt federal securities law in a variety of ways, investors are urged to follow the briefing and arguments in the coming months.