On December 13, 2022, the Supreme Court granted certiorari to consider whether Sections 11 and 12(a) of the Securities Act require a plaintiff who purchased shares through a direct listing to plead and prove that he bought shares registered under a specific allegedly misleading registration statement. Slack Techs. v. Pirani, No. 22-200. Petitioners (defendants below) are appealing a 2021 Ninth Circuit decision interpreting the “such security” language in Section 11[1] and Section 12(a)[2] to mean any share, registered or unregistered, and holding that plaintiff need not prove that he bought registered shares. Pirani v. Slack Techs., 13 F.4th 940 (9th Cir. 2021).[3]

Petitioners claimed that the Ninth Circuit’s reading threatens to dramatically expand liability under the Securities Act, will lead to forum shopping, and departs from well-established law. Petitioners noted that in the past, “seven other courts of appeals had uniformly held that ‘such security’ means a share registered under the registration statement challenged by the plaintiff as misleading.” They argued against the Ninth Circuit’s reliance on policy concerns to expand the meaning of “such security” to include unregistered shares and claimed that departing “from the settled understanding of Section 11 is irreconcilable with numerous other court of appeals decisions.”

Petitioners further warned that the Ninth Circuit’s rule would apply not only to direct listings, but also to traditional IPOs. Petitioners explained that six months after a typical IPO the lockup expires, allowing unregistered shares to be sold on an exchange. Petitioners point out that under the approach adopted by other courts of appeal, the expiration of the lockup generally cuts off Section 11 liability.[4] However, petitioners claimed that under the Ninth Circuit’s rule, any shareholder would have standing to sue under Section 11 until the statute of limitations expires.

By contrast, respondent claimed that the Ninth Circuit’s decision does not conflict with other circuit courts’ decisions. Although other circuits have found that “to have standing under Section 11 purchasers must ‘trace’ their securities to a particular registration statement,” they have done so in the context where there were multiple registration statements. Brief for Respondent, Slack Techs. v. Pirani (No. 22-200). Respondent argued that the “judge-made tracing requirement made sense in those instances” because to have standing, in the case of more than one registration statement, purchasers needed to trace their securities back to the registration statement with the alleged misstatement or omission. By contrast in this case respondent noted there was only one registration statement and, therefore, no chance that purchasers bought shares based on a registration statement that did not contain the alleged misrepresentations or omissions.

Respondent also argued that the Ninth Circuit properly considered the policy and legislative history underlying the statute because Section 11’s reference to “such security” is unclear on its face. Further, claiming that petitioners overstate the consequences and reach of the Ninth Circuit’s decision, respondent argued that the holding is limited to direct listings and only those instances where registered and unregistered shares are simultaneously sold to the public under a single registration statement. Respondent claimed that the Ninth Circuit observed the difference between a traditional IPO with its lockup period and a direct listing where all of the shares are released at the same time.

The Supreme Court will hear and rule on Slack Techs. v. Pirani later this term; a date for oral argument has not yet been set.

ENDNOTES

[1] Section 11 of the Securities Act provides, in relevant part: “In case any part of the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security . . . may, either at law or in equity, in any court of competent jurisdiction, sue . . . .” 15 U.S.C. § 77k(a).

[2] Section 12(a) provides, in relevant part: “Any person who . . . offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading . . . and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable, subject to subsection (b), to the person purchasing such security from him, who may sue . . . to recover the consideration paid for such security . . . .” 15 U.S.C. § 77l(a).

[3] Please click here to read our discussion of the Ninth Circuit’s decision in Pirani.

[4] As petitioners stated in their petition for a writ of certiorari, the expiration of the lockup, which causes a mix of unregistered and registered shares to be available for trading on an exchange, “cuts off Section 11 liability by precluding post-lockup buyers from proving that they bought registered shares.”

This post comes to us from Simpson, Thacher & Bartlett LLP. It is based on the firm’s memorandum, “Supreme Court: Grants Certiorari to Determine Whether Purchasing Shares in a Direct Listing Creates Standing Under the Securities Act,” dated January 31, 2023, and available here.