CRA Insights

Slack v. Pirani: Will the Section 11 tracing requirement lead to more direct listings?

June 8, 2023

Direct listings gained traction as an innovative approach to go public after Spotify went public through a direct listing on the NYSE in 2018.[1] There have since been 13 additional direct listings to date, including Slack Technologies (Slack) going public on the NYSE on June 20, 2019.[2]

In September 2019, following a stock price decline, Pirani filed a suit against Slack claiming damages under Sections 11 and 12. In September 2021, the Ninth Circuit ruled that liability extends to direct listing shares, contrary to Slack’s arguments that the plaintiff could not trace shares to a registration statement.[3] Last week, the Supreme Court ruled that “the better read­ing of §11 requires a plaintiff to plead and prove that he purchased shares traceable to the allegedly defective registration statement.”[4]

Unlike a traditional IPO, in which all shares offered to the public are registered, the registration statement in direct listings may cover only a subset of existing shares. Therefore, shares subsequently traded on an exchange might be traceable to either registered or unregistered shares sold by an insider.[5] Under the modern shareholding system in which shares are held in a fungible pool in “street name” (i.e., brokerage name) at the Depository Trust Corporation (DTC), it may be difficult for plaintiffs to trace their own shares to confirm that they are indeed registered.

It remains to be seen how the lower courts will evaluate traceability in the Slack matter on reconsideration of the question. Plaintiffs themselves may not have evidence of whether they purchased registered or unregistered shares. However, discovery might establish which shareholders sold and which purchased in a way that allows tracing. For future cases, new systems, such as the Consolidated Audit Trail, might enable secondary market purchasers to trace their shares through identification of counterparties in successive transactions leading back to the original pool of registered shares.[6] If such systems overcome the traceability question, then Section 11 litigation risk may still be a concern for future direct listings.

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