On September 20, 2021, the Ninth Circuit, in a split decision, held that plaintiff—a shareholder who allegedly purchased shares through a direct listing by a technology company (the “Company”)—had standing to bring claims under Sections 11, 12(a)(2), and 15(a) of the Securities Act of 1933 (the “Securities Act”). Fiyyaz Pirani v. Slack Technologies, Inc., et al, No. 20-16419 (9th Cir. Sept. 20, 2021). The Ninth Circuit affirmed the district court's order denying in part a motion to dismiss securities fraud claims. The Company challenged plaintiff's standing to sue under Sections 11 and 12(a)(2) of the Securities Act for failure to prove his shares were registered under the alleged misleading registration statement. The Court held that plaintiff had standing to bring Securities Act claims because, whether registered or unregistered, his shares could not have been purchased without the issuance of the Company's registration statement. The Court concluded that the shares purchased by plaintiff were governed by Sections 11 and 12 of the Securities Act and affirmed the district court's partial denial of the Company's motion to dismiss.
The Court noted that in a direct listing, unlike a traditional initial public offering, a company “does not issue any new shares and instead files a registration statement ‘solely for the purpose of allowing existing shareholders to sell their shares' on the exchange.” Shares are sold directly to the public and not through a bank, and there is no lock-up agreement restricting the sale of unregistered shares (i.e., shares fall within one of the registration exceptions enumerated in SEC Rule 144). Accordingly, as acknowledged by the Court, “from the first day of a direct listing, both unregistered and registered shares may be available to the public.”
In 2019, the Company went public through a direct listing and released 118 million registered shares and 165 million unregistered shares for purchase. Although plaintiff was unable to determine whether his shares were registered or unregistered, the district court held that plaintiff had standing because “he could show that the securities he purchased [over time] were ‘of the same nature' as those issued pursuant to the registration statement.” Section 11 provides that: “In case any part of the registration statement, when such part became effective, 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 . . . .” The district court was of the view that the reference to “such security” should be broadly read and took a similar approach to Section 12(a)(2)'s requirement that a plaintiff purchase “‘such security' from a defendant who ‘offers or sells a security . . . by means of a prospectus.'” The district court further held that these references to “such security” included registered or unregistered securities offered in a direct listing. The Ninth Circuit took up the issue on an interlocutory appeal.
The Ninth Circuit noted that the meaning of “such security” has been interpreted within the circuit as a “security issued under a specific registration statement, not some later or earlier statement.” The Court noted, however, that the specific issue before it—i.e., the meaning of the phrase “such security” in the context of a direct listing of registered and unregistered shares with only a single registration statement—was an issue of first impression because “[p]ast cases in this and other circuits have dealt with successive registrations,” where “there are multiple registration statements.”
The Court emphasized that “[t]he words of a statute do not morph because of the facts to which they are applied.” The Court accordingly stated it would not adopt the broad interpretation of Section 11 suggested by the district court. The Court observed, however, that “in a direct listing, the same registration statement makes it possible to sell both registered and unregistered shares to the public” because there is no lock-up period associated with direct listings that would keep unregistered shares out of the market. The Court accordingly concluded that “[a]ll of [the Company]'s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration,” such that “any purchaser of [the Company]'s shares in this direct listing [would be ] a ‘person acquiring such security' under Section 11.”
The Court further stated that to interpret Section 11 to only apply to registered shares in the direct listing context in which a purchaser will not know if they purchased a registered or unregistered share would “essentially eliminate Section 11 liability” for false statements in a registration statement in a direct listing. The Court expressed its concern that such an interpretation “would create a loophole large enough to undermine the purpose of Section 11” and that “companies would be incentivized to file overly optimistic registration statements accompanying their direct listings in order to increase their share price.”
As to the issue of standing under Section 12 of the Securities Act, the Court noted that Section 12 liability “is consistent with Section 11 liability” and that the shares sold in the direct listing were “sold by a means of a prospectus” because the prospectus was part of the offering materials that allowed the shares to be sold to the public. The Court accordingly held that plaintiff had adequately pled standing to bring Section 11 and Section 12 claims.
In a dissenting opinion, Judge Eric Miller stated that: “Although the factual setting of the case may be novel, the legal issues it presents are not. The interpretation of sections 11 and 12 has been settled for decades, and applying that interpretation, I would reverse the district court's order and remand with instructions to grant the motion to dismiss in full.” Judge Miller noted that “[e]very court of appeals to consider the issue” of the meaning of the phrase “such security” in Section 11, including the Ninth Circuit, has interpreted the phrase more narrowly than the majority did in this case. The Ninth Circuit has held that the phrase “such security” requires that a plaintiff purchase a security issued under the registration statement at issue, and because plaintiff here was unable to show his shares could be traced back to the registration statement, he did not have standing to bring his Section 11 claim. Judge Miller further noted that “nothing in the reasoning of the cases suggest” that the distinction of a direct listing with a single rather than multiple registration statements “should matter.” Judge Miller also observed that if “‘such security' means that plaintiffs must have purchased shares ‘issued under the allegedly false or misleading registration statement' in successive-registration cases . . . then that is also what it means in direct-listing cases” where only one registration statement is at issue.
Should this case reach the Supreme Court, the Court would have an opportunity to clarify important issues of standing under Sections 11 and 12 of the Securities Act.
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