On February 10, 2025, the Ninth Circuit Court of Appeals ruled in favor of Slack Technologies LLC, dismissing an investor class action lawsuit brought under Sections 11 and 12(a)(2) of the Securities Act. This decision follows the 2023 U.S. Supreme Court ruling, which held that the Slack plaintiffs must trace their purchased securities to the particular registration statement alleged to be false or misleading in order to bring a Section 11 claim. The Supreme Court declined to render judgment on the Section 12 claim. At that time, the case was remanded back to the Ninth Circuit for reconsideration.
In the context of Slack's direct listing, the traceability requirement posed challenges for investors. In order to satisfy the requirement, an investor must show a direct connection between the shares purchased and the specific document containing the alleged misstatement. In traditional IPOs, this chain of title is typically well-documented. However, because a direct listing involves the simultaneous public trading of pre-existing shares—without underwriters or lockup periods—the mingling of registered and unregistered shares makes it challenging to trace their individual origins.
On appeal for the Section 11 claim, the Slack plaintiffs sought to establish traceability through a statistical analysis. They argued that traceability should not require proving the registration status of particular shares but rather whether the plaintiffs can plausibly allege that at least some registered shares were purchased pursuant to the registration statement. According to the plaintiffs, traceability should be established by simply relying on the statistical inference that given the number of shares purchased and the percentage of shares on the exchange that were registered (approximately 42%), "the likelihood that none of the 30,000 shares was registered is infinitesimally small." However, the appeals court rejected the plaintiff's statistical inference theory as both factually and legally flawed and inconsistent with applicable judicial precedents.
The appeals court also separately confirmed that the tracing requirement similarly applies to a Section 12(a)(2) claim. Under Section 12(a)(2), a plaintiff must show that the security was offered or sold by means of a prospectus containing a material misstatement or omission. The appeals court rejected the Slack plaintiffs' argument that the provision should cover non-public offerings or exempt transactions. Since the Slack plaintiffs conceded that it was impossible to trace their shares back to the registration statement, they failed to state a claim and the appeals court reversed the district court's decision and remanded with instructions to dismiss the complaint in full and with prejudice.
The court's ruling narrows Sections 11 and 12(a)(2) liability by requiring investors to prove that their shares are linked to an offering's registration statement to have standing to sue for disclosure deficiencies. This narrowing of liability is likely to influence how companies consider direct listings as a means of listing their securities in the future. Going forward, companies may see direct listings as more favorable for avoiding certain types of liability, given the added complexity in tracking which shares are linked to the registration statement. A link to the court's opinion can be found here.
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