On June 1, 2023, the United States Supreme Court held in a unanimous decision that, under Section 11 of the Securities Act of 1933 (the “Securities Act”), plaintiffs must plead and prove that they purchased securities that were traceable to the registration statement that plaintiffs claim contained a material misstatement or omission. Slack Technologies, LLC v. Pirani
, No. 22-200 (June 1, 2023). At issue was whether a plaintiff who purchased shares of a company through a direct listing, in which shares that were registered under the alleged misleading registration statement were sold alongside unregistered shares, had standing to bring a Securities Act claim when plaintiff had not adequately pled that the shares it purchased were registered. We previously covered the now-vacated Ninth Circuit’s decision
, the Supreme Court’s grant of the petition for certiorari
to review the Ninth Circuit’s decision and the parties’ oral argument
before the Supreme Court.
As background, Slack Technologies (the “Company”) went public through a direct listing, in which, unlike in a traditional initial public offering, the listing company files a registration statement for the purpose of allowing existing shareholders to sell their shares directly to the public and not through a bank, and there is no lock-up agreement restricting the sale of unregistered shares. Both registered and unregistered shares are available for public trading from the first day of a direct listing. The Company argued that, because plaintiff was unable to determine whether his shares were registered or unregistered, he did not have standing to bring claims under either Sections 11 or 12 of the Securities Act because those provisions allow suits brought only by those who purchased a security issued pursuant to an allegedly false or misleading registration statement (Section 11) or offered by means of an alleged false or misleading prospectus (Section 12(a)(2)). 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.” The Ninth Circuit took up the issue on interlocutory appeal.
Section 11 provides, in relevant part: “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 (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue [certain enumerated parties].” 15 U. S. C. §77k(a). In affirming the district court decision, the Ninth Circuit interpreted the term “such security” more broadly than any court of appeals that had previously considered the issue. The Ninth Circuit held that “[a]l 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.” Accordingly, the Ninth Circuit decision departed from the statutory language and essentially read the “tracing” requirement out of Section 11, while purporting to find that all shares, including ones not registered under the registration statement at issue, were “traceable” to it. The Ninth Circuit also came to the same conclusion as to Section 12, stating that Section 12 liability “is consistent with Section 11 liability.” The Supreme Court granted certiorari
The Supreme Court began by observing that “[f]or many years, lower federal courts have held that liability under [Section 11] attaches only when a buyer can trace the shares he has purchased to a false or misleading registration statement” but that “[r]ecently, the Ninth Circuit parted ways with these decisions, holding that a plaintiff may sometimes recover under §11 even when the shares he owns are not traceable to a defective registration statement.” The Court stated that “[t]he question [it] face[d] is which of these approaches best conforms to the statute’s terms.”
The Supreme Court’s decision turned on its interpretation of whether the term “such security” in the context of Section 11(a)—which authorizes an individual to sue for a material misstatement or omission in a registration statement when the individual has acquired “such security”—required that the “security” be traceable to the at-issue registration statement. In considering the entire context of Section 11, the Court agreed with the Company that Section 11 does require that a plaintiff pursuing a Section 11 claim be able to trace its securities to the alleged misleading registration statement, reasoning that “the statute imposes liability for false statements or misleading omissions in ‘the
registration statement[,]’ [n]ot just a registration statement or any registration statement” and that the statute “uses the definite article to reference the particular registration statement alleged to be misleading, and in this way seems to suggest the plaintiff must ‘acquir[e] such security’ under that document’s terms.” The Court noted that this interpretation was further supported by the statute’s repeated use of the word “such,” which serves to “narrow the law’s focus” to particular things or statements, “[a]ll of which suggests that, when it comes to ‘such security,’ the law speaks to a security registered under the particular registration statement alleged to contain a falsehood or misleading omission.” The Court also found instructive that Section 11(e) caps damages against an underwriter in a Section 11 suit to the “total price at which the securities underwritten by him and distributed to the public were offered to the public,” which, the Court noted, “thus ties the maximum available recovery to the value of the registered shares alone.” The Court observed that this was “another feature” of Section 11 “that makes little sense on [plaintiff]’s account for if §11(a) liability extended beyond registered shares presumably available damages would too.”
Concerning plaintiff’s arguments as to policy and purpose—that adopting a broader reading of “such security” would “expand liability for falsehoods and misleading omissions and thus better accomplish the purpose” of the Securities Act—the Court stated it “cannot endorse this line of reasoning.” The Court emphasized that the Securities Act is “limited in scope,” while the Securities Exchange Act of 1934 Act “allows suits involving any sale of a security but only on proof of scienter,” such that, the Court stated, “it seems equally possible that Congress sought a balanced liability regime that allows a narrow class of claims to proceed on lesser proof but requires a higher standard of proof to sustain a broader set of claims.”
The Court did not address Section 12 of the Securities Act, holding that it did not need to reach the merits of the dispute over whether Section 12 liability only extends to shares traceable to a registration statement because the Ninth Circuit held only that the analysis for Sections 11 and 12 was the same and the Court had held that the Ninth Circuit’s Section 11 analysis was flawed. The Court stated, “the best course is to vacate its judgment with respect to [the Section 12] claim as well for reconsideration in the light of our holding today about the meaning of [Section] 11.” The Court noted, however, that it did not endorse the Ninth Circuit’s view that Section 11 and Section 12 should be considered under the same analysis and “caution[ed] that the two provisions contain distinct language that warrants careful consideration.”
The Court vacated the Ninth Circuit’s judgment and remanded the case to the Ninth Circuit to consider whether plaintiff can satisfy the requirements of Section 11, as clarified by the Court, and Section 12.