By Rodney F. Tonkovic, J.D.
Slack Technologies filed its final reply in its soon-to-be-argued case before the Supreme Court. At issue is a Ninth Circuit ruling that Slack argues upends a half-century of precedent holding that a plaintiff suing under Sections 11 and 12 of the Securities Act must prove that they bought registered shares. The wrinkle behind the appellate court's policy-based decision is that the shares were sold in a direct offering, but Slack argues that the statutory text means what it says. The matter is set for argument on April 17, 2023.
Direct listing. Slack Technologies went public via a direct listing in 2019. At the time, there were 118 million registered shares and 165 million exempt shares. The respondent, Fiyyaz Pirani, bought Slack shares soon after the company went public and, after a drop in share price, sued under Securities Act Sections 11, 12(a)(2), and 15 of the Securities Act, claiming that Slack’s registration statement was misleading. Slack countered that Pirani lacked standing because his shares could not be traced to the registration statement.
At issue was the phrase "any person acquiring such security" referring to who may sue over a misleading registration statement or prospectus under Sections 11 or 12. The district court, in a case of first impression, read the phrase broadly as meaning "acquiring a security of the same nature as that issued pursuant to the registration statement" and partially denied Slack's motion to dismiss. The Ninth Circuit agreed, reasoning, in essence, that the unregistered shares were "such securities" because their public sale could not occur without the existence of an effective registration statement. Behind this decision was a policy concern that to hold otherwise would undermine the purpose of Section 11 by essentially eliminating liability in direct listings.
Slack's petition for certiorari argued that the Ninth Circuit's holding conflicts with the decisions of seven other circuits as to the scope of Section 11. Since 1967, the seven appellate courts (including, Slack notes, the Ninth) to address the issue held that "such security" in Section 11 means a share registered under the registration statement the plaintiffs claim is misleading and not, as the Ninth Circuit held, "any share," registered or unregistered. The decision also conflicts with Supreme Court precedent. The question presented is: Whether Sections 11 and 12(a)(2) of the Securities Act of 1933 require plaintiffs to plead and prove that they bought shares registered under the registration statement they claim is misleading. Certiorari was granted in December 2022.
Brief for petitioners. Expanding on the petition, Slack's petitioner brief argues that both Sections 11 and 12 require a plaintiff to prove that they bought registered shares. Above all, because Pirani cannot show that the shares he bought were registered, his claims should have been dismissed. Sections 11 and 12 require plaintiffs to plead and prove that they bought registered shares, Slack says, and this position has been consistently endorsed by courts and the SEC and ratified by Congress. The Ninth Circuit's contrary position has no basis in the text of the provisions, the broader statutory context, or history.
Slack argues further that policy concerns are not a basis to rewrite statutory text. The Supreme Court has rejected interpretations of the securities laws that depart from the text Congress enacted. Plus, the Ninth Circuit's rule would be a bad policy because it allows plaintiffs to sue under Sections 11 and 12 whenever possible, erasing the balance between the '33 and '34 Acts. Slack also observes that Congress and the SEC have made painstaking distinctions between registered and unregistered shares that the Ninth Circuit's decision "runs roughshod over."
Reply brief. The respondent brief argued that the use of direct listings is a way to avoid liability under Section 11 by comingling registered and unregistered shares, which deliberately thwarts the statutory scheme. Echoing the Ninth Circuit, Pirani argues that all of the shares sold in a direct listing depend on the filing of the allegedly misleading registration statement. Given the ambiguity behind "such security," the Ninth Circuit's interpretation best fits the purpose of enforcing the statutory obligation to be truthful in registration statements. The same arguments apply to Section 12, the brief says.
If the Court agrees with Slack, Pirani says, the case should nevertheless be remanded to allow consideration of the standards for pleading and proving standing. If a plaintiff purchases a sufficient number of shares, the brief posits, it is statistically likely that at least some are registered. Moreover, there is no basis for the Court to hold that proving standing at later stages of the case is impossible as a matter of law. If necessary, the brief says, the lower courts should be allowed to consider whether to adopt a reasonable burden-shifting regime to mitigate the difficulties of proof.
Final petitioner brief. In response, Slack says that the respondent depends on policy concerns that are "irrelevant and overstated." Direct listings are rare, and there are many legitimate reasons to undertake one. So, the problem identified by Pirani is not real, Slack says, but the harmful effects of dramatically expanding the scope of liability are. Expanding liability would make companies reconsider going public and would increase the costs of insurance against securities suits. Even if there were a problem, Slack asserts, the Securities Act does not need to be rewritten to solve it. For example, a lockup period could be required, or shares could be labeled as registered or exempt on blockchain.
Slack also reiterates that Sections 11 and 12 require proof that registered shares were purchased. "Such" plays a limiting role and can only mean shares subject to registration: this is the "natural" way to read the text, and it is used similarly elsewhere in the Act. The use of "such security" contrasts with broader, catchall language elsewhere used to capture both registered and unregistered shares. Slack notes further that Congress has never disturbed the consistent judicial and regulatory interpretation of the requirement that plaintiffs prove they bought shares registered under the challenged registration statement.
Slack concludes by asking that the judgment of the Ninth Circuit be reversed and the case remanded with instructions to dismiss with prejudice.
The petition is No. 20-200.