1/20/2024 0 Comments Slack stock direct listingThe court concluded that Slack’s unregistered shares sold in its direct listing are “such securities” within the meaning of Section 11. The Ninth Circuit grappled with the meaning of the bolded phrase “such security” in the context of a direct listing, where only one registration statement exists and where registration and unregistered securities are offered to the public at the same time, based on the existence of one registration statement. may, either at law or in equity, in any court of competent jurisdiction, sue-(1) every person who signed the registration statement. 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. In relevant part, Section 11(a) of the Securities Act of 1933 provides: The Ninth Circuit’s Slack decision adopted an expansive view of shareholder standing. This raised a question of “first impression,” according to the majority opinion, about whether a stockholder has standing to sue if the stockholder cannot show the shares he or she purchased were issued under the allegedly false or misleading registration statement. He had no proof that his shares were registered in connection with Slack’s IPO. A purchaser of those shares later sued after Slack’s stock declined, claiming IPO documents were materially false and misleading. At its IPO, Slack released a combination of registered and unregistered shares simultaneously. Slack went public through a direct listing in 2019. When registered and unregistered shares are simultaneously issued (and mixed in the market), as in the case of a direct offering, it becomes difficult, if not impossible as a practical matter, for investors to show that the securities they purchased were issued pursuant to the challenged registration statement. That is because under longstanding precedent, only shareholders who purchase a security registered under the challenged registration statement have standing to sue. In theory, litigation risk would also be minimized. There are many perceived business advantages of a direct listing, including avoiding long lock-up periods for insiders and the costs of underwriting by investment banks. Instead, companies file a registration statement with the SEC for the sole purpose of allowing existing shareholders to sell their shares. In a direct listing, companies do not issue any new shares. The Slack decision is at odds with decisions by other courts of appeal and may make the Ninth Circuit a plaintiff-friendly jurisdiction for securities class actions involving direct listings. Slack Technologies, which sided with investors in closing off what it perceived as a “loophole” large enough to undermine the remedial purpose of the Securities Act. Not so, according to the Ninth Circuit’s recent 2–1 decision in Pirani v. As direct listings have become more popular, one benefit has been the potential that they would eliminate liability under the Securities Act of 1933. In the last few years, direct listings emerged as a potential cure for these cases. That strict liability regime attracts a steady stream of securities class actions when a newly public company’s stock price falls below its IPO price. Strict liability is the “strong medicine” that the federal securities laws impose for misleading statements made in connection with initial public offering documents.
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