Are plaintiffs required to plead and prove that they bought securities when claiming that a registration statement is misleading under Sections 11 and 12(a)(2) of the Securities Act of 1933?
This case asks the Supreme Court to determine whether a plaintiff suing under Sections 11 and 12(a)(2) of the Securities Act of 1933 must plead and prove that they bought shares registered under the allegedly misleading registration statement. Slack Technologies argues that the text of the statute reflects congressional intent to limit liability to only those who bought shares registered under the relevant registration statement. Slack additionally argues that past judicial and regulatory precedent supports this theory. Fiyyaz Pirani counters that the text of the statute reflects congressional intent to create broad liability by including a range of securities so as to protect investors. Pirani contends that this particular issue is novel and was undecided prior to the district court decision below. The outcome of this case will determine the extent to which investors are protected by the Securities Act of 1933 and the availability of remedial measures to investors under the Act.
Questions as Framed for the Court by the Parties
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
In 2018, the New York Stock Exchange (NYSE) issued a new rule allowing companies to publicly sell stock through a direct listing. Pirani v. Slack Technologies, Inc., at 6. Normally, a company issues stock to the public for the first time through an initial public offering (IPO). Id. An IPO requires a company to register new shares with the Securities and Exchange Commission (SEC). Id. Companies employ investment banks to act as underwriters of the registered shares; that is, the banks will purchase the shares at a set price from the company and then market and sell the shares to the public. Id. The investment banks typically require a lock-up period, preventing existing shareholders from selling their shares while the new shares are sold to the public. Id. Only the new, registered shares are sold during the IPO lock-up period; therefore, when an investor buys stock during an IPO lock-up period, the shares are guaranteed to be registered. Id. In contrast to the IPO process, a direct listing permits existing shareholders to sell their shares on the NYSE. Id. These shares do not have to be underwritten by a bank; accordingly, there is no lock-up period. Id. Unless they are exempt, like shares issued during an IPO lock-up period, shares issued during the direct listing must similarly be registered. Id. However, because there are various exemptions, many shares in direct listings are not registered. Id.
On June 20th, 2019, Slack Technologies Inc. (Slack) used a direct listing to go public. Id. The sale involved placing 118 million registered and 165 million unregistered shares into the market. Id. at 7. Fiyyaz Pirani purchased 30,000 shares of Slack on the first day of the offering and purchased an additional 220,000 shares over the next several months. Id. During this time, because of business operational issues, the price of Slack shares decreased from an initial price of $38.50, eventually dropping below $25 per share. Id. at 8.
Pirani sued Slack, alleging that the company’s registration statement was inaccurate and misleading, and therefore violated Section 11, Section 12(a)(2) and Section 15(a) of the 1933 Securities Act. Id. In particular, Pirani claimed that Slack failed to disclose agreements with customers that paid out credits when the company’s services were disrupted. Id. Slack moved to dismiss the claim, asserting that Pirani lacked standing because he could not prove his shares were registered; therefore, any potential deficiencies in the company’s registration statement were irrelevant. Id. at 8–9.
The United States District Court for the Northern District of California granted Slack’s motion to dismiss in part. First, the court dismissed the Section 12(a)(2) claim against Slack because Slack had not issued any new shares. Id. at 10. However, the court denied the motion with regard to the Section 11 claim, determining that Pirani had standing because he could show his securities, even if unregistered, were of the same nature as those registered by Slack. Id. at 9. Further, the court denied the motion with regard to Section 12(a)(2) liability against the Slack corporate officers and board members, holding that both registered and unregistered securities were covered in a direct listing. Id. According to the court, Pirani had pled sufficient facts to support the claim that Slack’s officers had solicited the purchase of shares by preparing offering materials. Id. at 9–10. The United States Court of Appeals for the Ninth Circuit affirmed the district court’s partial denial of Slack’s motion. Id. at 20.
The United States Supreme Court granted Slack certiorari on December 13, 2022. Brief for Petitioners, Slack Technologies, LLC at 1.
CONGRESSIONAL INTENT AND STATUTORY INTERPRETATION
Slack argues that the text of the Securities Act of 1933 requires plaintiffs suing under Section 11 and 12(a)(2) to plead and prove that they bought registered shares. Brief for Petitioner, Slack Technologies at 19. Moreover, Slack adds that shares exempt from registration do not meet this requirement. Id. Slack argues that Section 11 liability exists only in connection with registered shares. Id. at 20. Slack contends that, because the text of the section ties only the securities subject to registration to the registration requirement and focuses solely on these particular shares rather than a whole class of securities, liability under the section applies only to registered shares. Id. at 20-21. Slack highlights the phrase “any person acquiring such security” in the statute and argues that it refers to registered shares; as such, the right to sue under the section is limited to those who bought shares registered under the relevant registration statement. Id. at 21. Furthermore, Slack contends that other sections of the Act use similar language. Id. at 20. Slack notes that Section 5 also uses the phrase “such security” to refer to securities registered under the registration statement and highlights that Section 6 confirms that the registration statement applies only to the securities specified in the statement. Id. Slack also notes that the last sentence of Section 10 explicitly refers to registered shares, and Section 11 continues that reference when it mentions “such security” and the registration statements. Id. at 22. Slack asserts that, because the language used in Section 11 mirrors that used in other provisions, Section 11 should be interpreted the same way. Id. Slack additionally argues that, because damages in a Section 11 suit are measured using the value of registered shares offered to the public, which does not include the value of other shares of a similar class or type, the right to sue under Section 11 must be limited to only the buyers of registered shares. Id. at 22-23.
Slack further asserts that Section 12 also requires plaintiffs to plead and prove they bought registered shares because Section 12 liability requires a misleading prospectus, and only sellers in a public offering, where shares must be registered, are required to distribute a prospectus. Id. at 26. Slack argues that this conclusion is supported by Section 5 and Section 10 of the Act, which tie the prospectus to the registration statement and require that the prospectus contain all information written in the registration statement. Id. at 27. Slack contends that the consistent use of the term “prospectus” in sections governing the requirements for registration statements reflects congressional intent to require a prospectus for only registered shares. Id.
Finally, Slack argues that, if Congress had intended to impose liability upon a broad range of securities, it would have used corresponding language, such as “any security.” Id. at 28. Slack highlights Section 17 of the Act and Section 10(b) of the Securities Exchange Act of 1934, where Congress used the phrase “any security” to denote the broad scope of the sections’ application. Id. Slack argues that the lack of such broad language in Sections 11 and 12 of the 1933 Act reflects congressional intent to keep the scope of application limited. Id. Furthermore, Slack asserts that when Congress intends to base standing to sue upon the type or class of securities, it will use specific language to do so, as it did in the 1934 Act. Id. at 29. The lack of such language, Slack contends, indicates that Congress intended to base standing upon the registration status of the security, not the class or type of the security. Id. at 29-30.
Pirani counters that the text of Sections 11 and 12 does not require a plaintiff to plead and prove that they bought shares registered under the relevant registration statement. Brief for Respondent, Fiyyaz Pirani at 20. Pirani contends that the buyer of any security whose sale is permitted only because of the relevant registration statement is permitted to sue under Section 11 and that “such security” refers to any security that requires the registration statement to be sold. Id. at 21. Additionally, Pirani notes that, despite Slack’s use of the term “registered shares” throughout its brief, the term is neither defined nor used in the statute. Id. at 22. Pirani further emphasizes that registration statements do not actually specify individual shares. Id. As such, Pirani argues, the only way to know which shares are registered under a registration statement is to look at which shares required a registration statement to be sold. Id.
Furthermore, Pirani argues that securities statutes should be interpreted flexibly to serve their remedial purposes. Id. at 23. For example, Pirani asserts that, though it could be referring to a security issued under the registration statement, the term “such security” should be interpreted to mean something broader. Id. Pirani contends that Slack wrongly argues that Congress intended “such security” to refer only to registered securities because when Congress does intend such an interpretation, it uses corresponding language to express it. Id. Pirani uses Section 5 of the Act as an example, highlighting that Congress used “any security with respect to which a registration statement has been filed” to indicate it meant registered securities. Id. Pirani notes that Section 4 uses similar language and refers to registered securities as “a security as to which a registration statement has been filed.” Id. at 23-24. Additionally, Pirani argues that, though Section 4 exempts some sales from the registration requirement, it does not exempt those same sales from liability imposed under Section 11. Id. at 24. Therefore, Pirani asserts, Section 11 liability can arise from the sale of securities exempt from the registration requirement. Id.
Pirani additionally refutes Slack’s assertion that the phrase “such security” in Section 11 actually refers to the last sentence of Section 10. Id. at 29. Pirani contends that such an interpretation is grammatically implausible because Congress cannot reasonably expect readers of Section 11 to understand that “such security” refers to a description in Section 10. Id. Pirani further asserts that Slack fails to recognize that “such” has various meanings based on its context and that, in Section 11, it means something more than just registered shares. Id. at 30. Moreover, Pirani emphasizes that, because the Act does not require the registration to specify individual shares to be offered, exempt securities are considered specified within the registration statement if that registration statement is required to permit their sale. Id. at 30-31. Pirani finally points out that Slack mistakenly believes that Section 11’s damage cap provision only makes sense if the section is limited to registered shares. Id. at 31. Pirani counters that the damage cap is actually limited to the price of the securities offered to the public and notes that there is no reference to nor reason to infer a reference to registered shares in the actual text. Id.
REGULATORY AND JUDICIAL PRECEDENT
Slack argues that regulatory and judicial precedent supports their contention. Brief for Petitioner at 31. Slack asserts that both regulators and courts have required plaintiffs suing under the 1933 Act to plead and prove that they bought shares registered under the relevant registration statement. Id. In particular, Slack notes that all other circuit courts that decided this issue in the past, the First, Third, Fifth, Eighth, Tenth, and Eleventh Circuits, agreed that a plaintiff must plead and prove that they bought registered shares. Id. Slack contends that even the Ninth Circuit, before this case, agreed as well. Id. at 32. Additionally, Slack asserts that, because Congress did not amend the statute despite the consistent judicial interpretation, Congress has affirmed such a reading. Id. at 31. Furthermore, Slack argues that the SEC maintains this point of view and asserts that, in their amicus brief in Barnes v. Osofsky, the SEC agreed that the 1933 Act’s registration requirement applied only to the securities specified in the registration statement and that sellers were only obligated to distribute a prospectus to buyers of those securities. Id. at 33.
Pirani counters that these past cases can be differentiated from the present one because the past cases all dealt with multiple registration statements, unlike the singular contested registration statement in the present case. Brief for Respondent at 36. Pirani further asserts that the present case is different because the issue in this case concerns the application of Section 11 to exempt shares, rather than registered ones. Id. Pirani also posits that the SEC does not agree with Slack’s viewpoint. Id. at 37. In fact, Pirani argues, the SEC acknowledged in their amicus brief in Barnes that Section 11’s application to direct listings, the issue in this case, is still an open question. Id. Pirani emphasizes that the Court has not adopted Barnes, and that the only precedent on this issue is the district court decision in this case—holding that Section 11 does apply. Id.
The Chamber of Commerce, in support of Slack, argues that companies will not choose a direct listing over alternative methods of going public just to avoid Section 11 liability. Brief of Amici Curiae The Chamber of Commerce of the United States of America, et al., in Support of Petitioners at 9. The Chamber of Commerce explains that there are many reasons companies will still prefer an IPO over a direct listing, such as the need to raise capital; therefore, direct listings will continue to impact only a very small portion of investors. Id. The Chamber of Commerce also notes the benefits direct listings have for consumers, such as efficient price discovery and transparency, which would be lost if companies used other methods of accessing capital. Id. at 9–10. The Chamber of Commerce maintains that there are multiple ways that companies can access capital without risking Section 11 liability, so allowing liability for direct listings will not necessarily protect investors. Id. at 10–11.
Former SEC officials, in support of Pirani, argue that allowing investors to privately enforce Sections 11 and 12 of the Securities Act is key to ensuring the integrity of the securities market. Brief of Amici Curiae Former SEC Officials, in Support of Respondent at 9. The former SEC officials contend that successful enforcement of Sections 11 and 12 is necessary to ensure that defrauded investors are compensated for their losses. Id. The former SEC officials explain that successful claims under Sections 11 and 12 not only protect the individual investors who are able to recover damages, but also all investors whose investments in the market rely on the quality of disclosures issued by companies. Id. at 11. The former SEC officials note that reading the Securities Act in a broad manner, such as by allowing for more lenient standing requirements, supports stronger enforcement of the statute. Id. at 10. The former SEC officials argue that upholding Pirani’s standing is particularly important because the mere threat of liability has the desired effect of ensuring that companies exercise extreme care when preparing disclosures, allowing investors to safely rely on them. Id. at 8.
IMPACT ON THE BROADER ECONOMY
The Washington Legal Foundation (WLF), in support of Slack, maintains that upholding the lower court’s decision would lead to more companies refusing to go public out of fear of expanded liability. Brief of Amicus Curie Washington Legal Foundation, in Support of Petitioner at 16. The WLF claims that this would hurt capital markets by stifling investment in successful companies and preventing the possibility of significant returns. Id. Further, the WLF argues that the increased liability risk will increase the cost of raising public capital, which will in turn prevent many companies from joining the capital markets who otherwise would have. Id. The WLF highlights that this cost to companies will rise not only because of the risk of liability, but also because of the director and officer insurance that more companies will purchase due to the increased risk of meritless suits seeking settlements. Id. at 16–17.
Institutional Investors (Investors), in support of Pirani, argue that narrowing Section 11 liability may lead institutional investors to avoid investments in newer, riskier companies out of fear that their information is less reliable. Brief of Amici Curiae Institutional Investors, in Support of Respondent at 19. Investors contend that this will not only impact public companies, but also early-stage startups whose investors may fear decreased market demand when the company eventually decides to make a public offering. Id. Investors fear that this may lead to a decrease in new, innovative companies as investors fear their investments may be unprotected. Id. Former SEC officials, in support of Pirani, argue that decreased Section 11 protections will lead to a decrease in all forms of investment due to increased risk. Brief of Former SEC Officials at 11. The former SEC officials explain that this will not only deprive some from the benefits of investing but will also decrease the liquidity of the market, which will hurt all issuers attempting to raise capital. Id.
- Susan Hurd and Madeleine Juszynski, High Court Slack Case Not Likely to Broadly Affect Issuers, Alston & Bird (Jan. 27, 2023).
- Dan Schweitzer, Supreme Court Report: Slack Technologies, LLC v. Pirani, 22-200, National Association of Attorneys General (Dec. 19, 2022).
- Greg Stohr, Salesforce Gets Supreme Court Review of Shareholder’s Slack Suit, Bloomberg Law (Dec. 13, 2022).
- Supreme Court Grants Review to Decide Who May Sue under Sections 11 and 12(a)(2) of the Securities Act, Paul Weiss (Dec. 27, 2022).