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The Ninth Circuit Court of Appeals has made it even more difficult to bring claims based on securities purchased in direct listings by ordering the dismissal all the plaintiffs’ claims in Pirani v. Slack Technologies. The decision follows the Supreme Court’s 2023 decision that a plaintiff must prove “traceability” – i.e., that the purchased securities could be traced to a materially misleading registration statement – in order to have standing to bring a claim under Section 11 of the U.S. Securities Act of 1933.
The claims were made in connection with Slack’s direct listing on the NYSE, which involved a listing but not an underwritten offering. The plaintiff bought shares on the day Slack listed, and additional shares over the next few months. He sued under Section 11 and Section 12(a)(2) of the Securities Act, but he could not prove traceability because both the registered and unregistered shares were issued to the public market at the same time, making it impossible to trace shares back to the registration statement or prospectus.
The Supreme Court reaffirmed Section 11’s traceability requirement, vacating the Ninth Circuit’s judgment and remanding the Section 11 issue to the lower court to determine whether the plaintiff’s allegations satisfied the tracing requirement. The Supreme Court declined, however, to reach the merits of the Section 12(a)(2) claim, leaving it to the Ninth Circuit to decide.
On February 10, 2025, the Ninth Circuit held that section 12(a)(2) also requires traceability. Since the plaintiff conceded that he cannot show traceability, the Ninth Circuit concluded that the complaint should be dismissed in full with prejudice.
Plaintiffs looking to sue in connection with a direct listing may find other ways to demonstrate traceability and also still have the option of making claims based on Rule 10b-5 under the U.S. Securities Exchange Act of 1934, though Rule 10b-5 requires proof of reliance on the misleading statement or omission, as well as scienter. By contrast, both Section 11 and Section 12(a)(2) impose liability without requiring proof of either fraud or reliance.
14 February 2025
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