Divided 9th Circuit Panel Holds That Sections 11 and 12(a)(2) Apply to Unregistered Shares in Direct Listings

By: Dean Kristy , Jennifer C. Bretan

On September 20, 2021, in a 2-1 decision, the U.S. Court of Appeals for the Ninth Circuit held that Sections 11 and 12(a)(2) of the Securities Act of 1933 (1933 Act) apply to direct listings of company shares, including unregistered shares that were issued and traded at the same time as registered shares. The case, Pirani v. Slack Technologies, is one of first impression and, at least for now in the Ninth Circuit, will have important ramifications for issuers utilizing direct listings as a means of offering shares to the public. Unless reversed (whether by en banc review in the Ninth Circuit or by the U.S. Supreme Court), the decision will impose strict liability on issuers under the 1933 Act for alleged misstatements in a registration statement even though a shareholder cannot show that its shares were registered and issued pursuant to the allegedly defective registration statement.


In a traditional initial public offering, a company seeking to go public files a registration statement and then sells shares issued under that registration statement. In most circumstances, the investment banks underwriting the offering insist on a lock-up period during which existing shareholders may not sell their unregistered shares for a certain period. Anyone purchasing shares on the stock exchange during the lock-up period would therefore be certain that the shares were issued under the registration statement, as they are the only shares being actively traded on the exchange. Accordingly, in the typical situation, if the company’s stock price declines below the offering price due to an alleged misstatement, a shareholder plaintiff has no difficulty “tracing” its shares to the allegedly defective registration statement.

In Slack, the company did not use the traditional process. Instead, it went public through a direct listing permitted by New York Stock Exchange (NYSE) rules. It did not issue any new shares, but simply filed a registration statement so that certain shares already held by employees and early investors could begin to be traded on the NYSE. There were no underwriters and no lock-up period. On the first day of the offering, 118 million registered shares and 165 million unregistered shares were available for purchase on the exchange. The initial offering price was $38.50 per share.

Over the next few months, the company experienced difficulties that caused its stock price to drop below $25 per share. Plaintiff, who bought 30,000 shares on the offering day, filed a class action suit under the 1933 Act against the company, its officers and directors and venture capital fund investors, alleging that the registration statement contained false and misleading statements. Given the realities of modern trading systems, the plaintiff did not and could not allege that the shares he purchased were registered pursuant to the challenged registration statement or, instead, were unregistered shares that also entered the market that day. Defendants moved to dismiss, arguing that plaintiff could not satisfy the tracing requirement of §11.

The U.S. District Court for the Northern District of California denied defendants’ motion. It held that plaintiff had standing under §11 because he could show that the securities he purchased, even if unregistered, were “of the same nature” as those issued pursuant to the registration statement. Based largely on policy considerations, the district court adopted a broad reading of §11 to account for the difficulty of distinguishing between registered and unregistered shares when both are sold concurrently in a direct listing. The district court certified the question for interlocutory appeal to the Ninth Circuit.

The 9th Circuit’s Decision

In a 2-1 decision written by Judge Jane Restani, sitting by designation from the U.S. Court of International Trade, joined by Chief Judge Sidney Thomas (with a stern dissent from Circuit Judge Eric Miller), the Ninth Circuit affirmed the denial of the motion to dismiss. Noting that the matter was one of first impression, the appeals court focused its analysis on the language in §11, which in relevant part provides:

In case any part of a registration statement, when such part becomes effective, contained an untrue statement of a material fact . . . any person acquiring such security . . . may, either at law or in equity, in any court of competent jurisdiction, sue – (1) every person who signed the registration statement . . . 15 U.S.C. §77(k)(a).

The panel interpreted the words “such security” in §11 to apply to the direct listing despite the sale of unregistered shares. The appeals court reasoned that, under the NYSE rules, an issuer is required to issue a registration statement (solely for the purpose of allowing existing shareholders to sell their shares), in the absence of which a direct listing could not proceed. According to the appeals court, “in a direct listing, the registration statement makes it possible to sell both registered and unregistered shares to the public.” Thus, “Slack’s unregistered shares sold in a direct listing are ‘such securities’ within the meaning of §11 because their public sale cannot occur without the only operative registration in existence.” Plaintiff had standing because “[a]ll of Slack’s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration.” In that way, the panel majority distinguished a direct listing case from other decisions in the Ninth and other circuits uniformly holding that §11 applies only to registered shares that can be traced to a particular registration statement (as opposed to entering the market in other ways or through a different registration statement).

While purporting to be based on the statutory language, the panel also cited policy considerations. Because a plaintiff will not know whether the shares it purchased were registered or unregistered, the panel reasoned that interpreting §11 in any other way “would essentially eliminate §11 liability for misleading or false statements made in a registration statement in a direct listing for both registered and unregistered shares.” This would “incentivize[]” companies to file “overly optimistic” registration statements, and “create a loophole large enough to undermine the purpose of §11.”

In his dissent, Judge Miller criticized the panel for deviating from the “more natural” reading of the statutory language. Emphasizing that courts had uniformly interpreted the “such security” language in §11 to apply only to shares issued under the defective registration statement, he believed there was no basis to deviate from those determinations merely because this case involved a direct offering. “We did not invent a requirement that a plaintiff’s shares must have been issued under the registration statement because we thought it was a good idea; we interpreted the statutory text to impose that requirement.” Judge Miller also criticized the panel for relying on the NYSE rules, rather than the statutory text, and found that policy considerations are “no basis” for changing the settled interpretation of the statutory text.


Given the importance of the issue and the divided opinion, it is possible that the full Ninth Circuit will be asked to consider the matter en banc or that defendants will seek to have the matter reviewed by the Supreme Court. In the meantime, however, issuers in the Ninth Circuit, as well as their officers and directors, should anticipate that direct listings will be subject to the strict liability provisions of the 1933 Act for any material misstatements or omissions in a registration statement, and that they will face securities class actions for declines in their stock price regardless of whether plaintiff purchased registered or unregistered shares.


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