On
The majority explained that Sections 11 and 12(a)(2) of the Securities Act of 1933 permit such claims, even by purchasers of unregistered shares, because, in a direct listing, a single registration statement allows both registered and unregistered shares to be made available to investors. Further, in the majority's view, negative consequences would result from a contrary ruling, including incentivizing issuers to conduct direct listings, instead of underwritten IPOs, to evade liability for "overly optimistic" registration statements, and upending investors' ability to seek redress under laws in place almost 90 years. That prompted a sharp dissent from Judge
Pirani permits direct-listing investors to bring Sections 11 and 12(a)(2) claims for now, but it is unlikely to be the final word on the matter. The Pirani defendants may move for rehearing before an en banc Ninth Circuit. And even if that effort fails, the dissent offers a framework for future defendants to challenge such claims in other circuits. Given the implications for investors and issuers, including how shares come to the public moving forward, Pirani and its aftermath will be worth watching.
Background
Corporations traditionally have issued stock to the public through a firm commitment initial public offering, known as an "IPO." In an IPO, the corporation issues new shares, which it registers with the
In 2018, the
A typical investor cannot know whether the shares it acquires in a direct listing are registered or unregistered. From the investor's perspective, it simply places an order with its broker, who obtains the shares without knowledge of where they originated. This raises an issue under Sections 117 and 12(a)(2)8 of the Securities Act, which permit private suits based on alleged misrepresentations contained in a registration statement or prospectus, respectively.9 Both require a linkage between the shares purchased and the specific offering to which the registration statement or prospectus applies. A plaintiff may sue under Section 11 only if it acquires securities "actually issued in the offering for which the plaintiff claims there was a false or misleading registration statement."10 Likewise, under Section 12(a)(2), a plaintiff must "plead and prove that it purchased a security directly . . . as part of the [offering], rather than in the secondary market."11
The issue came to a head when
The Ninth Circuit's Decision
A divided panel of the Ninth Circuit affirmed, ostensibly grounding its ruling in the statutory text of Sections 11 and 12(a)(2).13 Section 11 permits suits by "any person acquiring such security,"14 which courts have held to mean "a security issued under a specific registration statement, not some later or earlier statement."15 In the majority's view, purchasers of both registered and unregistered shares in a direct listing acquire those shares "under" a single registration statement, i.e., the one "filed solely for the purpose of allowing existing shareholders to sell their shares."16 That is because the same registration statement-albeit expressly covering only registered shares-"makes it possible to sell both registered and unregistered shares to the public."17 Similarly, under Section 12(a)(2), all direct-listing investors acquire their shares "by means of" the same "prospectus" because "the prospectus [is] a part of the offering materials (i.e. the registration statement and prospectus) that permit[s] the shares to be sold to the public."18 Accordingly, the majority held that regardless of whether Pirani acquired registered or unregistered shares, he had standing to sue all the same.
The majority, however, also had public policy on its mind, emphasizing what it perceived to be dire consequences if it ordered dismissal of Pirani's claims. According to the majority, "interpreting Section 11 to apply only to registered shares in a direct listing context would essentially eliminate Section 11 liability for misleading or false statements made in a registration statement in a direct listing for both registered and unregistered shares."19 If that were so, the majority observed, "from a liability standpoint it is unclear why any company, even one acting in good faith, would choose to go public through a traditional IPO if it could avoid any risk of Section 11 liability by choosing a direct listing."20 Moreover, "companies would be incentivized to file overly optimistic registration statements accompanying their direct listings in order to increase their share price, knowing that they would face no shareholder liability under Section 11 for any arguably false or misleading statements."21 That would "create a loophole large enough to undermine the purpose of Section 11 for any arguably false or misleading statements."22 The majority avoided this outcome by declining to distinguish between registered and unregistered direct-listing shares.
The majority's policy-based inclinations prompted a vigorous dissent by Judge
Implications
Pirani extends the principal tools for private enforcement under the Securities Act-Sections 11 and 12(a)(2)-to direct listings, even if plaintiffs cannot demonstrate that they purchased registered shares. As long as Parini's holding remains the law, the "parade of horribles" envisioned by the majority will not come to pass: investors in direct listings will not be foreclosed from pursuing claims, and issuers will not be incentivized to conduct direct listings-as opposed to IPOs-so they can craft "overly optimistic registration statements" free from the specter of liability.29 Rather, issuers will choose between direct listings and IPOs based on whether they wish to enjoy the safety net of an underwritten offering, or avoid the costs and lock-up period that come with it, not, as the majority feared, based on liability considerations. Investors, meanwhile, will be able to assert Securities Act claims arising out of direct listings and IPOs, just the same.
The majority and dissent both framed the debate as turning on the meaning of specific phrases- "any such security" in Section 11 and "by means of a prospectus" in Section 12(a)(2). The reality, however, is that both phrases, as a textual matter, have no clear or absolute meaning. Not surprisingly, then, the focus turned not to the inherent meaning of these words, but to how courts have construed the phrases in the past and how that precedent applies today. On this point,
Given the sharp difference of opinion between majority and dissent, it is doubtful that Pirani will be the final word on the question. The Pirani defendants may move for rehearing before an en banc Ninth Circuit, which could issue a superseding decision.32 Even if the majority's holding survives, Pirani only will govern courts within the Ninth Circuit, leaving defendants ample opportunity to try their hand at
Footnotes
1. 13 F.4th 940 (9th Cir. 2021).
2. NYSE Listed Company Manual § 102.01B n. E (2021).
3. 15 U.S.C. § 77e(c).
4. See Order Granting Accelerated Approval of NYSE Proposed Rule Change Relating to Listing of Companies, Exchange Act Release No. 34-82627, 83 Fed. Reg. 5650, 5653-54 (
5. NYSE Listed Company Manual § 102.01B n. E. The
6. Shares may be exempt from registration if they meet certain enumerated requirements set forth in Rule 144, including a minimum holding period and adequate publicly available information about the issuer. See 17 C.F.R. § 230.144; see also SEC Investor Publication, Rule 144: Selling Restricted and Control Securities (
7. 15 U.S.C. § 77k(a) ("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 . . . may, either at law or in equity, in any court of competent jurisdiction, sue . . . .").
8. 15 U.S.C. § 77l(a)(2) ("Any person who-- . . . offers or sells a security . . . by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading . . . shall be liable . . . to the person purchasing such security from him . . . .").
9. The word "prospectus" is a "term of art" that refers to "a document soliciting the public to acquire securities from the issuer." Gustafson v.
10. Guenther v.
11. In re Wells Fargo Mortgage-Backed Certificates Litig., 712 F. Supp. 2d 958, 966 (
12. Pirani alleged that Slack's registration statement was inaccurate and misleading because it did not reveal (i) that Slack's service agreements had generous terms, which required it to pay customers whenever service was disrupted, (ii) that service disruptions were frequent, and (iii) that Slack was facing significant competition from Microsoft Teams, another messaging service. Pirani, 13 F.4th at 944.
13. The panel consisted of Chief Judge
14. 15 U.S.C. § 77k(a).
15. Pirani, 13 F.4th at 946.
16. NYSE Listed Company Manual § 102.01B n. E.
17. Pirani, 13 F.4th 947.
18. Id.
19. Id. at 948.
20. Id.
21. Id.
22. Id.
23.
24. Pirani, 13 F.4th at 951-52 (Miller, J., dissenting) (quoting Barnes v. Osofsky, 373 F.2d 269, 271-72 (2d Cir. 1967)).
25. Id.
26. Id. at 952 (quoting Hertzberg v.
27.
28. Id. at 952 (quoting Clark v. Martinez,
29. Id. at 948.
30. Pirani, 13 F.4th at 952 (quoting Hertzberg, 191 F.3d at 1080); see also
31. Pirani, 13 F.4th at 946.
32. Order, Pirani v. Slack Techs., Inc., No. 20-16419 (9th Cir.
33.
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