SCOTUS Slack Technologies Decision

Direct listings have some advantages over traditional, underwritten initial public offerings for companies seeking to become publicly traded, including allowing existing shareholders whose shares are eligible for resale under Rule 144 to sell their unregistered securities on the first day of public trading along with the company’s registered shares. Additionally, the direct listing process allows companies to create a public market for its shares without diluting existing shares and is a lower-cost alternative to a traditional initial public offering. Direct listing also offers companies a way to potentially avoid liability under Section 11 of the Securities Act of 1933 (the “Securities Act”). This advantage of direct listings was confirmed in the Supreme Court’s recent unanimous ruling in Slack Technologies v. Pirani, which reaffirmed that under Section 11, only shareholders who purchased securities registered under the challenged registration statement (i.e. claiming that the registration statement was materially false or misleading) have standing to sue. Specifically, the Supreme Court agreed with Slack that a Section 11 plaintiff must “plead and prove that he purchased shares traceable to the allegedly defective registration statement.”

Although the decision did not address the limitations and challenges of tracing (or alternative tracing arguments that could spawn from the decision) in modern and ever-changing markets, the Court did indicate that markets and technology may have developed beyond what was contemplated by the securities laws and stated in its dicta that “Congress remains free to revise the securities laws at any time, whether to address the rise of direct listings or any other development.” Nonetheless, the Slack decision’s reaffirmation of the tracing standing requirement under Section 11 will continue to limit shareholder claims in direct listings and could incent more companies to follow Slack Technologies in going public through a direct listing.