In Slack Technologies, LLC v. Pirani, No. 22-200, 2023 U.S. LEXIS 2301 (U.S. June 1, 2023), the Supreme Court of the United States (Gorsuch, J.) held that Section 11 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77k, requires plaintiffs to show that they purchased securities registered under the registration statement they seek to challenge, a requirement the Supreme Court referred to as “tracing.” In Slack, the public offering occurred under circumstances that did not allow the plaintiff or other purchasers to trace any security to the challenged registration statement. As a result, the Court vacated the decision of a panel of the United States Court of Appeals for the Ninth Circuit that had relieved plaintiff of a tracing obligation. The Supreme Court’s unanimous opinion confirms that courts must strictly enforce Section 11’s tracing requirement even when doing so precludes all purchasers in an offering from accessing Section 11’s liability provisions.

Slack Technologies, LLC’s (“Slack”) conducted a new type of public offering known as a “direct listing” whereby its securities would trade on the New York Stock Exchange (“NYSE”). Slack filed a registration statement for the 118 million registered shares it intended to offer. This was not an initial public offering (“IPO”), so no lock-up period (typically demanded in IPOs by underwriters) precluded Slack’s founders and early employees, who held 165 million pre-existing unregistered shares, from also selling their shares on the NYSE, including on the very first day of public trading. 

Plaintiff purchased his Slack shares on the first day of trading, as well as over the next few months. After Slack’s stock price dropped, plaintiff filed a Section 11 claim alleging that Slack’s registration statement was materially misleading. Slack moved to dismiss the claim, arguing that plaintiff could not allege that any share he purchased was among those that were registered as opposed to unregistered. The United States District Court for the Northern District of California denied defendants’ motion (Pirani v. Slack Technologies, Inc., 445 F. Supp. 3d 367 (N.D. Cal. 2020), and, on interlocutory appeal, a 2-1 majority of a panel of the Ninth Circuit affirmed, holding that a Section 11 plaintiff may sometimes recover under the statute even when shares are not traceable to the allegedly defective registration statement. Pirani v. Slack Technologies, Inc., 13 F.4th 940 (9th Cir. 2021). The Supreme Court then granted certiorari.

For the Supreme Court, the issue boiled down to whether Section 11(a)’s text authorizing access to the statute’s express private right of action — and more specifically, the term “such security” — narrowly reaches just those securities issued under the allegedly misleading registration statement or extends to “also sometimes encompass a security that was not issued pursuant to the allegedly misleading registration statement.” The Court analyzed the context of the statute and, based upon the “contextual clues,” concluded that the narrower reading “is the better one.”

Notably, in adopting the narrower reading, the Court rejected plaintiff’s efforts to show that the term “such security” encompassed Slack’s unregistered securities because those securities would not have been eligible for sale to the public “but for the existence of Slack’s registration statement.” Hence, a security’s “but for” relationship to a registration statement does not bring it within the statute’s scope. The Supreme Court also had an interesting response to plaintiff’s argument that Congress would have been clearer if it meant Section 11 liability to attach only to securities issued under a particular registration statement. The Court observed that the argument cuts both ways, as Congress could have also written the statute more clearly if it intended it to apply, as plaintiff argued it did, to any security bearing some relationship to a registration statement. The Court also refused to endorse plaintiff’s argument that an expensive reading of “such security” would better accomplish the Securities Act’s purpose. In the end, the Court commented that “Congress remains free to revise the securities laws at any time, whether to address the rise of direct listings or any other development.”

In many respects, the Supreme Court’s opinion breaks no new ground as it simply confirms what all circuit courts (including, until its decision in Slack, the Ninth Circuit) had held regarding the meaning of the term “such security” and the tracing obligation it imposes. But the unanimous decision’s force and clarity on the subject should remove any hesitancy court’s may still have in strictly enforcing Section 11’s tracing requirement in circumstances that, like in Slack, render the requirement impossible to meet.