On June 1, 2023, the U.S. Supreme Court issued a much-anticipated decision in Slack Technologies, LLC v. Pirani—an appeal concerning the scope of Section 11 of the Securities Act of 1933 and its application with respect to direct listings.

The Court sided with the defendants in holding that Section 11 requires plaintiffs to plead and prove that they bought shares registered under an allegedly defective registration statement. This requirement is contrary to the Slack plaintiff’s and Ninth Circuit Court of Appeals’ position that Section 11 more broadly permits plaintiffs to sue over other securities not registered under a defective registration statement—such as unregistered shares that became publicly tradeable once a direct listing-related registration statement was filed—so long as those other securities “bear some sort of minimal relationship to [the] defective registration statement.” The Court’s decision all but forecloses the ability of a plaintiff to bring a Section 11 claim tied to a direct listing, in which both registered and unregistered shares contemporaneously flood the public market once the direct listing becomes effective, making it practically impossible for a would-be plaintiff to ascertain whether shares that he or she purchased after such a direct listing were registered or not.

Whether this ruling makes direct listings more common remains to be seen. Direct listings have been rare with only a dozen or so in the past several years. Most private companies looking to go public lack the cash resources needed to forgo a traditional IPO, in which investment bank underwriters generally require company insiders to consent to “lockup agreements” that prohibit such insiders from selling unregistered shares that they might own (e.g., from pre-IPO stock awards) for a specified period.

Perhaps a possible result is that Slack will reinforce arguments made by the defense bar—with some traction in federal appellate decisions (one of which was cited with approval by the Supreme Court in Slack)—that it is virtually impossible for plaintiffs to bring Section 11 claims tied to post-IPO secondary public offerings. In secondary offerings, much like the direct listing in Slack, the market is comprised of certain shares that are traceable to an allegedly defective secondary offering registration statement and many other shares that are not. But, unlike direct listings, secondary public offerings are extremely common and Slack thus could have dramatic implications extending far beyond relatively novel and uncommon direct listings. To put it in perspective, the approximately $153.5 billion raised in 2021 core U.S. IPOs marked the most core U.S. IPO funds raised in any given year in history—but that amount paled in comparison to the $224.7 billion raised in post-IPO secondary public offerings in the same year.¹

Regardless of the merits of any Section 11 claim, and particularly given Section 11’s draconian liability provisions and the potentially substantial defense costs that are incurred simply to achieve dismissal of a Section 11 lawsuit, insureds should regularly audit their directors’ and officers’ liability insurance policies to ensure optimized coverage.

¹ https://www.sifma.org/wp-content/uploads/2022/07/CM-Fact-Book-2022-SIFMA.pdf