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(Reuters) - A Slack Technologies LLC investor who sued the company over an allegedly misleading registration statement from its 2019 direct listing IPO urged the U.S. Supreme Court on Wednesday to skip review of a precedent-setting appellate decision allowing his case to proceed.
Fiyyaz Pirani’s lawyers at Bragar Eagel & Squire told the justices that there was no need for them to plunge into the technicalities of litigation over direct listings, a relatively new form of IPO in which corporate insiders and early investors can sell their privately issued shares to the public without all of the formalities and expense of traditional IPOs.
The U.S. Securities and Exchange Commission authorized direct listings in 2018, and fewer than 20 companies have since used the vehicle to go public, Pirani's brief said. The Slack suit is so far the only case in which a federal appellate court, the 9th U.S. Circuit Court of Appeals, has ruled on whether direct listing investors can bring claims under the Securities Act. The Supreme Court, according to the Slack investor and his lawyers, should wait until other lower courts have had a chance to weigh in.
The brief also rejected arguments from Slack and its amici -- including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association -- that the 9th Circuit’s ill-reasoned decision has roiled the capital markets and exposed issuers and underwriters in traditional IPOs, not just direct listings, to higher risk of liability under the Securities Act.
Pirani's new brief refuted those arguments. According to Bragar Eagel, the 9th Circuit simply interpreted the text of the statute, as well as its legislative history, when it concluded that Slack’s registration statement for the direct listing applied to all of the 285 million shares offered to the public, even though more than half of the shares were exempt from registration under the SEC’s rules for privately issued shares, because the direct listing could not have taken place without a registration statement.
“This court need not concern itself with some draconian outcome if the 9th Circuit decision is affirmed, nor should the court wrestle with the thicket of applicable SEC rules and regulations without a fulsome district and circuit court review of the issues,” the opposition brief said. “There is simply no compelling reason for the court to grant [Slack’s] petition.”
Pirani’s counsel of record, Larry Eagel, declined to comment on the new brief. Slack’s lead counsel, Thomas Hungar of Gibson, Dunn & Crutcher, referred my query to the company, which declined to comment. Slack has said there is no merit to the claim that it misled investors.
The key issue in the Slack case is whether Pirani has standing to sue under the Securities Act even though he has conceded that he cannot prove that the specific Slack shares he acquired in the direct listing were registered. (As I mentioned, more than half of the shares in the offering were exempt from registration.)
Slack has long argued that because Pirani (and, by extension, all other investors in the direct listing) cannot ascertain if his shares were registered or unregistered, he cannot assert Securities Act claims arising from an allegedly deceptive registration statement.
Slack’s arguments are premised on longstanding consensus in the federal courts, dating back to the 2nd Circuit’s 1967 ruling in Barnes v. Osofsky, that investors must be able to trace their shares back to a particular registration statement in order to bring Securities Act claims. The company and its amici contend that the 9th Circuit’s 2021 decision allowing Pirani to proceed even though he cannot trace his shares to Slack’s registration statement will open the door to Securities Act liability beyond direct listings.
That assertion takes some explaining. Traditional IPOs generally restrict insiders from selling their privately issued shares during a lockout period that lasts several months. That means that all investors who buy shares in the IPO can trace their shares to the IPO registration statement. If the statement is misleading, they all have standing to sue under the Securities Act (which, remember, does not require proof of fraudulent intent). But traceability becomes a problem once the lockout period ends and insiders begin selling shares that were exempt from registration. So issuers and underwriters have generally regarded Securities Act liability to expire once the IPO lockout period is over.
Slack and its amici have argued that the 9th Circuit’s reasoning in the Slack case – that because the offering could not have taken place without a registration statement, investors need not prove direct traceability – could apply just as well to post-lockout claims by traditional IPO investors.
Pirani’s opposition brief argued that the doomsday predictions from Slack and its amici are unfounded. The IPO market was red hot in 2021, the brief said, and its slower pace in 2022 is unrelated to uncertainty about expanded Securities Act liability. (The brief does not mention the boom and bust in special purpose acquisition company IPOs.)
Bragar Eagel also told the Supreme Court that there’s no conflict between the 9th Circuit ruling in its case and the reams of precedent requiring investors to trace their shares to registration statements in Securities Act suits. All of that case law, the opposition said, arose from cases involving multiple successive offerings under different registration statements – not the scenario in the Slack case, where a single registration statement covered the entire offering.
I would not be surprised if the Supreme Court asked for the SEC’s views before deciding whether to take the Slack case. Pirani’s opposition brief noted that in 2020, when the SEC considered expanding the availability of direct listings, some investors raised concerns about their ability to bring Securities Act claims. When it decided to approve the expansion, the SEC noted the trial court’s ruling in the Slack case and said it did not think investors’ rights would be curtailed.
Read more:
Slack's backers warn SCOTUS of hit to capital markets from direct listing case
Slack will ask Supreme Court to review novel ‘direct listing’ case
Pressure's on 9th Circuit to revisit ‘direct listing’ in Slack decision
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