While direct listing offerings aren’t new, unicorns like Spotify and Slack have positioned the alternative to the traditional Initial Public Stock Offerings (IPOs) underwritten in recent headlines.

According to Jay Ritter of the University of Florida, companies that went public through direct listing outperformed the market average and beat those that went public using the traditional IPO. Despite this, direct listings are not very common – only 12 companies have.

Firms choosing them must comply with the registration statement and offering process requirements of the Securities Act of 1933, but without the involvement of underwriters, secondary market stabilization processes, or lock-in restrictions that characterize the traditional subscribed public offers. There are several reasons why businesses are reluctant to take this unconventional route. The main one is uncertainty. As with any untested process, there is uncertainty about future liability. Recently, it is about traceability.

The Ninth Circuit recently tackled a fundamental requirement in securities litigation. In a 2-1 decision in Pirani vs. Slack Technologies, the court imposed a strict liability standard for shares sold under direct listing. While this is a case of first impression, given the unique circumstances of Slack’s IPO, the ruling may still have major implications for securities litigation.

Give me Slack

The problems started for Slack when it chose to go public via a direct listing rather than a traditional IPO. Due to the absence of underwriters, other shares not subject to the registration statement of the new public company may be sold immediately after direct listing, provided there is a relevant exemption permitting the sale. However, many believe that what is actually recorded is the offer itself.

Is there a difference between the 118 million shares of the registration declaration and the 165 million assigned in derogation? The problem – A buyer can receive the same titles for effectively the same price at the same time. But Slack argued that the plaintiffs lacked standing because they could not trace the source of their actions between the two groups and the company therefore decided to drop the case.

Now, two federal courts are at odds, holding that regardless of the source of the actions, any false information or misrepresentation would affect everyone. The Ninth Circuit decision focused primarily on the overriding political concern to grant such a motion and applied the registration statement to all 283 million available-for-sale shares. The majority rightly point out that if they decided otherwise, a business could very easily avoid any liability under Section 11 via “a loophole large enough to undermine the purpose” of the law simply by “confusing the law. the tracks ”, by making a certain number of exempt tickets available. They argue that by mixing them with registered shares, there is no way to obtain standing to assert the Article 11 claims associated with registered shares.

Lobby the courts

The Securities Industry and Financial Markets Association, the United States Chamber of Commerce and the National Venture Capital Association argued that the Ninth Circuit ruling effectively removed the rule 144 exemption. question of timing? For holders of restricted, unregistered securities that are available for sale independently, deciding when, to whom and for how much to sell stocks is strictly an investment decision.

However, these investors did not seek to sell their shares until the Slack IPO. They also didn’t seek to hold their shares after Slack’s IPO and then sell them. Instead, they chose to sell during a time when, in a traditional IPO, they would have been stuck. Therefore, any reasonable buyer could equate these 165 million exempt shares to 118 million registered shares.

Perhaps, for major shareholders, especially longtime insiders and early investors who have had access to important information for a long time, this could represent an opportunity to get rid of the stocks and avoid some degree of liability. potentially abusing the rule 144 exemption.

How do we fix this?

If we assume that the Ninth Circuit was wrong, consider the implications for direct registrations. Rather than removing the exceptions to the law, a different decision would have effectively gutted section 11 as it applied to direct registrations. As stated, the issuer would only have to shuffle the headlines and make it nearly impossible to track the shares, so the plaintiffs would not have standing.

The courts have already recognized this. For more on this, check out this Columbia Law Blue Sky blog. In short, the tribunal recognizes that plaintiffs even face an almost impossible obstacle to being heard. The fast and complex OTC trading we know today did not exist until recently. Hiding behind the choices Congress made nearly a century ago, many are not careful today.

The decision in Soft is extraordinarily harsh on defendants and exposes companies seeking to go public through direct listing to significant risk associated with their registration statements. The imposition of potential liability on Slack and other companies with direct stock quotes that they have long expected to be exempt seems unfair. However, what is the alternative?

Maybe companies can and should implement blockchain-based ledgers for their shareholders. Many states, including Delaware, have already authorized such registries, and legal scholars and practitioners have all noted their potential benefits. Brokers should be required to keep records of the provenance of the shares they distribute to their clients. Although the courts have noted that many of them distribute shares as part of an “undivided interest in the [brokerage] the position of the house ”, nothing prevents them from actually keeping track.

Finally, in the short term, perhaps the SEC should encourage investors with available-for-sale securities under certain exemptions to hold them for a stabilization period immediately after direct listing. By avoiding muddling the waters during the IPO, the issues of traceability will be considerably reduced thereafter.

Where Slack Goes From Here

Following the Ninth Circuit ruling, Slack requested a new bench hearing. His argument is based on the reversal of the precedent, the resulting split in the circuit, and what he sees as a misinterpretation of the relevant laws and rules.

In addition to Slack’s own petition, an amicus brief in support of his position was filed by former SEC commissioner and Stanford Law School professor Joseph Grundfest. In it, he discusses many valid outstanding questions as to the correctness of registration statements, offers with multiple statements and, perhaps most importantly, whether or not the decision now applies to traditional underwritten IPOs.

The Ninth Circuit must now decide whether it intends to hear the case again. If not, the case would be sent back to the district court for the merits to be heard, and Slack may not be held responsible. Slack has since been acquired in a $ 27.7 billion acquisition by Salesforce.


Whatever the outcome, this case should serve as a warning to companies going public, whether through direct listing, traditional IPO, or some other method. It should encourage more in-depth disclosure from these companies and help ensure an accurate flow of public information leading to entry of companies into public procurement. To complicate matters further, Slack went public via a secondary direct listing. Since then, major exchanges, with permission from the SEC, have been given the green light for direct primary listings, allowing companies to raise funds and provide liquidity. While this should encourage companies to view direct listings as an alternative to traditional IPOs, the move may unintentionally chill the direct listings market.

For more information, see this post by John Livingstone, Robert N. Rapp, and Yours truly on the Columbia Law Blog Blue Sky. Thanks to John Livingstone, a recent graduate of Case Western Reserve University Law School, and Robert N. Rapp, professor at the school. Check out our recent article, “Investment Bankers as Underwriters: Barbarians or Guardians? a response to Brent Horton on “Direct Ads”, available here.