The US Supreme Court’s decision in Slack Techs., LLC v. Pirani prompted commentators to predict that plaintiffs would struggle to establish standing if they brought claims under Section 11 of the Securities Act of 1933 when a company offered stock through a direct listing.
Two recent district court decisions, one from Colorado and the other from New Jersey, demonstrate that courts are still grappling with this issue.
Slack
Workplace messaging company Slack Technologies used a direct listing to go public on the New York Stock Exchange in 2019, instead of conducting a traditional initial public offering.
Unlike a traditional IPO, when companies register shares with a Securities Act filing, Slack’s direct listing simultaneously offered unregistered and registered shares. As a result, purchasers had difficulty determining whether their acquired shares were registered.
After Slack’s stock price declined, a shareholder filed a putative class action alleging the company’s direct listing registration statement was materially misleading and violated Section 11. Slack argued the shareholder lacked standing because he hadn’t alleged that he purchased shares traceable to the allegedly misleading registration statement.
A district court denied Slack’s motion to dismiss, and the US Appeals Court for the Ninth Circuit upheld the district court’s decision, but the US Supreme Court reversed and tossed the shareholders’ complaint, explaining that a Section 11 plaintiff must “plead and prove that he purchased shares traceable to the allegedly defective registration statement.”
Palantir
The US District Court for the District of Colorado reached a similar conclusion in Cupat v. Palantir Technologies[, dismissing a shareholder complaint alleging that data analytics software company Palantir Technologies filed a materially misleading registration statement in connection with its direct listing.
Applying Slack, the court held that the plaintiffs’ Section 11 claim failed because they couldn’t trace their shares to the allegedly misleading registration statement. Holding that traceability must be pleaded with specificity, the court rejected each of the plaintiffs’ pleas.
The plaintiffs had argued it was “overwhelmingly likely” they purchased at least one registered share because “at least 17.9%” of available shares to trade were registered and the plaintiffs purchased more than 1.2 million shares.
This “probabilistic tracing theory” argument was rejected as inconsistent with Slack because “a plaintiff must plead facts supporting a plausible inference that its shares are traceable, not simply facts supporting a plausible inference that its shares are probably traceable to the challenged registration statement.”
The plaintiffs also alleged that “with appropriate discovery” they could prove that they acquired shares that could be directly traced to the registration statement. The court rejected this argument as well, explaining that standing must be established at the outset, not after discovery. Further, the court wasn’t persuaded that any permitted discovery could have proven “actual chain-of-title tracing.”
The plaintiffs further argued that any unregistered shares they purchased “should be deemed registered on an integrated offering theory.” Under this theory, registered and unregistered shares would be treated the same because they both became available on the public market at the same time as part of a single financing plan involving one class of securities for the same type of consideration and general purpose.
The court found this argument “difficult to square with Slack” because “what the Slack plaintiff was asking the Supreme Court to do”—and what the Supreme Court chose not to do—“was treat unregistered shares as if they were registered.”
Coinbase
Shareholders in New Jersey, however, survived a motion to dismiss in In re Coinbase Glob., Inc. Sec. Litig., a case involving a putative class action against cryptocurrency exchange Coinbase, which had gone public via a direct listing.
The court denied Coinbase’s argument that the shareholders hadn’t adequately pleaded that their purchases were traceable to the registration statement.
It held that allegations that the plaintiffs bought Coinbase stock on the first day it was listed “at prices near the opening price and when 88% of shares outstanding were registered pursuant to the Offering Materials” were sufficient to “plausibly allege” that the plaintiffs purchased shares that could be traced to the offering materials.
Coinbase sought review by the Third Circuit on April 11, arguing the district court erred in allowing the case to proceed based on “a possibility that the plaintiff purchased registered shares, not that a plaintiff actually purchased registered shares.” The Third Circuit hasn’t yet decided whether to accept the appeal.
Practical Implications
If courts enforce Section 11’s strict tracing requirements, as described by Slack and construed in Palantir, plaintiffs may, as a practical matter, have trouble pursuing Section 11 claims arising from allegedly misleading statements in direct listing registration statements.
While plaintiffs could still bring claims under Section 10(b) of the Securities Exchange Act of 1934, Section 10(b) imposes additional pleading requirements.
Although Slack, Palantir, and Coinbase all involved direct listings, these cases may have broader application to a common fact pattern in which an issuer conducts both an IPO and a later follow-on offering.
In that scenario, shareholders sometimes bring Section 11 claims based on purchases on or after the date of the follow-on offering even if they can’t trace whether their shares were originally sold in the IPO or in the follow-on offering.
If courts conduct a similar analysis in that scenario as the analysis conducted by the District of Colorado in Palantir, then companies should succeed in getting Section 11 claims dismissed at the pleading stage for lack of standing.
The cases are: Slack Techs., LLC v. Pirani, 2023 BL 186463, U.S., 22-200, 6/1/23; Cupat v. Palantir Techs., Inc., 2025 BL 134866, D. Colo., 22-cv-02384-GPG-SBP, 4/4/25; In re Coinbase Glob., Inc. Sec. Litig., 2024 BL 311016, D.N.J., 2:22-cv-04915 (BRM) (LDW), 9/5/24
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Samuel P. Groner and Katherine L. St. Romain are litigation partners at Fried, Frank, Harris, Shriver & Jacobson.
Natasha Menon, a law clerk at Fried Frank, contributed to this article.
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