In a rare unanimous opinion, the U.S. Supreme Court confirmed that parties pursuing claims under Section 11 of the Securities Act of 1933 must demonstrate that their shares were issued pursuant to a materially false or misleading registration statement giving companies looking to go public another reason to do so through direct listings. Securities laws impose strict liability for misleading statements in initial public offering documents. In recent years, direct listings have become more popular, in part to avoid litigation and potential liability under the Securities Act of 1933 because only shareholders who purchased securities registered under the challenged registration statement had standing to sue. Alternatively, in a direct listing, registered and unregistered shares are issued simultaneously, making it difficult for a shareholder to show that the securities in question were registered. 

The Ninth Circuit in the context of direct listings, adopted an expansive view of shareholder standing. A software company (the “Company”) went public through a direct listing simultaneously releasing a combination of registered and unregistered shares. The Company moved to dismiss a shareholder suit arguing that the shareholder could not prove that the shares were issued pursuant to the registration statement. The district court denied the motion and the Ninth Circuit affirmed expressing concern that direct listings could “create a loophole large enough to undermine the purpose of Section 11.” The decision was at odds with precedent from other jurisdictions and made the Ninth Circuit an outlier. 

The Supreme Court reversed and confirmed that only shareholders who can trace their shares to the registration statement have standing to sue under the Securities Act. Looking to “the context [and] circumstances” of the statute, the Court held that the “[Company’s] reading of the law is the better one.” The Court also rejected the shareholder’s argument that a broader reading of the statute’s standing requirements would “better accomplish” the purpose of the Securities Act, by taking a common position that it was not the Court’s role to expand the law. The Court decided not to make a determination on the shareholder’s claim under Section 12, which imposes strict liability for a false or misleading statement in a prospectus or oral communication and does not reference registration statements. The Court explained that because it rejected the Section 11 analysis, it was also vacating the judgment with respect to Section 12, but expressly stated it did not endorse the view that the two provisions necessarily travel together, and instead “caution[ed] that the two provisions contain distinct language that warrants careful consideration.” 

While preserving the status quo, this decision carries significant implications for securities litigators. By rejecting arguments that seek to expand the reach of Section 11 to fit developments in today's securities markets, the Company paves the way for intensified standing challenges nationwide and will make it easier for companies to obtain dismissal of such claims brought by parties who purchased their shares through direct listings.