445 F.Supp.3d 367
N.D. Cal.2020Background
- Plaintiff Fiyyaz Pirani bought Slack Class A shares in Slack’s June 20, 2019 NYSE direct listing and filed a putative class action alleging the Registration Statement/Prospectus (Offering Materials) contained material misstatements and omissions under §§11, 12(a)(2), and 15 of the Securities Act.
- Slack executed a direct listing (no new shares issued); registered shares and unregistered (Rule 144) shares became tradable simultaneously, and large pre-IPO holders (VC defendants) sold millions of shares at listing.
- Plaintiff alleges omissions/misstatements about frequent past outages, unusually generous SLAs (99.99% uptime and punitive credit multipliers), scalability problems, competition (notably Microsoft Teams), and growth metrics; significant outages occurred June–July 2019 and price dropped after a September 4, 2019 earnings/MD&A disclosure.
- Defendants moved to dismiss under Rule 12(b)(6), arguing (inter alia) that Section 11 plaintiffs must trace purchases to the registered offering, that no offering price exists for damages in a direct listing, Section 12 sellers/privity are not alleged, and several challenged statements are nonactionable or adequately disclosed.
- The court denied dismissal in part and granted it in part: it (1) adopted a broader reading of “such security” in §11 for this direct-listing context and denied dismissal for §11 standing and damages at the pleading stage; (2) denied dismissal of §12(a)(2) claims against Individual Defendants on a solicitation theory; (3) found some categories of alleged misstatements actionable (notably outages/SLA omissions) but dismissed others (scalability, competition, key benefits, certain growth statements); and (4) denied dismissal of §15 control claims as plausibly pleaded against VC defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| §11 standing ("such security"/tracing) | Pirani: tracing rule cannot bar §11 in a direct listing where registered and unregistered shares became tradable simultaneously; purchasers whose shares became tradable only because registration occurred should have §11 standing | Defs: Ninth Circuit tracing requirement requires proof purchases were of shares issued under the registration statement; tracing is impossible here so §11 standing fails | Court adopted a broader reading of “such security” in this unique direct-listing context and DENIED dismissal for lack of §11 standing |
| §11 damages / "offered to the public" price | Pirani: not required to plead damages now; alleges opening market price and may pursue value-based damages theory | Defs: direct listing lacks an IPO offering price, so §11 damages formula cannot apply as a matter of law | Court held defendants did not show lack of damages at pleading stage; DENIED dismissal on damages grounds |
| §12(a)(2) seller / solicitation privity | Pirani: Individual Defendants signed Offering Materials, participated in Investor Day, sold shares, and were financially motivated—adequate to plead solicitation/privity | Defs: signing or participation in marketing events is insufficient; plaintiff must show direct solicitation or sale to purchasers | Court found allegations of signing, investor-day solicitation, and motive plausibly plead active solicitation; DENIED dismissal of §12(a)(2) claims against Individual Defendants |
| Material misstatement/omission sufficiency | Pirani: Offering Materials omitted material facts about frequent outages, onerous SLAs, scaling failures, Microsoft competition, and slowing growth—violations of Items 105/303 and §§11/12 | Defs: disclosures warned of outages/competition/scaling; many challenged statements are puffery or forward-looking (bespeaks-caution) and adequately disclosed elsewhere | Court: sustained claims as to outages/SLAs (omissions plausibly material) but DISMISSED claims based on scalable-architecture, competition-data, "key benefits" puffery, and certain growth-strategy forward-looking statements |
| §15 control (VC defendants) | Pirani: VC defendants held large supervoting stakes, placed directors on the Board, caused/benefited from the direct listing and sales—plausibly controlled Slack | Defs: minority ownership and board seats alone insufficient to plead control | Court held allegations (ownership, board designees, motive to effectuate listing to cash out) sufficiently plausible at Rule 8 to DENY dismissal of §15/control claims |
Key Cases Cited
- Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967) (early tracing analysis and narrower reading of "such security")
- Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (9th Cir. 1999) (adopts tracing requirement for §11 standing)
- In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104 (9th Cir. 2013) (tracing doctrine and difficulties proving traceability)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standards and conclusory allegations)
- Pinter v. Dahl, 486 U.S. 622 (1988) (§12 seller—sale or active solicitation required)
- Tcherepnin v. Knight, 389 U.S. 332 (1967) (remedial statutes construed broadly)
- SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476 (9th Cir. 1973) (securities acts are remedial; full and fair disclosure purpose)
- In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) (materiality standard for misstatements/omissions)
- SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011) (mixed question of fact for adequacy of disclosure)