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District Court Concludes Section 11 Liability “Likely Foreclose[d]” For Companies Going Public Through Direct Listing
April 10, 2025 Download PDF
On April 4, 2025, a federal district court in Colorado dismissed a Section 11 claim arising out of a direct listing and concluded that recent Supreme Court precedent “likely forecloses Section 11 liability in the direct listing context” altogether. The court applied the Supreme Court’s unanimous decision in Slack Technologies, LLC v. Pirani, 598 U.S. 759 (2023), which requires that a Section 11 plaintiff plead and prove that it purchased shares traceable to the registration statement it claims is materially misleading. Notwithstanding plaintiffs’ creative legal theories and plea for an opportunity to prove traceability through discovery, the district court held that plaintiffs could not plausibly allege that the shares they purchased were issued pursuant to the allegedly deficient registration statement because both registered and unregistered shares of the issuer’s stock were available at the time of the direct listing. Consistent with our prior analysis of Slack, this decision demonstrates that, in the wake of the Supreme Court’s decision, Section 11 plaintiffs will be held to a strict tracing requirement, which may effectively insulate companies that go public through a direct listing from Section 11 liability.
Background: The Direct Listing
The lawsuit, Cupat v. Palantir Technologies, Inc., No. 1:22-cv-02384-GPG-SBP (D. Colo.), concerned Palantir Technologies, Inc. (“Palantir”), a software company that went public through a direct listing in September 2020. A direct listing is different from a traditional initial public offering (“IPO”) in several respects. In an IPO, a company files a registration statement to issue new shares and unregistered shares (such as those owned by company insiders) are “locked up” and cannot be sold on an exchange for a period of time. By contrast, in a direct listing, a company files a registration statement to permit existing shareholders to publicly sell their shares, and both registered and unregistered shares are immediately tradeable. When Palantir went public by way of direct listing, approximately 53% of the shares available for trading were registered under the direct listing registration statement, while the remaining shares were exempt from registration under SEC rules.
After Palantir’s share price declined, a putative class of shareholders sued, alleging that defendants misled the market about the company’s growth prospects. Among other claims, plaintiffs alleged that Palantir made misleading statements in its registration statement in violation of Section 11 of the Securities Act of 1933.
The District Court’s Dismissal Decision
The district court granted defendants’ motion to dismiss the Section 11 claim. The court acknowledged Slack’s requirement that a Section 11 plaintiff “plead and prove that he purchased shares traceable to the allegedly defective registration statement,” but noted that the Supreme Court “did not assess whether any specific allegations were sufficient to plead traceability, nor what evidence is sufficient to prove it.”
Plaintiffs sought to satisfy the tracing requirement by alleging that (i) the probability that plaintiffs “purchased at least one registered share is so high as to constitute a legal certainty”; (ii) they would be able to prove traceability with appropriate discovery; and (iii) “any unregistered shares they purchased should be deemed registered on an integrated offering theory.” The court rejected each of these theories. Plaintiffs identified no authority permitting them to proceed on a Section 11 claim on a probabilistic tracing theory or to engage in discovery to establish Section 11 standing. To the contrary, and consistent with decisions from the First and Ninth Circuits, the court reasoned that a Section 11 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 court also rejected plaintiffs’ integrated offering allegations, which sought to “make an end-run around what the Supreme Court has suggested is a strict tracing requirement.” As the court explained, the integrated offering doctrine applies when an issuer seeks to avoid registration regulations by dividing what is effectively a single offering into multiple offerings; here, however, the issuer conducted only one offering, albeit via direct listing.
Although the court acknowledged that its decision “produces a harsh result” because it “likely forecloses Section 11 liability in the direct listing context,” it concluded that its ruling is consistent with Slack’s strict tracing requirement, even if it does create a potential “loophole” for direct listings.
Implications
The decision confirms that Slack’s strict tracing requirement may effectively insulate companies that go public through a direct listing from Section 11 liability. The decision further suggests that nothing short of chain-of-title allegations will suffice to plead traceability, posing a significant challenge to plaintiffs seeking to plead a Section 11 claim arising out of a direct listing. The decision may also have implications in other circumstances where tracing shares to a particular registration statement is difficult, such as where unregistered shares enter the market after an IPO lockup period expires, or where there have been multiple offerings pursuant to multiple registration statements. Ultimately, this decision and others interpreting Slack may make direct listings a more attractive avenue for companies that are looking to go public, as a direct listing may reduce associated litigation exposure.
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