On June 1, the U.S. Supreme Court in Slack Technologies LLC v. Fiyyaz Pirani clarified liability exposure under Section 11 of the Securities Act involving direct listings, but may have created new uncertainty around issuer liability for business combinations involving special-purpose acquisition companies.
In light of the court's holding, the U.S. Securities and Exchange Commission might be encouraged to finalize its proposed rules more quickly to level the playing field between initial public offerings and companies created following a merger with a SPAC. However, given the court's reasoning in Slack, it may be up to Congress to resolve the issue.
In Slack, the Supreme Court ruled that in order to state a claim for a violation of Section 11, plaintiffs who purchase shares in a direct listing must be able to plead and prove that "the securities held by the plaintiff [are] traceable to the particular registration statement alleged to be false or misleading."
The plaintiff, Pirani, had purchased 30,000 shares of Slack the day it was listed and subsequently purchased another 220,000 shares. Slack's price per share dropped shortly thereafter and Pirani filed suit, alleging that Slack had filed a materially misleading registration statement in violation of Section 11.
Pirani claimed Slack had failed to warn shareholders in its registration statement that increased demand for its product and services brought on network outages that required the company to pay over $8 million in customer credits.
Slack moved to dismiss Pirani's Section 11 claim on the grounds that the shares he had purchased could not be traced to the registration statement filed at the time of the direct listing.
Slack argued it was impossible to know whether Pirani's shares came from the 118 million registered shares or the 165 million shares that were not registered under any registration statement, since both sets of shares became available on the market the same day.
The U.S. District Court for the Northern District of California denied Slack's motion to dismiss, which a divided U.S. Court of Appeals for the Ninth Circuit affirmed on the grounds that allowing Slack to escape liability in this case would create a loophole contrary to the intent of the Securities Act.
The Supreme Court's decision focuses on the text of Section 11, which "authorizes an individual to sue for a material misstatement or omission in a registration statement when he has acquired 'such security.'"
The key question, the court explained, was: "Does the term 'such security' refer to a Douglas Paul Ildefonso Mas Craig Coben security issued pursuant to the allegedly misleading registration statement? Or can the term also sometimes encompass a security that was not issued pursuant to the allegedly misleading registration statement?"
The court focused solely on the statutory text, noting at the end that "Congress remains free to revise the securities laws at any time, whether to address the rise of direct listings or any other development."
The question now is whether this textualist approach to Section 11 claims has implications for companies that become public by way of a de-SPAC transaction, potentially increasing the difficulty for securities fraud plaintiffs to bring Section 11 claims for significant drops in shareholder value following a de-SPAC transaction.
In the majority of de-SPAC transactions, a target company is merged into a SPAC. Created at the outset is a SPAC, which is simply a shell company with shares offered to the public pursuant to an SEC Form S-1 or F-1 registration statement.
This shell company with public shares is created with the purpose of identifying and acquiring a private company that will later merge into that publicly traded shell company and become public.
Once a target company is identified, the SPAC files a Form S-4 or F-4 registration statement incident to the merger of the target into the SPAC. The Form S-4 or F-4 registration statement is typically only signed by the SPAC directors and executive officers, and not the directors and executive officers of the target company.
This arguably precludes a Section 11 suit against those target party defendants since they are not signing off on any statements in the Form S-4 that can be later characterized in a lawsuit as misleading. To consummate the de-SPAC transaction, the target company's shares are typically exchanged for a controlling number of shares in the publicly traded SPAC.
Investors who buy shares in a SPAC may experience new challenges bringing Section 11 claims if Slack's tracing requirement for direct listings is extended to SPACs.
As detailed by the court in Slack, Section 11(a) provides a claim for any "untrue statement of a material fact or [omission of] a material fact required to be stated therein or necessary to make the statements therein not misleading," and that "any person acquiring such security ... may, either at law or in equity, in any court of competent jurisdiction, sue[.]"
Investors in the SPAC, following a de-SPAC, are not acquiring any shares; rather, they are voting not to redeem their shares for cash, while the target company is exchanging shares in the target for a controlling interest in the SPAC.
SPAC investors may struggle to trace their acquired shares to allegedly misleading statements set forth in the Form S-4 registration statement, as that registration occurs after the SPAC shares are acquired by SPAC investors. The plaintiff in In re: CarLotz Inc. Securities Litigation in the U.S. District Court for the Southern District of New York was recently confronted with this very issue.
The Southern District of New York's reasoning is further solidified by the Supreme Court's reasoning in Slack, although the Supreme Court did not directly address this issue in the context of SPAC investors and de-SPAC transactions.
Additionally, as discussed above, the target company and its directors and executives are not co-registrants on or signatories to the Form S-4 or F-4 registration statement, potentially making it more difficult to bring Section 11 claims against those parties.
However, creative plaintiffs might be able to convince other federal courts that Slack is limited to a direct listing situation. In other words, they might argue that the SPAC's Form S-1 registration statement is so tied up with the acquisition of a target company such that the failure to accomplish this or a dramatic stock price drop after the de-SPAC transaction creates Section 11 liability traceable to the Form S-1 registration statement.
As a result, or in a similar vein, the decision not to redeem shares for cash in connection with the SPAC's acquisition of the target could be argued to be a kind of new purchase of shares, in turn involving a new investment decision that presumably relies on the disclosure around the target company.
Based on this or a similar rationale, could courts create a rule for de-SPAC transactions that distinguishes and gets around the technical tracing requirement in Slack?
The Supreme Court's unanimous ruling in Slack, however, appears to leave little room for any lower court or the Supreme Court to depart from any hypertechnical tracing requirement that would allow creative Section 11 plaintiffs to survive a motion to dismiss in federal court.
This might result in Section 11 claims for SPAC and de-SPAC transactions potentially rising and falling with the particularities of how a transaction is structured.
As discussed above and as seen in the Southern District of New York's treatment of Section 11 claims related to de-SPAC transactions, traditional de-SPAC transactions may not allow for Section 11 claims that satisfy Slack's tracing requirement.
There do exist a small percentage of de-SPAC transactions, however, where the SPAC is merged into the target company, rather than the typical reverse merger for a de-SPAC transaction.
In these circumstances, Section 11 plaintiffs may be able to more plausibly allege that their shares remain all the same shares purchased, received pursuant to the target's registration statement. This is because the SPAC investors in some of these circumstances receive shares traceable to the target's registration statement or a new holding company into which the SPAC is merged.
The SEC, of course, has proposed new rules that may likely diminish any different legal treatment between IPOs and de-SPAC transactions otherwise potentially amplified by Slack.
These rules would close gaps created by tracing requirements to registration statements, including by requiring the target company — and its lead executives and directors — in a de-SPAC transaction to be a co-registrant and signatory to the Form S-4 associated with the de-SPAC transaction.
Thus, Section 11 plaintiffs would be able to trace their claims against the target company or its directors and officers more easily to misleading statements made in a Form S-4 or F-4 registration.
The proposed rules also require additional disclosures for SPACs, create greater potential for underwriter liability, remove PLRSA safe harbor for marketing de-SPAC transactions and more generally ensure that de-SPAC transactions receive the same legal treatment as IPOs.
A securities regulatory enforcement regime that is influenced by the mere legal structure of de-SPAC transactions and the accompanying registration statements that are filed appears to run against the grain of the SEC's proposed rulemaking described above.
Slack, therefore, has the potential unintended consequence for a company to use a SPAC as a vehicle to minimize legal risk and reduce Section 11 liability by the mere way a de-SPAC transaction is legally structured.
Of course, any liability gaps caused by tracing requirements imposed by Slack might be resolved by new SEC rules altering registration statements or requiring additional registration statements or disclosures.
Otherwise, federal courts will be left to grapple over Slack's reach and whether creative transactional lawyers can use Slack's tracing requirements as a way to eliminate potential Section 11 claims incident to going public transactions that otherwise would exist for shareholders acquiring shares in a traditional IPO.
Slack's potential amplification of the different legal treatment between IPOs and de-SPAC transactions could prove to be a catalyst for the SEC to remove, more urgently, any different legal and regulatory treatment that remains between de-SPAC transactions and IPOs.
Attempting to close this gap purely through SEC rulemaking, however, may set the stage for a future case before the Supreme Court as the court implied that a regulatory, as opposed to a legislative fix, may not suffice: "Naturally, Congress remains free to revise the securities laws at any time, whether to address the rise of direct listings or any other development."
In sum, Slack may hasten the need for the SEC to finalize its rulemaking and ensure that IPOs and SPACs have similar liability regimes, preventing an undesirable legal arbitrage and for Congress to ultimately act to revise the securities laws in light of the Supreme Court's admonition.
Douglas Paul and Ildefonso P. Mas are Partners at Akerman LLP.
Craig Coben is a Managing Director at SEDA Experts LLC.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Slip op. at 7, available at https://www.supremecourt.gov/opinions/22pdf/22- 200_097c.pdf.
 Slack, slip op. at 9.
 Slack, slip op. at 5.
 See In re CarLotz, Inc. Sec. Litig., No. 21-CV-5906 (RA), 2023 WL 2744064, at *7 (S.D.N.Y. Mar. 31, 2023). ("Plaintiffs argue that Bailey's shares are still traceable to the S-4 registration statement for the purposes of a Section 11 claim, because the merger functionally transformed Bailey's Acamar shares into the new CarLotz shares. Plaintiffs' theory, while creative, is foreclosed in this Circuit.").
 See https://www.sec.gov/rules/proposed/2022/33-11048.pdf at p. 75. ("We are proposing to amend Form S-4 and Form F-4 to require that the SPAC and the target company be treated as co-registrants when these registration statements are filed by the SPAC in connection with a de-SPAC transaction. In view of the protections that the Securities Act provides to investors in a traditional initial public offering, it is appropriate in our view to interpret Section 6(a) to encompass the target company, in addition to the SPAC, as an issuer for purposes of Section 6(a) and the signature requirements of Form S-4 or Form F-4.").
 See id. at 64-96.
 Slack, slip. op. at 9.
Craig Coben has over 25 years of financial industry experience serving as the Vice Chairman of Global Capital Markets and Global Head of Equity Capital Markets at Bank of America Merrill Lynch. He is an investment banking world-class expert with deep expertise in a full range of equity products, including IPOs, SPACs, block trades, accelerated bookbuilds, secondary offerings, rights issues, equity-linked offerings (convertible and exchangeable bonds), margin loans and corporate equity derivatives.
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