Jun 2, 2023 - Economy

Supreme Court sides with Slack, putting direct listings in jeopardy

Illustration of the Slack logo made of gavels.

Illustration: Shoshana Gordon/Axios

The Supreme Court on Thursday ruled unanimously in favor of Slack, in its appeal of a shareholder lawsuit over the enterprise chat company's 2019 direct listing.

Why it matters: This raises major questions about the future viability of direct listings, which some companies believe are a more efficient alternative to IPOs.

  • In practice, SCOTUS told investors in direct listings that they should not rely upon information contained within stock registration statements.
  • Given that giant warning sign, it's unclear why anyone would buy into a direct listing, and thus why any company would attempt one.

Details: Slack, now owned by Salesforce, was sued in a prospective class action by Fiyyaz Pirani, who alleged misstatements in the company's stock registration statement and prospectus.

  • Slack's defense was that Pirani's claim was invalid under Sections 11 and 12 of the Securities Act of 1933, because he couldn't prove that the 250,000 shares he purchased were registered.
  • In its direct listing, Slack had offered 118 million registered shares and 165 million unregistered shares. But in a direct listing there's no way for most investors to know which type of share is being purchased.
  • The 9th U.S. Circuit Court of Appeals found for the plaintiff, favoring the law's spirit over its letter, but SCOTUS yesterday told the lower court to reconsider.
  • SCOTUS did not take any position on the veracity of Slack's registration statement.

What Pirani is saying: "I am profoundly disappointed with this ruling, which I believe fails to adequately protect the interests of investors. While I respect the Court's authority, I maintain that all investors, whether in registered shares or not, deserve transparency and accountability. I will continue to explore all available legal avenues."

What Slack is saying: Crickets.

What SCOTUS is saying, in the opinion written by Justice Neil Gorsuch: "Naturally, Congress remains free to revise the securities laws at any time, whether to address the rise of direct listings or any other development. Our only function lies in discerning and applying the law as we find it."

What's next: The case gets kicked back down, but the big question has been answered.

The bottom line: Someone with unregistered shares can't say they relied on a registration statement. But because direct listing investors have no way to know which type of share they're purchasing, the entire enterprise collapses into a legal black hole.

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