Section 11 seeks to reduce the incidence of even unintentional falsehoods in a registration statement by holding issuers strictly liable for misstatements or omissions in a securities offering’s registration statement. But to prevent this demanding liability standard from chilling market activity, Section 11 requires a claimant to prove that the shares they purchased were those offered in the registration statement, as Judge Henry Friendly wrote in Barnes v. Osofsky in 1967. For over fifty years, courts have faithfully applied that principle, supplying predictability to securities markets. In a 2–1 decision, the Ninth Circuit upended this rule in favor of an expansive reading of Section 11 that upsets Section 11’s balance of interests and usurps Congress’s exclusive role in enacting securities laws, significantly altering the calculus companies face when deciding whether to go public.
In breaking with decades of precedent, the Ninth Circuit held that Section 11 encompasses both registered and unregistered shares (i.e., those exempt from registration with the SEC) where a public offering cannot occur without a registration statement. The Ninth Circuit cited concerns that Section 11 liability would be eliminated where registered and unregistered shares mingle in the market, as they do from the start of trading for direct listings. But the legislative history of Section 11 makes clear that the statute was not intended to cover a broad class of purchasers. Indeed, federal courts have repeatedly rejected these policy concerns, holding instead that it is up to lawmakers and regulators, weighing the political and economic costs and benefits, to alter Section 11 should they find that the statute’s balance of interests is not being served.
Moreover, the Ninth Circuit’s policy-driven decision ignores the policy benefits of public offerings for entrepreneurs, start-up companies, investors, and the economy as a whole. While going public benefits companies in the form of increased capital and benefits investors in the form of increased transparency, the Ninth Circuit’s new rule has the potential to deter companies from ever going public for fear of increased Section 11 liability. Moreover, the Ninth Circuit’s novel interpretation of Section 11 will hinder innovation in public offerings, including the direct listing method that Slack used to go public here.
The Supreme Court should grant Slack’s petition for certiorari to correct the Ninth Circuit’s error and ensure that Section 11 stays within the boundaries that Congress intended. If a change to the Securities Act’s comprehensive liability scheme is warranted, Congress should be responsible for determining the circumstances for Section 11 liability, not the Ninth Circuit.
