Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 1 of 31
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`UNITED STATES DISTRICT COURT
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`NORTHERN DISTRICT OF CALIFORNIA
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`FIYYAZ PIRANI,
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`Plaintiff,
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`v.
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`SLACK TECHNOLOGIES, INC., et al.,
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`Case No. 19-cv-05857-SI
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`ORDER GRANTING IN PART AND
`DENYING IN PART DEFENDANTS'
`MOTION TO DISMISS AND
`GRANTING LEAVE TO AMEND
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`Defendants.
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`Re: Dkt. No. 52
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`Before the Court is defendants’ motion to dismiss the Amended Class Action Complaint
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`(“ACAC”) filed by lead plaintiff Fiyyaz Pirani. Pursuant to Civil Local Rule 7-1(b) and General
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`Order 72, the Court finds this matter appropriate for resolution without oral argument. Having
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`considered the papers submitted and for good cause shown, the motion is GRANTED in part and
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`DENIED in part, and plaintiff is GRANTED leave to amend. If plaintiff wishes to amend the
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`complaint, he shall do so by May 6, 2020.
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`I.
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`The Parties and the Direct Listing
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`BACKGROUND
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`This securities class action is brought by lead plaintiff Fiyyaz Pirani (“plaintiff”) against
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`Slack Technologies, Inc. (“Slack”) and other named defendants. Plaintiff purchased 30,000 shares
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`of Slack’s Class A common stock at $40/share on June 20, 2019, the first day of Slack’s public
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`listing, and approximately another 220,000 shares at various prices from June 21 to September 9,
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`2019. Holleman Decl. in Supp. of Mot. to Appoint Lead Pl., Ex. A (Dkt. No. 26-1). Plaintiff brings
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`this case “on behalf of a class consisting of all persons and entities that purchased or otherwise
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`acquired Slack common stock pursuant to and/or traceable to the Offering Materials.” ACAC ¶ 38
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 2 of 31
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`(Dkt. No. 42).
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`Slack is a San Francisco-based software company “that offers a cloud-based collaboration
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`and productivity platform” for workspace computing. Id. ¶ 2. Other named defendants include
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`CEO Stewart Butterfield, CFO Allen Shim, and CAO Brandon Zell; and Board of Directors
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`(“Board”) members Andrew Braccia, Edith Cooper, Sarah Friar, John O’Farrell, Chamath
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`Palihapitiya, and Graham Smith (collectively “Individual Defendants”). Id. ¶¶ 19-29.
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`The complaint also names as defendants three venture capital firms: Accel, which appointed
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`defendant Braccia to the Board; Andreessen Horowitz, which appointed defendant O’Farrell to the
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`Board; and Social+Capital, which appointed defendant Palihapitiya to the board (collectively “VC
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`Defendants”). Id. ¶¶ 22, 25, 26, 30-33. The VC Defendants “collectively held more than 47% of
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`the Company’s voting power and included 3 members of the Board at the time of the Offering.” Id.
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`¶ 34. They “caused Slack to effectuate the Offering.” Id. They also “caused [Slack] to indemnify
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`them from any liabilities arising from the Securities Act [of 1933] and the Securities Exchange Act
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`of 1934” and “to obtain and maintain a directors and officers insurance policy for them.” Id. Upon
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`Slack’s listing, the VC Defendants “sold more than 12.5 million shares for gross proceeds of more
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`than $484 million.” Id.
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`Slack’s Class A common stock shares began trading on the New York Stock Exchange
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`(“NYSE”) on June 20, 2019 under the ticker symbol “WORK.” Id. ¶ 4. Slack did not take the
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`traditional route of an Initial Public Offering (“IPO”), in which “a company will offer a certain
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`amount of new and/or existing shares to the public . . . [to] help raise additional capital for company
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`operations and expansion.” Id. ¶¶ 66-67. Instead, Slack opted for a direct listing: no new shares
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`were issued, but insiders and early investors of the company were able to sell their preexisting shares
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`to the public. Id. ¶¶ 66, 69.1 Because these shares were not subject to a lockup period as in an IPO,
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`they were available for sale immediately upon Slack’s listing. Id. ¶ 70.
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`In preparation for the direct listing, Slack filed a Form S-1 resale shelf registration statement
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`(the “Registration Statement”) and a Form 424B4 prospectus (the “Prospectus”) (collectively the
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`1 The regulatory changes that enabled Slack’s direct listing are discussed in greater detail
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`infra.
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 3 of 31
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`“Offering Materials”) with the Securities Exchange Commission (“SEC”). Id. ¶¶ 71-75. Slack,
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`with defendants Butterfield and Shim, also “hosted an ‘investor day’ in New York City to generate
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`investor interest” on May 13, 2019. Id. ¶ 72. The contents of the Offering Materials applied to “up
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`to 118,429,640” shares offered for resale to the public. Id. ¶ 4; see Kahn Decl. in Supp. of Mot. to
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`Dismiss, Ex. A (Dkt. No. 54-1).2 The Offering Materials noted that additional shares were available
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`for resale and exempt from registration pursuant to SEC Rule 1443: “approximately 164,932,646
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`shares of common stock immediately after [Slack’s] registration.” Kahn Decl. Ex. A at 164; see
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`ACAC ¶ 4.
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`II.
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`The Offering Materials
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`Plaintiff alleges that he and other class members suffered losses to the value of their
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`purchased shares as a result of misstatements or omissions of material facts in the Offering
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`Materials. Id. ¶¶ 11-12. These include statements regarding service outages and Slack’s Service
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`Level Agreements (“SLAs”) in the case of such outages; competition from Microsoft Teams;
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`scalability and purported key benefits; and growth and growth strategy. Id. ¶ 76.
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`Regarding outages, Slack disclosed that it had “service level commitments to [its] paid
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`customers” in the event of service disruptions and noted that if Slack failed to meet those
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`commitments, it “could be obligated to provide credits for future service . . . which could harm [its]
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`business, results of operations, and financial condition.” Id. ¶ 95 (emphasis removed). However,
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`Slack did not disclose alleged vulnerabilities it was already suffering that “caused severe service
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`disruptions,” including a failure to meet its uptime guarantee for “7 out of 12 months” in 2018 alone.
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`2 Defendants request judicial notice of several documents, including Exhibit A, which is the
`Registration Statement filed with the SEC and incorporated by reference into the ACAC. Dkt. No.
`53. Plaintiff does not object except to the extent that defendants rely on the documents for the truth
`of the matters asserted. Pl’s Opp’n at 1 n.2. The Court GRANTS defendants’ request for judicial
`notice without “assum[ing] the truth of [the] incorporated document if such assumptions only serve
`to dispute facts stated in a well pleaded complaint.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d
`998, 1003 (9th Cir. 2018).
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` SEC Rule 144 is an administrative rule adopted “to establish specific criteria for
`determining whether a person is not engaged in a distribution.” 17 C.F.R. § 230.144. This in turn
`determines whether a securities transaction is exempt, pursuant to Section 4(a)(1) of the Securities
`Act of 1933, from certain registration requirements. 15 U.S.C. § 77d(a)(1).
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 4 of 31
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`Id. ¶ 96. Slack also failed to disclose that its service level commitment was “highly unusual and
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`punitive.” Id. “[W]hile most competitors guaranteed uptime of three-nines (99.9%), Slack
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`guaranteed four-nines (99.99%).” Id. ¶ 63. Failure to meet that guarantee would require a refund
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`or credit payout of “100 times what the customer would have paid during the downtime as opposed
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`to the actual cost of service lost during the downtime,” automatically and regardless of whether or
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`not specific customers actually experienced the downtime or requested the credit. Id.
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`Regarding competition, the Offering Materials identified Microsoft as its primary competitor
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`but stated that “we are uniquely positioned to more rapidly innovate and respond to new
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`technologies and customer requirements than our competitors.” Id. ¶¶ 83-84. Defendants allegedly
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`“downplayed the impact” of these competitors, including “the impact . . . Microsoft in particular[]
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`was already having on [Slack’s] expansion into enterprise customers prior to the Offering.” Id. The
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`competitor product Microsoft Teams launched in March 2017; in December 2017, defendant
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`Butterfield acknowledged in a Business Insider interview that “Microsoft is the main competitor.
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`They’re the third largest company in the world and if they start channeling all their resources against
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`you, that’s a lot to compete with.” Id. ¶¶ 52-53. In 2018, when Microsoft Teams introduced a free
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`tier and a feature for adding people outside of an organization, it began “to compete head-to-head
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`with Slack’s freemium model.” Id. ¶ 52. That same year, Slack acquired intellectual property from
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`another software company, Atlassian, and announced a close partnership between them. Id. ¶¶ 54-
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`55. PCMag.com reported: “What went unsaid in both [Slack’s and Atlassian’s] statements is that
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`they’re partnering up to take on an even bigger competitor in Microsoft Teams.” Id. ¶ 57.
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`Plaintiff alleges that the Offering Materials touted various “key benefits to users, teams, and
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`organizations” and that Slack built its “technology infrastructure using a distributed and scalable
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`architecture on a global scale,” and that these statements “implied that the Slack App was a market
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`leader with unique advantages over its competitors and that the Company possessed the ability to
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`scale up its services to reach more lucrative enterprise customers.” Id. ¶¶ 91-93 (emphasis
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`removed). Slack also stated that it had a “[d]ifferentiated go-to-market strategy,” comprised of a
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`customer engagement model and expansion within larger organizations, and implied this was
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`responsible for “‘rapid[]’ growth . . . high customer engagement . . . [and] revenue growth and
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 5 of 31
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`decreasing net losses from 2017 through 2019.” Id. ¶¶ 77-78. But Slack’s “growth was slowing
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`down in several aspects, including its key metric, [daily active users].” Id. ¶ 82.
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`III.
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`Performance After the Direct Listing
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`On the first day of trading, June 20, 2019, shares began selling at $38.50. Id. ¶ 4. On June
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`28, 2019, Slack experienced a service outage of approximately fifteen hours affecting customers in
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`the United States and Europe; the outage received attention from the media, with reporting by such
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`news outlets as Newsweek. Id. ¶¶ 99-102. Another large-scale service outage occurred on July 29,
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`affecting customers in the United States, Japan, and Europe. Id. ¶ 106. In a conference call on
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`September 4, defendant Butterfield admitted that the outages were caused by “scaling . . . we
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`continue to hit limits that we didn’t realize were built into the system.” Id. ¶ 111 (emphasis
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`removed). He also admitted that the uptime guarantee reflected policies that “are outrageously
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`customer-centric,” “exceptionally generous,” and “unusual.” Id. ¶¶ 109-112.
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`By July 11, 2019, Microsoft Teams had reached 13 million daily active users, surpassing
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`Slack in this metric. Id. ¶ 107. On November 20, 2019, MarketWatch reported that “Microsoft
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`Teams, which grew 54% since July to more than 20 million daily active users, is on a trajectory to
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`double Slack’s customer base by early next year as more corporations adopt group chat.” Id. ¶ 90.
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`On September 4, 2019, Slack reported second-quarter fiscal 2020 results, including that
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`“[r]evenue was negatively impacted by $8.2 million of credits related to service level disruption in
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`the quarter”; that “GAAP operating loss was $363.7 million, or 251% of total revenue, compared to
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`a $33.7 million . . . or 37% of total revenue” loss in the second quarter of the previous year; and
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`“[n]et cash provided by operations was $0.3 million, or 0% of total revenue, compared to cash
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`provided by operations of $1.5 million, or 2% of total revenue, for the second quarter of fiscal year
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`2019.” Id. ¶ 108.
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`After the September 4, 2019 earnings announcement, share prices dropped to below $25,
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`going as low as $19.53. Id. ¶¶ 9-10. At the time this action commenced, the price was $25.72 per
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`share; at the time the ACAC was filed, the price was $22. Id. ¶¶ 10 & 10 n.2.
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`Plaintiff brings this action under the Securities Act of 1933, asserting claims under Sections
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 6 of 31
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`11, 12(a)(2), and 15. Defendants move to dismiss all claims under Fed. R. Civ. P. 12(b)(6).
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`A complaint must contain “a short and plain statement of the claim showing that the pleader
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`LEGAL STANDARD
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`is entitled to relief,” Fed. R. Civ. P. 8(a)(2), and a complaint that fails to do so is subject to dismissal
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`pursuant to Rule 12(b)(6). To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege
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`“enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly,
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`550 U.S. 544, 570 (2007). This “facial plausibility” standard requires the plaintiff to allege facts
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`that add up to “more than a sheer possibility that a Defendant has acted unlawfully.” Ashcroft v.
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`Iqbal, 556 U.S. 662, 678 (2009). While courts do not require “heightened fact pleading of
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`specifics,” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative
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`level.” Twombly, 550 U.S. at 544, 555. “A pleading that offers ‘labels and conclusions’ or ‘a
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`formulaic recitation of the elements of a cause of action will not do.’” Iqbal, 556 U.S. at 678 (quoting
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`Twombly, 550 U.S. at 555). “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid
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`of ‘further factual enhancement.’” Id. (quoting Twombly, 550 U.S. at 557). “While legal
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`conclusions can provide the framework of a complaint, they must be supported by factual
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`allegations.” Id.
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`In reviewing a Rule 12(b)(6) motion, a district court must accept as true all facts alleged in
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`the complaint and draw all reasonable inferences in favor of the plaintiff. See Usher v. City of Los
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`Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, a district court is not required to accept as
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`true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable
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`inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).
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`As a general rule, courts may not consider materials beyond the pleadings when ruling on a
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`Rule 12(b)(6) motion. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). However,
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`the incorporation-by-reference doctrine “permit[s] district courts to consider material outside a
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`complaint” in order to “prevent[] plaintiffs from selecting only portions of documents that support
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`their claims, while omitting portions of those very documents that weaken—or doom—their
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`claims.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 998, 1002 (9th Cir. 2018). There are
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`also instances, albeit rare, where the court may review a document when assessing the sufficiency
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`of a claim at the pleading stage. Id. at 1002 (citing Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir.
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`2005) (affirming the incorporation of materials that the complaint did not reference at all because
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`the claim “necessarily depended on them”)).
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`If the Court dismisses the complaint, it must then decide whether to grant leave to amend.
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`The Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no
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`request to amend the pleading was made, unless it determines that the pleading could not possibly
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`be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000)
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`(citations and internal quotation marks omitted).
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`Defendants argue that plaintiff cannot plead standing under Section 11 because of the case
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`DISCUSSION
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`law interpreting that statute holding that a plaintiff’s purchased shares must be traced to the defective
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`registration statement, which is impossible to do here. Defendants further argue that Section 11
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`damages cannot be established in the case of a direct listing, that plaintiff lacks standing under the
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`stricter privity requirement of Section 12, and that failure to state a claim under either Sections 11
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`or 12 necessarily obviates standing under Section 15. Lastly, defendants argue that plaintiff has
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`failed to allege material misstatements or omissions.
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`Plaintiff argues that, because of the unique regulatory framework of Slack’s direct listing,
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`this case “presents a matter of first impression that, if decided in Defendants’ favor, will provide a
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`blueprint for companies to evade liability under Section 11 for filing a misleading registration
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`statement.” Pl.’s Opp’n at 1 (Dkt. No. 63). Plaintiff contends that by structuring the Offering such
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`that registered and unregistered shares became publicly tradeable at the same time, “Defendants
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`attempt to take unfair advantage of the judge-made ‘traceability’ requirement that arose out of cases
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`involving successive offerings in which plaintiffs must show that they bought their shares in the
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`specific offering at issue.” Id. at 2. Plaintiff contends that there is only one interpretation of Section
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`11 that makes sense in the context of a direct offering: where a company offers its shares for public
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`trading through a direct listing or otherwise by filing a registration statement as required by the
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 8 of 31
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`federal securities laws, and non-registered shares also become publicly traded in the same offering,
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`any person who acquires shares – which could be sold on a public exchange only when and because
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`the registration statement was filed – may sue those responsible under Section 11 where the
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`registration statement contains material misstatements and omissions.
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`I.
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`Section 11 Standing
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`A.
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`“Such security”
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`Section 11 of the Securities Act of 1933 (the “Securities Act”) provides a strict liability cause
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`of action for violations of certain registration requirements. The statute reads in relevant part: “In
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`case any part of the registration statement, when such part became effective, contained an untrue
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`statement of a material fact or omitted to state a material fact required to be stated therein or
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`necessary to make the statements therein not misleading, any person acquiring such security . . .
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`may . . . sue . . .” 15 U.S.C. § 77k.
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`The Second Circuit was the first to interpret the phrase “such security.” See Barnes v.
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`Osofsky, 373 F.2d 269 (2d Cir. 1967). In Barnes, shares were issued pursuant to registration
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`statements issued in 1961 and 1963, and purchasers filed shareholder class actions alleging claims
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`under Section 11 that the 1963 registration statement and prospectus contained material
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`misstatements and omissions. The district court approved a settlement limited to purchasers who
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`could establish that they had purchased securities issued under the 1963 registration statement.
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`Objectors to the settlement, who could not trace their purchases to the 1963 registration statement,
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`appealed. Writing for the court, Judge Friendly4 found “the difficulty, presented when as here the
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`registration is of shares in addition to those already being traded, is that ‘such’ has no referent.” Id.
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`at 271. Judge Friendly weighed two possible readings of the phrase: a narrower reading, “acquiring
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`a security issued pursuant to the registration statement”; and a broader reading, “acquiring a security
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`of the same nature as that issued pursuant to the registration statement.” Id. Of the broader reading,
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`4 “Judge Friendly, without a doubt, did more to shape the law of securities regulation than
`any judge in the country.” Louis Loss, In Memoriam: Henry J. Friendly, 99 Harv. L. Rev. 1722,
`1723 (1986).
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 9 of 31
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`Judge Friendly noted that it “would not be such a violent departure from the words that a court could
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`not properly adopt it if there would good reason for doing so.” Id. Judge Friendly adopted the
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`narrower reading after a review of the overall statutory scheme5; language from the legislative
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`history6; dicta from within the Second Circuit7; and a treatise and amicus brief from the SEC. Id. at
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`272-73. The Ninth Circuit has followed suit in its interpretation: “Clearly, this limitation [on ‘any
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`person’] only means that the person must have purchased a security issued under that, rather than
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`some other, registration statement.” Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080 (9th
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`Cir. 1999) (citing Barnes, 373 F.2d 269).
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`This narrower reading became the basis for case law requiring plaintiffs to “trace their shares
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`back to the relevant offering” in order to plead standing under Section 11. In re Century Aluminum
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`Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir. 2013). In the Ninth Circuit, this means plaintiffs must
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`either have “purchased shares in the offering made under the misleading registration statement,” or
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`purchased shares in the aftermarket “provided they can trace their shares back to the relevant
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`offering.” Id. The difficulty arises when there are multiple registration statements, in which case
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`the plaintiff must prove that the purchased shares were issued under the allegedly false or misleading
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`one, “rather than some other registration statement.” Id.; Hertzberg, 191 F.3d at 1080. “Courts
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`have long noted that tracing shares in this fashion is ‘often impossible,’ because ‘most trading is
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`5 Reasoning that Section 11’s “stringent penalties are to insure full and accurate disclosure
`through registration,” Judge Friendly observed that “under §§ 2(1) and 6, only individual shares are
`registered.” Id. at 272. By contrast, the antifraud sections 12(2) and 17 “are not limited to the newly
`registered shares.” Id. Furthermore, the damages and liability limitations in sections 11(g) and
`11(e) suggested that standing should be limited “to purchasers of the registered shares, since
`otherwise their recovery would be greatly diluted when the new issue was small in relation to the
`trading in previously outstanding shares.” Id.
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`6 The identical House and Senate versions of the statute contained the language, “every
`person acquiring any securities specified in such statements,” and “any persons acquiring any
`securities to which such statement relates.” Id. (citing S. 875, 73d Cong. § 9 (1st Sess. 1933); H.R.
`4314, 73d Cong. §9 (1st Sess. 1933)).
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` 7
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` In Barnes, Judge Friendly gave particular weight to Judge Frank’s dictum in Fischman v.
`Raytheon Mfg. Co., 188 F.2d 783, 786 (2d Cir. 1951) (noting, in the context of holding that proof
`of fraud or deceit is not required for Section 11 claim, that a Section 11 claim “may be maintained
`only by one who comes within a narrow class of persons i.e. those who purchase securities that are
`the direct subject of the prospectus and the registration statement”) because of Judge Frank’s role
`as “a leading member of the SEC in its early days.” Barnes, 373 F.2d at 273.
`9
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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 10 of 31
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`done through brokers who neither know nor care whether they are getting newly registered or old
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`shares,’ and ‘many brokerage houses do not identify specific shares with particular accounts but
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`instead treat the account as having an undivided interest in the house’s position.’” Century
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`Aluminum, 729 F.3d at 1107 (quoting Barnes, 373 F.2d at 271-72). Nevertheless, courts have
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`deferred to Congress to amend the statute. See Century Aluminum, 729 F.3d at 1107 (“this tracing
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`requirement is the condition Congress has imposed for granting access to the ‘relaxed liability
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`requirements’ § 11 affords”); Barnes, 373 F.2d at 273 (“the time may have come for Congress to
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`reexamine these two remarkable pioneering statutes in the light of thirty years’ experience”).8
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`Lower courts in this and other jurisdictions have imposed the same requirement where unregistered
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`shares entered the market following the issue of registered shares; these courts have resolved the
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`tracing requirement by limiting claims to certain factual circumstances or time periods. See, e.g.,
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`Lilley v. Charren, 936 F. Supp. 708, 716 (N.D. Cal. 1996) (granting leave to amend for plaintiffs to
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`“identify the purchasers of the unregistered shares” that entered market prior to registered shares or
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`other “specific dates and facts that establish . . . standing”); In re Initial Pub. Offering Sec. Litig.,
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`227 F.R.D. 65, 118-119 (S.D.N.Y. 2004) (cutting off plaintiff class period “at the time when
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`unregistered shares became tradeable”), vacated on other grounds by 471 F.3d 24 (2d Cir. 2006).
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`The precise issue before this Court appears to be one of first impression. This is because
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`Slack’s direct listing on the NYSE is the result of a new regulatory development approved by the
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`SEC in 2018. See Order Granting Accelerated Approval of NYSE Proposed Rule Change Relating
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`to Listing of Companies, Exchange Act Release No. 34-82627, 83 Fed. Reg. 5650 (Feb. 2, 2018).
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`The SEC approved changes to the NYSE Listed Company Manual in order to “provide a means for
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`a category of companies with securities that have not previously been traded on a public market and
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`8 The American Law Institute’s model code for comprehensive reform included eliminating
`the tracing requirement by giving “a right of action to a person who proves— (1) that, in the case of
`an offering statement, he bought a security of a class covered by the offering statement after its
`effectiveness; or (2) that, in the case of a registration statement or report, he bought or sold a security
`of the registrant after the effectiveness of the registration statement or the filing of the report.” Fed.
`Sec. Code § 1704(c)(2) (Am. Law Inst. 1980). In the only amendment to the Securities Act since
`the 1930s, a provision for joint liability was added at § 11(f), but the relevant language discussed
`here remained unchanged. Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, §
`201(b), 109 Stat. 737.
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`that are listing only upon effectiveness of a selling shareholder registration statement, without a
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`related underwritten offering, and without recent trading in a Private Placement Market, to list on
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`the Exchange.” Id. at 5654. Most significantly for this case, the rule change allows a company to
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`(1) enter the public market for the first time on a major public listing (2) without issuing new shares
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`as in an IPO; but the company is still (3) subject to the registration requirements of the Securities
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`Act and thus (4) subject to Section 11 liability.9 Because no new shares are issued, insiders holding
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`preexisting shares are not subject to the typical “‘lock-up period’ of 90 to 180 days where they
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`cannot sell their shares.” ACAC ¶ 70. In other words, shares of Slack common stock became
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`available for purchase on the NYSE immediately on June 20, 2019, from two simultaneous entry
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`points: under the Securities Act registration statement and under the SEC Rule 144 exemption from
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`registration. See 17 C.F.R. § 230.144. In a traditional IPO, the registered shares would be sold first,
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`and the unregistered shares would become available for sale after the lockup period; a plaintiff
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`pleading Section 11 standing for purchases made after the availability of unregistered shares would
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`likely be unsuccessful because the market would be so diluted as to make tracing “virtually
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`impossible.” See In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 118. In a direct listing, the
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`impossibility of tracing begins on the very first day of listing due to the simultaneous offering of
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`unregistered and registered shares.
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`Plaintiff argues that to follow the standard tracing analysis here “would eviscerate the rights
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`afforded by Section 11 and allow companies to eliminate Section 11 liability by releasing non-
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`registered shares into the market at the same time as registered shares.” Pl.’s Opp’n at 2 (Dkt. No.
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`63). Defendants acknowledge that “Slack’s direct listing was only the second significant direct
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`listing ever to take place” and that cases analyzing the tracing requirement have involved successive
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`rather than simultaneous stock offerings; nevertheless, defendants assert the same principles of
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`tracing apply. Defs.’ Reply at 4 (Dkt. No. 66).
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`Because this case presents a question of apparent first impression – whether an investor who
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`9 The proposal’s previously withdrawn Amendment No. 2 envisioned no Section 11 liability
`whatsoever; the proposed rule “would have allowed a company to list immediately upon
`effectiveness of an Exchange Act [of 1934] registration statement only, without any concurrent IPO
`or Securities Act of 1933 (‘Securities Act’) registration.” Id. at 5651 fn.11.
`11
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`Northern District of California
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`United States District Court
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`

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`Case 3:19-cv-05857-SI Document 74 Filed 04/21/20 Page 12 of 31
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`purchases a security in a direct listing in which registered and unregistered shares are made publicly
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`tradeable at the same time may bring a Section 11 claim – the Court finds it instructive to return to
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`the statutory text. If the text is ambiguous, the Court “may [also] use canons of construction,
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`legislative history, and the statute’s overall purpose to illuminate Congress’s intent.” Pac. Coast
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`Fed’n of Fishermen’s Ass’ns v. Glaser, 945 F.3d 1076, 1084 (9th Cir. 2019) (citation omitted). The
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`Court is “guided by the familiar canon of statutory construction that remedial legislation should be
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`construed broadly to effectuate its purposes.” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967); FTC
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`v. AT&T Mobility LLC, 883 F.3d 848, 854 (9th Cir. 2018). “The 1933 and 1934 Acts are remedial
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`legislation, among the central purposes of which is full and fair disclosure relative to the issuance
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`of securities.” SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 480 (9th Cir. 1973) (citing
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`Tcherepnin, 389 U.S.