On February 3, 2023,the NAM filed an amicus brief urging the U.S. Supreme Court to reverse the 9th Circuit’s decision allowing a plaintiff to pursue his securities class action under Section 11 of the Securities Act of 1933--which imposes strict liability for any misstatements or omissions, even innocent ones, in a registration statement or prospectus--based on their purchase of unregistered shares. Consistent with the statutory text and 60 years of case law, plaintiffs are required to “trace” their securities to shares registered under the allegedly misleading registration statement on which they base their Section 11 claim. In this case, however, the 9th Circuit eliminated the tracing requirement and conferred standing on a shareholder who purchased shares through a direct listing, meaning he could not prove whether he purchased registered or unregistered shares.
We argue that the 9th Circuit’s policy concerns—that all companies will forego IPOs in favor of a direct listing to avoid any risk of Section 11 liability—reflect a fundamental misunderstanding of capital markets. In reality, companies choose a method of going public to fit their business needs and standing in the market. Each of those methods offers tradeoffs when it comes to things like a company’s ability to raise capital and find buyers for its shares, as well as relative cost, complexity, and risk of loss. Eliminating the requirement that plaintiffs trace their securities to shares registered under the statement on which they base their Section 11 claim would undermine the certainty that capital markets require. All publicly traded manufacturers have an interest in curbing unauthorized securities actions which are prevalent anytime stock price goes down.
Happily, on June 1, 2023, the U.S. Supreme Court reversed the 9th Circuit's decision.