SCOTUS Decision on Direct Listings Leave Investors without Recourse
In a recent client alert from market leading law firm, Morrison & Forrester LLP, their experts opined on the recent decision by the SCOTUS to reject the Ninth Circuit Court’s ruling citing that the plaintiff had no standing for a securities class action claim. Re: Pirani v. Slack Technologies
“The federal securities laws impose strict liability for misleading statements made in connection with initial public offering documents. As a result, if a newly public company’s stock price falls below its IPO price, for whatever reason, the company is likely to face a securities class action. In recent years, direct listings have become more popular, in part as a way to avoid litigation and potential liability under Section 11 of the Securities Act of 1933. That is because, under long-standing precedent, only shareholders who purchased securities registered under the challenged registration statement had standing to sue. In a direct listing, registered and unregistered shares are issued simultaneously, making it difficult, if not impossible, for investors to show that the securities they purchased were registered.”
No traceability is a huge risk for investors in direct listed companies on Form DRS. According to the SCOTUS decision, leaves investors with no standing / legal recourse to sue the company via the traditional securities class action claims. According to Morrison & Foerster LLP analysis, ” [the decision] will make it easier for companies to obtain dismissal of such claims brought by plaintiffs who purchased their shares through direct listings.
This is why fundamental due diligence is so important when considering equity or debt securities investments. Besides the typical financial statements, management team experience, product viability, business plan and risks disclosed, it’s equally important to know what SEC Staff comment letters (FORMs UPLOAD, CORRESP, and DRSLTR) reveal. Below is an excerpt from one such letter citing 27 concerns regarding the disclosure information in the direct listing:
“Revise your risk factor heading to indicate you have a history of losses and highlight the explanatory paragraph in your audit opinion raising substantial doubt about your ability to continue as a going concern.”
Statistics don’t lie. Scrutinization of the registration statements vary wildly between an S-1 IPO and the DRS, direct registration statement. For every S-1 filed, there’s an average of 4 comment letters issued by the SEC staff asking for clarification, detailed explanations, and revisions to identify undisclosed risks to the investor. Compare that to DRS filings, where in 2020 and 2021 only half of the registrations each year were issued a comment letter. As with most registrations in the past 3 years, the growth in the number of biomedical-biotechnology-pharmaceutical sectors supercedes all other categories.
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