Supreme Court sides with Slack, putting direct listings in jeopardy
axios.com
axios.com
1. Instead of a traditional IPO, Slack went public through an alternative process called a direct listing.
2. As part of its direct listing, Slack sold some million "registered" and some million "unregistered" shares.
3. What are registered and unregistered shares? I could not find an explanation on Wikipedia.
4. Fiyyaz Pirrani purchased some number of shares, but later complained that Slack had misrepresented something in its declarations before going public. He filed suit against the company.
5. SCOTUS says that because Fiyyaz Pirrani could not tell which of his shares were registered and which were unregistered, he could not prove standing(?)
6. This problem would not have arisen with an IPO (because?). On the other hand, similar doubts will arise with all future direct listings, making investors hesitant to purchase shares in the corresponding companies.
Is this an accurate assessment? What are registered and unregistered shares?
Now SCOTUS is saying that Pirrani cannot sue slack because he may not have bought shares directly from Slack.
[1] https://www.bloomberg.com/opinion/articles/2023-06-01/ai-bot...
7. Pirrani's suit relied on Section 11 of the Securities Act. This alleges that the company lied in its registration document.
8. In an IPO, all shares are covered by the registration document. In a direct listing, the current shareholders of the company just start trading their shares on the market one day.
9. Notably, a direct listing makes it unclear which shares are registered (covered by the registration document) and which are unregistered. According to SCOTUS, Pirrani can't tell, so he can't prove standing under Section 11.
10. He should have sued the company under Section 10 of the Securities Act instead. This is the same mechanism used against "mature" companies. Lawyers don't like to sue under Section 10 because of reasons.
Some stuff which is still unclear to me:
1. People speak of owning n shares of a company. I always thought this was simply shorthand for something like: "I own shares #1034852, #1092647, and #2986246".
2. People sometimes own 0.25 shares of a company, but I thought that this was a convenience invented by stock brokers like Fidelity and Robinhood.
3. If each share is associated with a share number, and people only hold whole shares in principle, then isn't the provenance of that share clear? Whether it is registered or not should simply be a matter of following it back in time?
Per the Money Stuff article, Section 10 has a higher burden of proof. For a shareholder to win a lawsuit under section 10, they need to show that the disclosures were deliberately misleading, such that the board was trying to defraud investors.
Under a section 11 lawsuit, however, they only need to show that the disclosures were materially wrong: proof of motivation isn't required in the same way.
So for convenience sake, they don’t assign a unique share to you, because why make it so that you have to keep a complex record of a bunch of fungible things? (i.e. Uh oh, that specific share is being lent to a short seller, but the true owner wants to sell it).
In practice, he bought the right to be given a share of Slack, not a specific piece of paper.
His broker can prove they bought unregistered shares, but they’re not the plaintiffs here.
Most people no longer own their shares directly. Most online self-clearing brokerages are "nominee" accounts where shares are held in the brokerages' name rather than the end customer's name. Owning specific shares in one's own name would be a "direct" account.
This is also how fractional shares are handled. Share ownership is a ledger at the brokerage, not an actual stock registered in your name.
Nominee brokerage accounts are cheap and fast.
India and Australia you own the share and you still have cheap and fast brokerage accounts.
Nope, (private) shares are almost always fungible and not numbered/serialized in any way.
In fact most shares are just a name followed by a number of shares in an excel spreadsheet or Google sheet at best, if not simply a declaration in founding documents.
> People sometimes own 0.25 shares of a company, but I thought that this was a convenience invented by stock brokers like Fidelity and Robinhood.
Again, no. Fractional shares are very normal. Any time shares are created (via dilution, additional investment, etc.) some existing grants and holdings are likely to become fractional. Usually fractional shares are calculated to the third or fourth decimal place.
Many shareholders in the forementioned spreadsheet will have their share amount tied to a % calculation which will inevitably resolve to a fractional share amount.
Say a share is worth $500, are you okay with $500 rounding errors? I wouldn't be. With 4 decimals the maximum rounding error becomes an immaterial 5 cents.
But what about public shares, which is what people are usually discussing?
Do publicly traded shares not have serial numbers or identification numbers or something to that effect?
No they’re fungible. The vast majority are held as book entries in the DTCC[1]. Even if you pull them out of that system, they still don’t have an individual identification number like a bond’s serial number.
[1]: https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
Bonds are also typically fungible in the same way these days (including typically being held by a clearing house if they are traded).
Does this mean that it's possible that the total number of shares people own doesn't add up exactly to the number issued?
so somebody gets the piece that in your mind is in question. I don't know where the piece goes or i would tell you, but it's not lost
Right. If you read judge Gorsuch's statement quoted in the article a bit between the lines, he says: The Securities Act is a nonsense law in this aspect. If a company makes incorrect statements in a public listing and offer you shares they will be liable. But if you buy shares of the same company from someone else who owned the shares before the company was listed, the company is not liable for their wrongdoing. There is no reason why some shares of the same type of a single company deserve more protection than others depending on who was a previous owner. A dysfunctional law.
I think if a company failing to publish certain disclosures forced people to hold and not sell their shares until such time as the disclosures could be made people would be outraged.
I guess maybe this case leaves that open?
I'm not a serious follower of financial news, but various things do come across my radar, and since I've subbed to the email version of Money Stuff (about a year now), I always feel like I'm a week ahead of everyone else (again, at this not-serious-follower level, not a week ahead of the folks who are genuinely in the know). Like all the Twitter lawsuit stuff, all the FTX-fraud stuff, a bunch of LLMs-in-finance-and-law stuff lately... on all of those issues Levine kept me better informed, a week earlier, than every HN article put together. (Note that the HN comments are how I found out about Money Stuff in the first place)
The problem is that half the time it's just frickin' boring. I guess ya pays ya nickel and ya takes ya chances.
(Sometimes it is absolutely hilarious, which helps.)
From a lesser writer, this would be disqualifying! Somehow I find myself enjoying it.
I love Money Stuff but hate reading for pleasure on an LCD display?
I think the specific problem with this is that they use the "unregistered" / "registered" jargon without actually defining it first. Just one opening bullet point in "Details" that defines unregistered/registered shares and explains that buyers can't tell which they have would have done the job IMO.
From being on the school newspaper (nerd) with a ruthless English teacher as editor, I learnt the older style you just described.
Actually I learnt it by having large swathes of my text highlighted and deleted with an instruction "rewrite this".
I didn't realise how bad modern news is at this until you pointed it out. It's fairly common these days for me to start reading an article but still have little idea what it's about beyond the clickbait headline when I'm a third or a quarter way through an enormous read, so I just give up and leave.
I wonder when and why this changed?
https://newrepublic.com/article/167733/axios-guide-writing-w...
Buying a class of stock with no or minimal voting rights is known upfront. You don’t have to buy them and presumably they are price to take into account the lack of voting power.
And given the tiny spread in how voting versus non-voting shares trade, it doesn't seem that investors value voting rights very much.
Op might actually have a point here, insofar as it would apply to public stock. If such a class separation exists with private stock, that's a risk an accredited investor is probably either good to understand or flush enough with cash to be protected. But Mark cratering stock that moms and pops bought into, that's a good fit for regulation like anything else involving public markets.
A dual-structure set of shares does not result in any of these problems, or prevent litigation and enforcement surrounding them.
What the regulation doesn't protect, and shouldn't protect people from, is investing in honest, but dumb companies. The metaverse play was obviously dumb three years ago.
> And so what happened in Slack is that, on the first day, roughly 118 million shares were available for sale under Slack’s registration statement, and roughly 165 million shares were available for sale without registration. And if you bought stock, there was no way to know which kind of stock you bought: You didn’t buy directly from the company in an IPO process; you just bought on the stock exchange from an anonymous counterparty. If you bought “registered shares,” then technically you are allowed to sue Slack under section 11, just like in an IPO; if you bought “unregistered shares,” then you are not, just like in a mature public company. But there is no way of knowing which one you bought, so in practice you can’t sue under section 11.
I don't see how this is materially different from Axios' analysis?
Because Axios is saying:
> 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.
But this is ignoring the fact that you can still sue under section 10 (regular securities fraud) as opposed to section 11 (IPO fraud), which the Money Stuff article explains.
People will be no less willing to purchase shares in a direct listing than they are to purchase shares in any public company any day of the week.
Axios is claiming this will be a death knell for direct listings (their editorial opinion), while the Money Stuff article comes to no such conclusion. That's the material difference.
So it does seem pretty far-fetched to me. If you followed that logic, the entire stock market would grind to a halt.
My belief here is based solely on having read some documents about the assignment process and having seen no reference to such record-keeping.
https://www.theocc.com/getmedia/0cdda3c2-ab81-450f-b8b8-7ce8... https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...
But yes, I think that's the one.
The judiciary has other essential roles, including adapting laws to new circumstances, justice, fairness, and mercy. The judiciary fails when it hurts people or causes injustice simply because Congress didn't anticipate some circumstance (and obviously Congress can't anticipate every circumtance).
They pull out the claim above when it suits them, and then are expansive about US tradition, Congress's 'real' intent, etc. when it suits them.
Totally disagree. The judiciary should not make up law. They are 9 people who have not been elected, have life terms, and have zero accountability to the people. If there needs to be new law, that responsibility should fall on our elected representatives, in other words Congress.
"Given that giant warning sign, it's unclear why anyone would buy into a direct listing, and thus why any company would attempt one." - How does that follow?
It makes them more attractive to companies, and less attractive to investors. And the companies are the ones making the decisions!
Investors grumble about investor-unfriendly structures from public companies all the time: dual class stock, staggered boards, executive pay. But they suck it up and buy the companies at the same prices anyway. And it's not like this ruling gives companies carte blanche to defraud investors - in fact it's specifically about protecting companies that make a good faith mistake.
So investors can't make direct listings unpalatable. Who can? An act of Congress, or perhaps the SEC finding a way to make these companies' lives really miserable. Or major index providers deciding they won't include companies that went public via direct listing - but even then they'll likely have to cave to investor pressure.
No, it also makes them more attractive for (real) investors.
Reminder that investors own the company, so when a parasite investor joins up with some class action lawyers to sue the company, they are just looking for a cash grab at the expense of all the other investors.
Which is fine! Different processes to suit different issuer and investor risk profiles is no bad thing.
I really don't see how anyone that actually reads Supreme Court decisions calls this court illegitimate. They are very consistent about not being a super legislature, no matter how disruptive that happens to be. While the prior court seems to have been acting ... more like one? Its the opposite of how the media and discourse has been, but every time I read a case I just can't reach that conclusion.
I just don't think this observation will be considered controversial in history books, compared to now.
Congress can't reach consensus and doesn't understand the most holistic thing to do. The court stopped picking up the slack for Congress and wouldn't have been doing so before in a system with actual checks and balances. Isn't that a plainer reading of what's happening?
Also, we have the 14th amendment, which basically bars discrimination. The Constitution is the super legislature and it's up to the Supreme Court to keep it that way by making sure states can't turn women or sexual minorities into second or third class citizens. Which they are currently doing.
we obviously don't have checks and balances to prevent that, aside from judges that chose not to … like we currently have
is this really a uniquely “republican” stance right now? as opposed to just driving people away from partisans at all, because I’m in the latter camp and wont support modifying a view just to help a party consolidate power
Most of the high profile cases are:
(1) Questions about the meaning of the laws actually passed, and
(2) Questions about the Constitutional power of one or another branch or level of government.
These classes of questions share the feature that Congress cannot resolve them by passing a law. (At least, if it tries to in thebfiret case, that sets up an infinite regression of laws to pass.)
The ruling that I, and most people, find to be damning is overturning Row. I don't give two shits about what you think of the actual issue. It doesn't matter if the previous ruling was wrong, the point of the courts ironically isn't to actually get it right but make a decision. After that the law has been interpreted and it's up to the legislature to say, "no I actually meant this." There is some room for exceptions on this but a split decision, split on party lines, and extremely tenuous reasoning, should be all the signal you need that you don't have the "this is fine because it's obviously wrong" to warrant an exception like this.
You present many controversial philosophical opinions as facts, which many people disagree with. 'Stare decisis' is the term used to describe the notion that existing judgements should be given deference, even when they're clearly wrong. The degree to which courts defer to SD varies a great deal, with judges holding diverse views on the subject, and many judges using it more as an argument of convenience than a philosophy which they follow.
I will assume that by "Row" you mean "Roe v. Wade", and it is a very good counter-example to the statements which follow it. RvW was decided based on constitutional grounds, which means that even if a legislature thought it was wrong, there would be no way to 'clarify' the matter. Another problem is that lots of cases have split decisions, some on party lines. In addition to those, there have been many times when the judges have (almost) all been from the same party (the 1930s come to mind); should those cases get deference?
That's not true at all, at least rules as written. If the supreme court interprets the constitution and the legislature doesn't like it they have the power to amend it. Thats the explicit check the legislature has on the courts. And yeah it's a huge PITA but we've also done it 27 times.
> In addition to those, there have been many times when the judges have (almost) all been from the same party (the 1930s come to mind); should those cases get deference?
Yes, absolutely. I have no idea why you thought I would say no to this.
Split decisions are fine for first rulings, it's how it goes, people disagree. But when it comes to the courts changing their mind down the road the bar needs to be higher. The previous ruling has been standing for however long without the legislature feeling the need to intervene. Unless there is some new information like a hypothetical ruling that was based on phrenology or an exceptional case where it's clear to everyone that it was a mistake and the logic doesn't actually follow you should give deference.
And look, I know this gives a huge amount of bias to the decision in the first ruling but without it the decisions of the court stop having any meaning. So what if they ruled <thing> is unconstitutional? I can keep doing it because the next time it might not be.
It is pants-on-head stupid that flagrantly violating the constitution on purpose after the law has been settled so you can go back to the supreme court and rule a different way even has a chance of working.
When you have half the court saying the decision as it was originally made was not only not made in error but that it was correct that really needs to be the legislature's problem.
My, grandma, what large bad faith you have!
I see consistency.
A court that was acting like a super legislature along partisan lines could easily have taken much further advantage than that, and …. didn’t? They didn't say “its banned, bye”. they said “elected officials should be handling this” no matter how disruptive that is, which is only disruptive because elected officials did not address the issue because they were hoping to be elected again
yes, lying to get appointed is a common strategy in the US. I dont think that has bearing on the merit of the ruling itself. I see consistency and congruence, and I dont see absurd wild interpretations that people suggest is occurring
https://news.ycombinator.com/item?id=31962613
the rationale presented in the case was a reversion to the mean, where the court doesn't function as a surrogate for the legislature. grasping at the procedural aspects of appointment because the judicial review was sound but disruptive suggests that these aren't strong arguments about the judges.
"[A]nyone that actually reads Supreme Court decisions" is the pertinent part of your comment. That is a very small group of people,* and usually a very quiet one that doesn't jump to the conclusion that the court is "illegitimate". The vast majority of the 50+ decisions each year do not make the news and the plurality of them are decided unanimously.**
* Basically nobody, unless it's their job, reads every case. However it is normal to follow a site like SCOTUSblog.com and get summaries to stay in the know.
** I guess check out any of the years here: https://www.scotusblog.com/reference/stat-pack/
There is so much distorted information fueling people’s emotions, but the contents of the cases are actually very interesting and illuminating of many options left open for people to get closer to what they want, like when judges point out “well maybe if you brought a case forward this other way, we could evaluate these outstanding questions” but nobody passionate about a cause reads this stuff and only reacts to the outcome
If you think the Court is merely "interpreting the constitution" then please explain how to interpret the 14th amendment without giving the Supreme Court wide latitude to protect minorities?
EDIT: Equal protection means whatever the Supreme Court says it means. They are a super legislature whether we like or not, and if they're going to be one, it sure would be nice if they cared at least a little bit about public opinion on matters of great controversy. And popular vote absolutely matters for legitimacy and "will of the people", even if the rules are currently stacked against one person one vote.
Equal protection doesn't mean that any law that has any racially disparate impact is unconstitutional. It means that you cannot treat different citizens in different way based on who they are.
Ignoring stare decisis with the flimsy "history and tradition" argument is farcical, considering the jurisprudence it was overturning was in place for about 1/5 of the nation's history.
The legitimacy of the court is in question because the court is at this point another political branch .
This is because the legislature is going full scorched earth in their "advise and consent" powers as a weapon.
Reform is needed.
I’m not sure I’d want Supreme Court decisions about slaves not being US citizens to stand simply because it’s precedent.
The original Roe V. wade decision was a weak one, something admitted even by supporters of abortion rights.
The court simply threw out the weakly supported argument and returned the decision to the legislature.
Congress is divided over divisive issues, and unified over other issues.
E.g. the first COVID legislation was passed in like 2 weeks. Hardly a sign of "dysfunctional legislators".
The only reason to do this is so you can put fraudulent info in the prospectus in the knowledge that the only people getting registered shares are those who are in on the fraud, and none of the victims can sue you because of magic fraud reasons.