In its June 2023 decision in the Slack case, the United States Supreme Court held that, order to establish standing, Section 11 plaintiffs must plead and prove that the shares they purchased in a direct listing offering are traceable to the allegedly misleading registration statement. However, as I noted at the time, while the Court was clear that Section 11 plaintiffs must establish traceability, the Court had little to say about what is required to establish the tracing.

In a recent ruling in a securities lawsuit against Palantir Technologies, which went public in a direct listing, the Court granted the defendants’ motion to dismiss the plaintiffs’ Section 11 claim, after finding that the alternatives the plaintiffs proposed to try to establish tracing were insufficient. The practical implication of the Court’s decision is that the strict tracing requirements may, as an April 16, 2025, memo from the Paul Weiss law firm put it, “effectively insulate companies that go public through a direct listing from Section 11 liability.”

The District of Colorado’s April 4, 2025, decision in the Palantir case can be found here.

Background

In September 2020, Palantir Technologies went public through a direct listing. A direct listing differs from a traditional IPO. In an IPO, new shares are created to sell to the public, underwriters are involved to help sell the shares, and any prior non-public shares (such as for example shares held by insiders) are subject to a lock-up, meaning the insiders cannot sell their shares for a specified period of time. In a direct offering, as the Paul Weiss memo put it, “a company files a registration statement to permit existing shareholders to publicly sell their shares, and both registered and unregistered shares are immediately tradeable.” About 53% of the shares available at the time of Palantir’s direct listing were registered under the company’s registration statement; the remainder were not registered.

After Palantir completed its offering, the company’s rate of growth slowed and it faced other setbacks. The company’s share declined, and shareholder plaintiffs filed a securities class action lawsuit that alleged violations of both Section 10(b) of the Securities Exchange Act and Section 11 of the Securities Act.

The defendants filed a motion to dismiss. In seeking dismissal, the defendants argued, among other things, that the plaintiffs lacked standing to assert Section 11 claims because they could not show that the shares they had purchased were traceable to the registration statement.

The April 4, 2025 Opinion

In a detailed April 4, 2025 Opinion, District of Colorado Judge Gordon P. Gallagher granted the defendants’ motion to dismiss. In particular, with respect to the defendants’ motion to dismiss the plaintiffs’ Section 11 claims, Judge Gallagher agreed with the defendants that the plaintiffs had not adequately pleaded they have standing to bring a Section 11 claim, because they had not sufficiently alleged that the shares they purchased are traceable to the allegedly misleading registration statement.

Judge Gallagher began his of the Section 11 standing issue by observing that while the Slack decision affirmed the traceability requirement for Section 11 plaintiffs, “the Supreme Court did not opine on what this means exactly – it did not assess whether any specific allegations were sufficient to plead traceability, nor what evidence is sufficient to prove it.” Judge Gallagher noted further that “there is no consensus among lower courts as to what allegations are enough to plead.” He did agree with the First and Ninth Circuits that mere conclusory allegations alone are insufficient.

In order to try to prove that their shares were traceable to the registration statement, the plaintiffs made three arguments: first, that given the mix of shares available in the offering, the probability that the lead plaintiff purchased at least one registered share is so high as to constitute a legal certainty; second, that with appropriate discovery, the plaintiffs could prove that they acquired shares directly traceable to the registration statement; and third, any unregistered shares they purchased should be deemed registered on an “integrated offering theory.”

Judge Gallagher rejected the plaintiffs’ first theory – what he called “pleading-by-probability” – on the grounds that plaintiffs are required to plead facts to supporting a plausible inference that its shares are traceable, not simply that their shares are probably traceable to the registration statement. It is not sufficient that there is a chance that they purchased shares traceable to the registration statement. By the same token, Judge Gallagher rejected plaintiffs’ second theory, that with discover they could demonstrate traceability, again because the burden is on plaintiffs to plead traceability, not that they might be able to determine that they did in fact purchase traceable shares if they are able to conduct discovery.

Judge Gallagher also rejected the plaintiffs “unified offering” theory – which in effect argued that but for the existence of the registration statement, the unregistered shares would not have been eligible for sale to the public. The court said the unified offering theory applies only when an issuer seeks to avoid registration requirements by dividing up a single offering into multiple offerings, which was not the case here.

Judge Gallagher noted that his interpretation of the requirements for pleading a Section 11 claim “produces a harsh result: if Section 11 plaintiffs must do more than Plaintiffs have here to plead traceability (for instance, assert chain-of-title allegations) that likely forecloses liability in the Section 11 context,” noting further that “Section 11 defendants can structure their offerings to thwart tracing.” Slack, Judge Gallagher said, holds Section 11 plaintiffs to a strict tracing requirement, “even if this requirement does create a prospect of a loophole for direct listings.” Whether limited discovery or other alternatives might solve this loophole, “this is an issue best resolved through statutory or regulatory changes.”

Discussion

As I noted at the outset, if the traceability standards the district court applied here are indeed the standards to establish Section 11 standing, companies conducting public offerings via direct listing may effectively be insulated from Section 11 liability. The standard Judge Gallagher applied suggests that nothing short of “chain-of-title” allegations are sufficient to establish traceability. This obvious poses a substantial, and arguably insurmountable, barrier to plaintiffs seeking to assert a Section 11 claim in connection with a company that went public via a direct listing.

The court’s holding here could be highly relevant to companies considering going public, and to their D&O insurers as well. At least in circumstances in which the direct listing results in the availability of both registered and unregistered shares for purchase, it is going to be very difficult for Section 11 plaintiffs to meet the requirements to establish Section 11 standing. As the Paul Weiss memo to which I linked above puts it, this court’s ruling and others interpreting Slack “may make direct listings a more attractive avenue for companies that are looking to go public, as a direct listing may reduce associated litigation expense.”

The possibility that there could be reduced litigation expense associated with a direct listing, by contrast to the potential expense associated with a traditional IPO, could make companies conducting direct listings a more attractive opportunity for D&O underwriters by comparison to traditional IPOs.

These considerations about direct offerings may not be as relevant in the current circumstances, as the Trump administration’s recent imposition of tariffs seems to have put the IPO marketplace on ice, for the foreseeable future.

But even if we assume a restored market for IPOs, the court’s decision concerning pleading a Section 11 claim in connection with a direct listing still arguably may not affect a lot of companies. The fact is that since 2018, when the SEC authorized direct listings, only 19 companies have gone public via direct listings (including both Slack and Palantir), as of March 28, 2025. By contrast, during the period 2020 to 2025 there were, depending on how and what you count, several thousand traditional IPOs.

While relatively fewer companies have chosen to go public via direct listing, there are a number of reasons why a direct listing may be an attractive option. Among other thing, the associated transaction costs are lower. It may be that if a perception develops that a company that conducts a direct listing has lower risk of Section 11 liability compared to the risk associated with a traditional IPO, more companies might consider the direct listing alternative. This particular advantage of the direct listing could be underscored if companies with direct listings were to realize lower D&O insurance costs than companies conducting traditional IPOs.  

Of course, direct listings and traditional IPOs are not the only options for a company seeking to go public. A company seeking a public listing might also merge with a SPAC. While the marketplace reaction to SPACs has varied widely over recent months, the fact is that a SPAC merger is an alternative way for a company to go public