A Supreme Court ruling has made it harder for invest🌜ors to sue over direct listing stock offerings, potentially making them a more appealing option for companies going public.

The Supreme Court ruled unanimously against California investor Fiyyaz Pirani, who sued instant messaging technology company Slack over its 2019 public offering, alleging that the company had misled investors in its registration statement. 

Overturning a lower court ruling, the Supreme Court said investors who want to sue over false registration statements must trace their shares and prove that those shares were created during a public offering under the registration statement, as opposed to unregistered shares that had been created earlier and given to insiders and early investors.

This makes it harder to sue because 澳洲幸运5官方开奖结果体彩网:tracing shares is nigh impossible in many cases involving 澳洲幸运5官方开奖结果体彩网:direct listings, securities law experts have said, and is likely to encourage more companies to go public via direct listings instead of traditional initial public offerings. 

“This decision is great for tech c𒀰ompanies contemplating direct listings, but not for investors. I would expect a rise in the use of the direct listing vehicle, due to this ruling,” Anat Beck, a law professor specializing in securiti༒es at Case Western Reserve University, said in an email. “Now tech companies can enjoy regulatory approval to raise capital through a direct listing without being limited by traditional tight pricing restrictions.”

When Slack went public via direct listing, 118 million shares were created under its registration statement and mixed with 165 million unregistered ones owned by company insiders and early investors. Pirani didn't prove which of his 250,000 shares were which, and had argued it didn’t matter since the shares were indistinguishable from one another. 

This confusion is less of an issue in traditional 澳洲幸运5官方开奖结果体彩网:initial public offerings because early investors and insiders are prevented from selling shares during the 澳洲幸运5官方开奖结果体彩网:lock-up period that follows an IPO. Direct listings—a streamlined type of offering created by the Securities and Exchange Commission in 2018 to encourage more companies to go public—allow unregistered securities to be sold without a lockup period. 

The Supreme Court’s decision is in line with the status quo—outside of the 9th Circuit Court, which ruled in favor of Pirani, previous rulings by various lower courts had also held that investors had to trace their shares if they wanted to sue over registration statements.

The court’s ruling only addresses whether Pirani has the right to sue, and says nothing either way about whether Slack did anything wrong or lied in its registration statement.

The case isn’t completely dead, since the Supreme Court sent it back to the lower 9th Circuit Court to be reconsidered with the tracing requirement in mind. The new legal battleground will be over what standards of traciꦅng plaintiffs have to meet, John Livingstone, a research fellow at Case Western said. Still,🍎 he said, the ruling clearly makes the outlook better for direct listings. 

“Companies certainly can rest easier knowing that the court is going to require tracing to occur,” he said.