The U.S. Supreme Court recently decided the most significant securities law case of court's current term, Slack Technologies v. Pirani, a case raising substantial questions about the scope of private litigation under the Securities Act of 1933. In the decision below, the U.S. Court of Appeals for the Ninth Circuit had held—contrary to 50 years of Securities Act case law, including the Ninth Circuit's own prior rulings—that investors could assert Securities Act claims based on an allegedly misleading registration statement without showing that they purchased shares registered under the challenged registration statement. A Supreme Court decision affirming the Ninth Circuit's novel ruling could have radically expanded the scope of potential Securities Act liability. In a short unanimous opinion, however, the Supreme Court reversed the Ninth Circuit and confirmed that Section 11 of the Securities Act requires plaintiffs to "trace" the shares they purchased to the challenged registration statement. But the court did not decide whether Section 11's sibling provision, Section 12(a)(2), imposed a similar tracing requirement, instead remanding for the Ninth Circuit to decide that question in the first instance. Thus, while the court's decision in Slack confirmed an important limitation on Section 11 litigation, it left the door open to a potential expansion of liability in connection with the Securities Act's registration requirements under Section 12(a)(2) in the future.

The Securities Act's Private Rights of Action and the 'Tracing' Requirement

The Securities Act regulates public offerings of securities. Among other things, it requires companies offering securities to the public to register those securities with the SEC. To register securities for sale to the public, a company must file a registration statement with the SEC, comprised of two parts: a selling document or "prospectus" with detailed information about the company's business, which sellers must supply to anyone to whom they seek to sell the securities and certain additional exhibits and information that the company must file with the SEC but need not be supplied to purchasers. The Securities Act also prohibits false or misleading statements or materially misleading omissions in registration statements. And Sections 11 and 12(a)(2) of the Securities Act provide investors who purchase securities offered under false or misleading registration statements with two distinct private rights of action against those who issued, offered, underwrote or sold the securities.