U.S. Supreme Court Issues Ruling on Direct Listing Loophole; Weakens Investor Protections

On June 1, 2023, the Supreme Court of the United States issued a ruling in Slack Technologies v. Pirani relating to liability under §11 of the Securities Act of 1933, holding that a plaintiff may sometimes recover under §11 even when the shares he owns are not traceable to a defective registration statement.

Christopher Iacovella, President & CEO of the American Securities association said, “Unfortunately, today’s court decision on the “direct listing loophole” leaves investors as unprotected from fraud as they were in 1930’s. Iacovella added, "The “direct listing loophole” removes trusted gatekeepers from the share issuance process and deprives investors of their ability to hold a company accountable for using false or misleading statements. Congress must close the “direct listing loophole” before further investor harm results.”

ASA has been very active against "direct listings" for years, urging the SEC and Congress not to rollback decades-old investor protections for initial public offerings (IPOs) in a way that tips the scales in favor of Wall Street and Silicon Valley at the expense of America’s mom-and-pop investors.

ASA Activity:

• December 2019: ASA sent a letter to the Securities and Exchange Commission (SEC) outlining several investor protection concerns regarding the expanded use of direct listings to raise primary capital from America’s retail investors.

• January 2020: the ASA appeared in the Wall Street Journal saying, the "direct listing" loophole would be a complete end run around the traditional underwriting process, and it would create a massive loophole in the regulatory regime that governs the offerings of securities to the public.

• March 2020: ASA sent a letter to the SEC calling on the Commission to prioritize investor protections as it considers a proposal to expand the use of direct listings to raise primary capital.

• September, 2020: ASA sent a letter to the SEC reiterating its investor protection concerns and highlighted how Chinese companies will use the process to defraud American investors and retirement savers.

• May, 2021: ASA submitted a comment letter to the House Financial Services Committee ahead of its hearing examining direct listings, SPACS, and the need for more investor protections. In the letter, ASA outlined how direct listings harm investors, recommended additional disclosures for SPACs, detailed how Communist China is abusing the JOBS Act, and called on Congress to direct the SEC to reorient the IPO process back towards its historical purpose of investor protection and small business capital formation.