Coinbase Investor Dismisses Class Action After Ninth Circuit Ruling Requiring Traceability for Securities Act Claims Arising From Direct Listings

A Coinbase investor voluntarily dismissed a putative class action against Coinbase arising from shares issued through a direct listing, rather than an initial public offering.  The dismissal of the case – In re Coinbase Global Inc. Securities Litigation, No. 3:21-cv-05634 (N.D. Cal.) – illustrates the fallout from the recent ruling by the U.S. Court of Appeals for the Ninth Circuit in Pirani v. Slack Technologies, Inc. (Feb. 10, 2025) that purchasers of shares sold to the public through a direct listing cannot sue under sections 11 and 12(a)(2) of the Securities Act of 1933 unless they can trace their shares to an allegedly false or misleading registration statement or prospectus.

As the Coinbase case shows, the Ninth Circuit’s decision on traceability – which itself resulted from a 2023 Supreme Court decision – increases the difficulty of pleading Securities Act claims arising from direct listings.  The plaintiff here apparently believed she could not meet that high burden.  Disgruntled purchasers might now be left only with claims under the Securities Exchange Act of 1934, which imposes stricter standards for liability.

Background

In 2018, the Securities and Exchange Commission began to allow certain companies to go public through direct listings.  As the Ninth Circuit explained in Slack, “[a] direct listing differs from an initial public offering in that the company does not issue any new shares; it simply lists already-issued shares so that existing shareholders can sell them on the exchange.”

In a traditional IPO, a company seeking to offer new shares files a registration statement and then sells the shares issued under that document.  Investment banks often underwrite the offering by agreeing to buy the shares at a predetermined price.  To ensure that the stock price remains stable for some period after the offering, underwriters usually require a “lock-up period” that restricts pre-IPO shareholders from selling their existing, unregistered shares for several months.  As the Ninth Circuit observed, “[a]nyone purchasing shares on the stock exchange during the lock-up period can therefore be certain that the shares were issued under the registration statement.”

In a direct listing, a company files a registration statement to register pre-existing shares before they can be sold to the public.  The newly listed shares are sold directly to the public without any underwriting – and without a lock-up period.  A direct listing thus makes both registered and unregistered shares available to the public as soon as the direct listing takes effect.

The Slack Case

Slack Technologies went public through a direct listing – as did Coinbase.  Slack filed a registration statement and prospectus for a specified number of registered shares that it intended to offer.  Because the offering was a direct listing rather than an IPO, holders of pre-existing, unregistered shares could also sell their shares into the market.

Slack’s stock price subsequently declined, and a shareholder sued under §§ 11, 12(a)(2), and 15 of the Securities Act, alleging misrepresentations in the registration statement and prospectus for the direct listing.  The disappointed Coinbase shareholder filed a similar Securities Act suit against Coinbase when Coinbase’s share price declined after the direct listing.

Section 11 applies to alleged misrepresentations or omissions in registration statements.  Section 12(a)(2) applies to alleged misrepresentations or omissions in prospectuses and in oral communications relating to a prospectus.  The Securities Act imposes strict liability on the issuer, while the Exchange Act requires proof of fraud.  But because the burden of proof is easier under the Securities Act, those claims are available only to plaintiffs who can trace their shares to an allegedly false or misleading registration statement or prospectus.

The Slack defendants moved to dismiss the complaint, contending that the plaintiff had not established that he had purchased registered shares issued pursuant to the registration statement and prospectus, rather than unregistered shares that had entered the market through the direct listing at the same time as the registered shares.  The District Court denied the motion to dismiss even though the plaintiff had conceded that he could not trace his shares to those issued under the registration statement and prospectus.  The Ninth Circuit – in a 2-1 decision – affirmed.

The Supreme Court unanimously vacated the Ninth Circuit’s ruling on the § 11 claim.  The Court held that § 11 authorizes suit only when the security at issue was issued pursuant to a registration statement alleged to have been false or misleading.

The Court remanded the case for further consideration of whether the plaintiff had sufficiently pled traceability under § 11 “as properly construed.”  The Court also directed the Ninth Circuit to reconsider its ruling on § 12(a)(2) in light of the Court’s construction of § 11.

Ninth Circuit Decision on Remand in Slack

On remand, the Ninth Circuit held that the plaintiff had effectively conceded that he could not trace his share purchase to the allegedly defective registration statement. Although the Complaint had alleged without elaboration that the plaintiff and other class members had purchased shares “‘pursuant and/or traceable to’” the registration statement, the plaintiff’s “subsequent concessions expressly waived any allegation of traceability.”

The Ninth Circuit next held that the Supreme Court’s traceability requirement for § 11 applied as well to § 12(a)(2).  That section “requires tracing a plaintiff’s shares to an allegedly false or misleading prospectus.”

The Coinbase Case

The Coinbase case was making its way through the court while the Slack litigation proceeded.  In January 2023, the court stayed the Coinbase action to await the Supreme Court’s decision in Slack.  The court then extended the stay after the Supreme Court’s ruling while the Ninth Circuit considered the Slack remand.

After the Ninth Circuit issued its Slack decision in February 2025, the Coinbase parties discussed how to proceed, including whether the plaintiff would seek to amend her Complaint.  The plaintiff appears to have decided not to amend, and she filed a notice voluntarily dismissing the case without prejudice.

Implications

As expected, the Slack decisions have increased the difficulty of pleading Securities Act claims for securities issued in direct listings because purchasers might not be able to establish that they purchased registered shares, rather than unregistered ones.  If they cannot plead and prove traceability to a challenged registration statement or prospectus, purchasers will be left only with Exchange Act claims, which require proof of scienter, reliance, and loss causation.

Time will tell whether the strict traceability requirement will encourage issuers to go public through direct listings rather than through IPOs – as the Ninth Circuit majority had feared in its first opinion.  While the potential for the reduced liability risk of a direct listing might be attractive, companies hoping to raise significant amounts of new capital might view the traditional IPO route as more realistic from a business perspective.  Direct listings are still relatively rare, although the Slack decisions and the Coinbase dismissal could lead to renewed consideration of that approach to going public.