When you issue stock per a traditional underwritten prospectus, say an IPO, a purchaser has a right to sue if there is a material omission or misstatement.

Over the last few years, many companies have gone public by offering their shares directly to the public in what is called in the trade a “direct listing,” one advantage of which is that there is no underwriter in the deal insisting that existing stockholders refrain from selling their shares immediately.  SO– if you buy shares in a direct listing and the prospectus lies, you can also sue the company, right?

Wait– in an underwritten offering you know your seller: the company sold all the shares.  But in a direct listing, how to you know whom to sue?  Maybe the company did not sell the shares you bought.  Under SEC law, according to the requirement of “tracing,” you need to prove shares were issued pursuant to a registration statement or traceable to it.

The net result is of course unacceptable to have different outcomes, and by a 2-1 vote the Federal Ninth Circuit, known as an activist appellate jurisdiction, declared that the remedial purpose of the Securities Act of 1933 requires that the company be liable with respect to all shares in a direct listing without proving the identity of the seller.  This is the first such  judicial determination in a direct listing; it likely will be appealed, and is binding only on the Left Coast where the Ninth Circuit reigns.

Someone call a Congressperson quick…..