Pirani v. Slack Technologies, Inc.

• Court: District Court, N.D. California
• Decided: April 21, 2020
• Docket: 3:19-cv-05857
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 FIYYAZ PIRANI, Case No. 19-cv-05857-SI

8 Plaintiff, ORDER GRANTING IN PART AND 9 v. DENYING IN PART DEFENDANTS' MOTION TO DISMISS AND 10 SLACK TECHNOLOGIES, INC., et al., GRANTING LEAVE TO AMEND 11 Defendants. Re: Dkt. No. 52

12 13 Before the Court is defendants’ motion to dismiss the Amended Class Action Complaint 14 (“ACAC”) filed by lead plaintiff Fiyyaz Pirani. Pursuant to Civil Local Rule 7-1(b) and General 15 Order 72, the Court finds this matter appropriate for resolution without oral argument. Having 16 considered the papers submitted and for good cause shown, the motion is GRANTED in part and 17 DENIED in part, and plaintiff is GRANTED leave to amend. If plaintiff wishes to amend the 18 complaint, he shall do so by May 6, 2020. 19 20 BACKGROUND 21 I. The Parties and the Direct Listing 22 This securities class action is brought by lead plaintiff Fiyyaz Pirani (“plaintiff”) against 23 Slack Technologies, Inc. (“Slack”) and other named defendants. Plaintiff purchased 30,000 shares 24 of Slack’s Class A common stock at $40/share on June 20, 2019, the first day of Slack’s public 25 listing, and approximately another 220,000 shares at various prices from June 21 to September 9, 26 2019. Holleman Decl. in Supp. of Mot. to Appoint Lead Pl., Ex. A (Dkt. No. 26-1). Plaintiff brings 27 this case “on behalf of a class consisting of all persons and entities that purchased or otherwise 1 (Dkt. No. 42). 2 Slack is a San Francisco-based software company “that offers a cloud-based collaboration 3 and productivity platform” for workspace computing. Id. ¶ 2. Other named defendants include 4 CEO Stewart Butterfield, CFO Allen Shim, and CAO Brandon Zell; and Board of Directors 5 (“Board”) members Andrew Braccia, Edith Cooper, Sarah Friar, John O’Farrell, Chamath 6 Palihapitiya, and Graham Smith (collectively “Individual Defendants”). Id. ¶¶ 19-29. 7 The complaint also names as defendants three venture capital firms: Accel, which appointed 8 defendant Braccia to the Board; Andreessen Horowitz, which appointed defendant O’Farrell to the 9 Board; and Social+Capital, which appointed defendant Palihapitiya to the board (collectively “VC 10 Defendants”). Id. ¶¶ 22, 25, 26, 30-33. The VC Defendants “collectively held more than 47% of 11 the Company’s voting power and included 3 members of the Board at the time of the Offering.” Id. 12 ¶ 34. They “caused Slack to effectuate the Offering.” Id. They also “caused [Slack] to indemnify 13 them from any liabilities arising from the Securities Act [of 1933] and the Securities Exchange Act 14 of 1934” and “to obtain and maintain a directors and officers insurance policy for them.” Id. Upon 15 Slack’s listing, the VC Defendants “sold more than 12.5 million shares for gross proceeds of more 16 than $484 million.” Id. 17 Slack’s Class A common stock shares began trading on the New York Stock Exchange 18 (“NYSE”) on June 20, 2019 under the ticker symbol “WORK.” Id. ¶ 4. Slack did not take the 19 traditional route of an Initial Public Offering (“IPO”), in which “a company will offer a certain 20 amount of new and/or existing shares to the public . . . [to] help raise additional capital for company 21 operations and expansion.” Id. ¶¶ 66-67. Instead, Slack opted for a direct listing: no new shares 22 were issued, but insiders and early investors of the company were able to sell their preexisting shares 23 to the public. Id. ¶¶ 66, 69.1 Because these shares were not subject to a lockup period as in an IPO, 24 they were available for sale immediately upon Slack’s listing. Id. ¶ 70. 25 In preparation for the direct listing, Slack filed a Form S-1 resale shelf registration statement 26 (the “Registration Statement”) and a Form 424B4 prospectus (the “Prospectus”) (collectively the 27 1 “Offering Materials”) with the Securities Exchange Commission (“SEC”). Id. ¶¶ 71-75. Slack, 2 with defendants Butterfield and Shim, also “hosted an ‘investor day’ in New York City to generate 3 investor interest” on May 13, 2019. Id. ¶ 72. The contents of the Offering Materials applied to “up 4 to 118,429,640” shares offered for resale to the public. Id. ¶ 4; see Kahn Decl. in Supp. of Mot. to 5 Dismiss, Ex. A (Dkt. No. 54-1).2 The Offering Materials noted that additional shares were available 6 for resale and exempt from registration pursuant to SEC Rule 1443: “approximately 164,932,646 7 shares of common stock immediately after [Slack’s] registration.” Kahn Decl. Ex. A at 164; see 8 ACAC ¶ 4. 9 10 II. The Offering Materials 11 Plaintiff alleges that he and other class members suffered losses to the value of their 12 purchased shares as a result of misstatements or omissions of material facts in the Offering 13 Materials. Id. ¶¶ 11-12. These include statements regarding service outages and Slack’s Service 14 Level Agreements (“SLAs”) in the case of such outages; competition from Microsoft Teams; 15 scalability and purported key benefits; and growth and growth strategy. Id. ¶ 76. 16 Regarding outages, Slack disclosed that it had “service level commitments to [its] paid 17 customers” in the event of service disruptions and noted that if Slack failed to meet those 18 commitments, it “could be obligated to provide credits for future service . . . which could harm [its] 19 business, results of operations, and financial condition.” Id. ¶ 95 (emphasis removed). However, 20 Slack did not disclose alleged vulnerabilities it was already suffering that “caused severe service 21 disruptions,” including a failure to meet its uptime guarantee for “7 out of 12 months” in 2018 alone. 22 2 Defendants request judicial notice of several documents, including Exhibit A, which is the 23 Registration Statement filed with the SEC and incorporated by reference into the ACAC. Dkt. No. 53. Plaintiff does not object except to the extent that defendants rely on the documents for the truth 24 of the matters asserted. Pl’s Opp’n at 1 n.2. The Court GRANTS defendants’ request for judicial notice without “assum[ing] the truth of [the] incorporated document if such assumptions only serve 25 to dispute facts stated in a well pleaded complaint.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 998, 1003 (9th Cir. 2018). 26

3 SEC Rule 144 is an administrative rule adopted “to establish specific criteria for 27 determining whether a person is not engaged in a distribution.” 17 C.F.R. § 230.144. This in turn 1 Id. ¶ 96. Slack also failed to disclose that its service level commitment was “highly unusual and 2 punitive.” Id. “[W]hile most competitors guaranteed uptime of three-nines (99.9%), Slack 3 guaranteed four-nines (99.99%).” Id. ¶ 63. Failure to meet that guarantee would require a refund 4 or credit payout of “100 times what the customer would have paid during the downtime as opposed 5 to the actual cost of service lost during the downtime,” automatically and regardless of whether or 6 not specific customers actually experienced the downtime or requested the credit. Id. 7 Regarding competition, the Offering Materials identified Microsoft as its primary competitor 8 but stated that “we are uniquely positioned to more rapidly innovate and respond to new 9 technologies and customer requirements than our competitors.” Id. ¶¶ 83-84. Defendants allegedly 10 “downplayed the impact” of these competitors, including “the impact . . . Microsoft in particular[] 11 was already having on [Slack’s] expansion into enterprise customers prior to the Offering.” Id. The 12 competitor product Microsoft Teams launched in March 2017; in December 2017, defendant 13 Butterfield acknowledged in a Business Insider interview that “Microsoft is the main competitor. 14 They’re the third largest company in the world and if they start channeling all their resources against 15 you, that’s a lot to compete with.” Id. ¶¶ 52-53. In 2018, when Microsoft Teams introduced a free 16 tier and a feature for adding people outside of an organization, it began “to compete head-to-head 17 with Slack’s freemium model.” Id. ¶ 52. That same year, Slack acquired intellectual property from 18 another software company, Atlassian, and announced a close partnership between them. Id. ¶¶ 54- 19 55. PCMag.com reported: “What went unsaid in both [Slack’s and Atlassian’s] statements is that 20 they’re partnering up to take on an even bigger competitor in Microsoft Teams.” Id. ¶ 57. 21 Plaintiff alleges that the Offering Materials touted various “key benefits to users, teams, and 22 organizations” and that Slack built its “technology infrastructure using a distributed and scalable 23 architecture on a global scale,” and that these statements “implied that the Slack App was a market 24 leader with unique advantages over its competitors and that the Company possessed the ability to 25 scale up its services to reach more lucrative enterprise customers.” Id. ¶¶ 91-93 (emphasis 26 removed). Slack also stated that it had a “[d]ifferentiated go-to-market strategy,” comprised of a 27 customer engagement model and expansion within larger organizations, and implied this was 1 decreasing net losses from 2017 through 2019.” Id. ¶¶ 77-78. But Slack’s “growth was slowing 2 down in several aspects, including its key metric, [daily active users].” Id. ¶ 82. 3 4 III. Performance After the Direct Listing 5 On the first day of trading, June 20, 2019, shares began selling at $38.50. Id. ¶ 4. On June 6 28, 2019, Slack experienced a service outage of approximately fifteen hours affecting customers in 7 the United States and Europe; the outage received attention from the media, with reporting by such 8 news outlets as Newsweek. Id. ¶¶ 99-102. Another large-scale service outage occurred on July 29, 9 affecting customers in the United States, Japan, and Europe. Id. ¶ 106. In a conference call on 10 September 4, defendant Butterfield admitted that the outages were caused by “scaling . . . we 11 continue to hit limits that we didn’t realize were built into the system.” Id. ¶ 111 (emphasis 12 removed). He also admitted that the uptime guarantee reflected policies that “are outrageously 13 customer-centric,” “exceptionally generous,” and “unusual.” Id. ¶¶ 109-112. 14 By July 11, 2019, Microsoft Teams had reached 13 million daily active users, surpassing 15 Slack in this metric. Id. ¶ 107. On November 20, 2019, MarketWatch reported that “Microsoft 16 Teams, which grew 54% since July to more than 20 million daily active users, is on a trajectory to 17 double Slack’s customer base by early next year as more corporations adopt group chat.” Id. ¶ 90. 18 On September 4, 2019, Slack reported second-quarter fiscal 2020 results, including that 19 “[r]evenue was negatively impacted by $8.2 million of credits related to service level disruption in 20 the quarter”; that “GAAP operating loss was $363.7 million, or 251% of total revenue, compared to 21 a $33.7 million . . . or 37% of total revenue” loss in the second quarter of the previous year; and 22 “[n]et cash provided by operations was $0.3 million, or 0% of total revenue, compared to cash 23 provided by operations of $1.5 million, or 2% of total revenue, for the second quarter of fiscal year 24 2019.” Id. ¶ 108. 25 After the September 4, 2019 earnings announcement, share prices dropped to below $25, 26 going as low as $19.53. Id. ¶¶ 9-10. At the time this action commenced, the price was $25.72 per 27 share; at the time the ACAC was filed, the price was $22. Id. ¶¶ 10 & 10 n.2. 1 11, 12(a)(2), and 15. Defendants move to dismiss all claims under Fed. R. Civ. P. 12(b)(6). 2 3 LEGAL STANDARD 4 A complaint must contain “a short and plain statement of the claim showing that the pleader 5 is entitled to relief,” Fed. R. Civ. P. 8(a)(2), and a complaint that fails to do so is subject to dismissal 6 pursuant to Rule 12(b)(6). To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege 7 “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 8 550 U.S. 544, 570 (2007). This “facial plausibility” standard requires the plaintiff to allege facts 9 that add up to “more than a sheer possibility that a Defendant has acted unlawfully.” Ashcroft v. 10 Iqbal, 556 U.S. 662, 678 (2009). While courts do not require “heightened fact pleading of 11 specifics,” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative 12 level.” Twombly, 550 U.S. at 544, 555. “A pleading that offers ‘labels and conclusions’ or ‘a 13 formulaic recitation of the elements of a cause of action will not do.’” Iqbal, 556 U.S. at 678 (quoting 14 Twombly, 550 U.S. at 555). “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid 15 of ‘further factual enhancement.’” Id. (quoting Twombly, 550 U.S. at 557). “While legal 16 conclusions can provide the framework of a complaint, they must be supported by factual 17 allegations.” Id. 18 In reviewing a Rule 12(b)(6) motion, a district court must accept as true all facts alleged in 19 the complaint and draw all reasonable inferences in favor of the plaintiff. See Usher v. City of Los 20 Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, a district court is not required to accept as 21 true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable 22 inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). 23 As a general rule, courts may not consider materials beyond the pleadings when ruling on a 24 Rule 12(b)(6) motion. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). However, 25 the incorporation-by-reference doctrine “permit[s] district courts to consider material outside a 26 complaint” in order to “prevent[] plaintiffs from selecting only portions of documents that support 27 their claims, while omitting portions of those very documents that weaken—or doom—their 1 also instances, albeit rare, where the court may review a document when assessing the sufficiency 2 of a claim at the pleading stage. Id. at 1002 (citing Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 3 2005) (affirming the incorporation of materials that the complaint did not reference at all because 4 the claim “necessarily depended on them”)). 5 If the Court dismisses the complaint, it must then decide whether to grant leave to amend. 6 The Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no 7 request to amend the pleading was made, unless it determines that the pleading could not possibly 8 be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) 9 (citations and internal quotation marks omitted). 10 11 DISCUSSION 12 Defendants argue that plaintiff cannot plead standing under Section 11 because of the case 13 law interpreting that statute holding that a plaintiff’s purchased shares must be traced to the defective 14 registration statement, which is impossible to do here. Defendants further argue that Section 11 15 damages cannot be established in the case of a direct listing, that plaintiff lacks standing under the 16 stricter privity requirement of Section 12, and that failure to state a claim under either Sections 11 17 or 12 necessarily obviates standing under Section 15. Lastly, defendants argue that plaintiff has 18 failed to allege material misstatements or omissions. 19 Plaintiff argues that, because of the unique regulatory framework of Slack’s direct listing, 20 this case “presents a matter of first impression that, if decided in Defendants’ favor, will provide a 21 blueprint for companies to evade liability under Section 11 for filing a misleading registration 22 statement.” Pl.’s Opp’n at 1 (Dkt. No. 63). Plaintiff contends that by structuring the Offering such 23 that registered and unregistered shares became publicly tradeable at the same time, “Defendants 24 attempt to take unfair advantage of the judge-made ‘traceability’ requirement that arose out of cases 25 involving successive offerings in which plaintiffs must show that they bought their shares in the 26 specific offering at issue.” Id. at 2. Plaintiff contends that there is only one interpretation of Section 27 11 that makes sense in the context of a direct offering: where a company offers its shares for public 1 federal securities laws, and non-registered shares also become publicly traded in the same offering, 2 any person who acquires shares – which could be sold on a public exchange only when and because 3 the registration statement was filed – may sue those responsible under Section 11 where the 4 registration statement contains material misstatements and omissions. 5 6 I. Section 11 Standing 7 A. “Such security” 8 Section 11 of the Securities Act of 1933 (the “Securities Act”) provides a strict liability cause 9 of action for violations of certain registration requirements. The statute reads in relevant part: “In 10 case any part of the registration statement, when such part became effective, contained an untrue 11 statement of a material fact or omitted to state a material fact required to be stated therein or 12 necessary to make the statements therein not misleading, any person acquiring such security . . . 13 may . . . sue . . .” 15 U.S.C. § 77k. 14 The Second Circuit was the first to interpret the phrase “such security.” See Barnes v. 15 Osofsky, 373 F.2d 269 (2d Cir. 1967). In Barnes, shares were issued pursuant to registration 16 statements issued in 1961 and 1963, and purchasers filed shareholder class actions alleging claims 17 under Section 11 that the 1963 registration statement and prospectus contained material 18 misstatements and omissions. The district court approved a settlement limited to purchasers who 19 could establish that they had purchased securities issued under the 1963 registration statement. 20 Objectors to the settlement, who could not trace their purchases to the 1963 registration statement, 21 appealed. Writing for the court, Judge Friendly4 found “the difficulty, presented when as here the 22 registration is of shares in addition to those already being traded, is that ‘such’ has no referent.” Id. 23 at 271. Judge Friendly weighed two possible readings of the phrase: a narrower reading, “acquiring 24 a security issued pursuant to the registration statement”; and a broader reading, “acquiring a security 25 of the same nature as that issued pursuant to the registration statement.” Id. Of the broader reading, 26 4 “Judge Friendly, without a doubt, did more to shape the law of securities regulation than 27 any judge in the country.” Louis Loss, In Memoriam: Henry J. Friendly, 99 Harv. L. Rev. 1722, 1 Judge Friendly noted that it “would not be such a violent departure from the words that a court could 2 not properly adopt it if there would good reason for doing so.” Id. Judge Friendly adopted the 3 narrower reading after a review of the overall statutory scheme5; language from the legislative 4 history6; dicta from within the Second Circuit7; and a treatise and amicus brief from the SEC. Id. at 5 272-73. The Ninth Circuit has followed suit in its interpretation: “Clearly, this limitation [on ‘any 6 person’] only means that the person must have purchased a security issued under that, rather than 7 some other, registration statement.” Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1080 (9th 8 Cir. 1999) (citing Barnes, 373 F.2d 269). 9 This narrower reading became the basis for case law requiring plaintiffs to “trace their shares 10 back to the relevant offering” in order to plead standing under Section 11. In re Century Aluminum 11 Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir. 2013). In the Ninth Circuit, this means plaintiffs must 12 either have “purchased shares in the offering made under the misleading registration statement,” or 13 purchased shares in the aftermarket “provided they can trace their shares back to the relevant 14 offering.” Id. The difficulty arises when there are multiple registration statements, in which case 15 the plaintiff must prove that the purchased shares were issued under the allegedly false or misleading 16 one, “rather than some other registration statement.” Id.; Hertzberg, 191 F.3d at 1080. “Courts 17 have long noted that tracing shares in this fashion is ‘often impossible,’ because ‘most trading is 18

19 5 Reasoning that Section 11’s “stringent penalties are to insure full and accurate disclosure through registration,” Judge Friendly observed that “under §§ 2(1) and 6, only individual shares are 20 registered.” Id. at 272. By contrast, the antifraud sections 12(2) and 17 “are not limited to the newly registered shares.” Id. Furthermore, the damages and liability limitations in sections 11(g) and 21 11(e) suggested that standing should be limited “to purchasers of the registered shares, since otherwise their recovery would be greatly diluted when the new issue was small in relation to the 22 trading in previously outstanding shares.” Id.

23 6 The identical House and Senate versions of the statute contained the language, “every person acquiring any securities specified in such statements,” and “any persons acquiring any 24 securities to which such statement relates.” Id. (citing S. 875, 73d Cong. § 9 (1st Sess. 1933); H.R. 4314, 73d Cong. §9 (1st Sess. 1933)). 25

7 In Barnes, Judge Friendly gave particular weight to Judge Frank’s dictum in Fischman v. 26 Raytheon Mfg. Co., 188 F.2d 783, 786 (2d Cir. 1951) (noting, in the context of holding that proof of fraud or deceit is not required for Section 11 claim, that a Section 11 claim “may be maintained 27 only by one who comes within a narrow class of persons i.e. those who purchase securities that are 1 done through brokers who neither know nor care whether they are getting newly registered or old 2 shares,’ and ‘many brokerage houses do not identify specific shares with particular accounts but 3 instead treat the account as having an undivided interest in the house’s position.’” Century 4 Aluminum, 729 F.3d at 1107 (quoting Barnes, 373 F.2d at 271-72). Nevertheless, courts have 5 deferred to Congress to amend the statute. See Century Aluminum, 729 F.3d at 1107 (“this tracing 6 requirement is the condition Congress has imposed for granting access to the ‘relaxed liability 7 requirements’ § 11 affords”); Barnes, 373 F.2d at 273 (“the time may have come for Congress to 8 reexamine these two remarkable pioneering statutes in the light of thirty years’ experience”).8 9 Lower courts in this and other jurisdictions have imposed the same requirement where unregistered 10 shares entered the market following the issue of registered shares; these courts have resolved the 11 tracing requirement by limiting claims to certain factual circumstances or time periods. See, e.g., 12 Lilley v. Charren, 936 F. Supp. 708, 716 (N.D. Cal. 1996) (granting leave to amend for plaintiffs to 13 “identify the purchasers of the unregistered shares” that entered market prior to registered shares or 14 other “specific dates and facts that establish . . . standing”); In re Initial Pub. Offering Sec. Litig., 15 227 F.R.D. 65, 118-119 (S.D.N.Y. 2004) (cutting off plaintiff class period “at the time when 16 unregistered shares became tradeable”), vacated on other grounds by 471 F.3d 24 (2d Cir. 2006). 17 The precise issue before this Court appears to be one of first impression. This is because 18 Slack’s direct listing on the NYSE is the result of a new regulatory development approved by the 19 SEC in 2018. See Order Granting Accelerated Approval of NYSE Proposed Rule Change Relating 20 to Listing of Companies, Exchange Act Release No. 34-82627, 83 Fed. Reg. 5650 (Feb. 2, 2018). 21 The SEC approved changes to the NYSE Listed Company Manual in order to “provide a means for 22 a category of companies with securities that have not previously been traded on a public market and 23

24 8 The American Law Institute’s model code for comprehensive reform included eliminating the tracing requirement by giving “a right of action to a person who proves— (1) that, in the case of 25 an offering statement, he bought a security of a class covered by the offering statement after its effectiveness; or (2) that, in the case of a registration statement or report, he bought or sold a security 26 of the registrant after the effectiveness of the registration statement or the filing of the report.” Fed. Sec. Code § 1704(c)(2) (Am. Law Inst. 1980). In the only amendment to the Securities Act since 27 the 1930s, a provision for joint liability was added at § 11(f), but the relevant language discussed 1 that are listing only upon effectiveness of a selling shareholder registration statement, without a 2 related underwritten offering, and without recent trading in a Private Placement Market, to list on 3 the Exchange.” Id. at 5654. Most significantly for this case, the rule change allows a company to 4 (1) enter the public market for the first time on a major public listing (2) without issuing new shares 5 as in an IPO; but the company is still (3) subject to the registration requirements of the Securities 6 Act and thus (4) subject to Section 11 liability.9 Because no new shares are issued, insiders holding 7 preexisting shares are not subject to the typical “‘lock-up period’ of 90 to 180 days where they 8 cannot sell their shares.” ACAC ¶ 70. In other words, shares of Slack common stock became 9 available for purchase on the NYSE immediately on June 20, 2019, from two simultaneous entry 10 points: under the Securities Act registration statement and under the SEC Rule 144 exemption from 11 registration. See 17 C.F.R. § 230.144. In a traditional IPO, the registered shares would be sold first, 12 and the unregistered shares would become available for sale after the lockup period; a plaintiff 13 pleading Section 11 standing for purchases made after the availability of unregistered shares would 14 likely be unsuccessful because the market would be so diluted as to make tracing “virtually 15 impossible.” See In re Initial Pub. Offering Sec. Litig., 227 F.R.D. at 118. In a direct listing, the 16 impossibility of tracing begins on the very first day of listing due to the simultaneous offering of 17 unregistered and registered shares. 18 Plaintiff argues that to follow the standard tracing analysis here “would eviscerate the rights 19 afforded by Section 11 and allow companies to eliminate Section 11 liability by releasing non- 20 registered shares into the market at the same time as registered shares.” Pl.’s Opp’n at 2 (Dkt. No. 21 63). Defendants acknowledge that “Slack’s direct listing was only the second significant direct 22 listing ever to take place” and that cases analyzing the tracing requirement have involved successive 23 rather than simultaneous stock offerings; nevertheless, defendants assert the same principles of 24 tracing apply. Defs.’ Reply at 4 (Dkt. No. 66). 25 Because this case presents a question of apparent first impression – whether an investor who 26 9 The proposal’s previously withdrawn Amendment No. 2 envisioned no Section 11 liability 27 whatsoever; the proposed rule “would have allowed a company to list immediately upon 1 purchases a security in a direct listing in which registered and unregistered shares are made publicly 2 tradeable at the same time may bring a Section 11 claim – the Court finds it instructive to return to 3 the statutory text. If the text is ambiguous, the Court “may [also] use canons of construction, 4 legislative history, and the statute’s overall purpose to illuminate Congress’s intent.” Pac. Coast 5 Fed’n of Fishermen’s Ass’ns v. Glaser, 945 F.3d 1076, 1084 (9th Cir. 2019) (citation omitted). The 6 Court is “guided by the familiar canon of statutory construction that remedial legislation should be 7 construed broadly to effectuate its purposes.” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967); FTC 8 v. AT&T Mobility LLC, 883 F.3d 848, 854 (9th Cir. 2018). “The 1933 and 1934 Acts are remedial 9 legislation, among the central purposes of which is full and fair disclosure relative to the issuance 10 of securities.” SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 480 (9th Cir. 1973) (citing 11 Tcherepnin, 389 U.S. at 336); see also SEC v. Levin, 849 F.3d 995, 1001 (11th Cir. 2017) (“These 12 exemptions [from Section 5’s registration requirements] must be narrowly viewed because, as 13 remedial legislation, the Securities Act is entitled to a broad construction.”). The Supreme Court 14 “itself has construed securities law provisions ‘not technically and restrictively, but flexibly to 15 effectuate [their] remedial purposes.’” Pinter v. Dahl, 486 U.S. 622, 653 (1988) (quoting Affiliated 16 Ute Citizens v. United States, 406 U.S. 128, 151 (1972)). The canon, however, “should not be 17 ‘treated . . . as a substitute for a conclusion grounded in the statute’s text and structure.’” Wadler v. 18 Bio-Rad Labs., Inc., 916 F.3d 1176, 1187 (9th Cir. 2019) (citation omitted). 19 As discussed above, the phrase “any purchaser acquiring such security” is susceptible of at 20 least two meanings. 15 U.S.C. § 77k. The second, broader meaning—“acquiring a security of the 21 same nature as that issued pursuant to the registration statement”—has yet to be examined. Barnes, 22 373 F.2d at 271. Judge Friendly remarked only that it “would not be such a violent departure from 23 the words that a court could not properly adopt it if there were good reason for doing so.” Id. Here, 24 the Court finds good reason for doing so. 25 The statutory scheme of the Securities Act provides for remedial penalties (Sections 11, 12, 26 15) where its registration requirements have been violated (Sections 5 through 7). 15 U.S.C. §§ 77k- 27 77l, 77o, 77e-77g. Pursuant to Section 4 and Rule 144, certain transactions are exempted from the 1 registration requirement, and those exempt transactions are not subject to the remedial penalties.10 2 Ordinarily, as discussed in the tracing cases above, transactions subject to the registration 3 requirements and those that are exempt from such requirements occur at different time periods. See, 4 e.g., Lilley, 936 F. Supp at 715-16 (80,000 unregistered shares entered market prior to IPO and 5 preferred stock offering). In Slack’s direct listing, however, both types of transactions originated 6 and occurred simultaneously. Applying the narrower reading of “such security” in the context of 7 Slack’s direct listing would cause the exemption provision of Section 4 to completely obviate the 8 remedial penalties of Sections 11, 12 and 15. 9 Moreover, “[c]ourts must interpret a congressional act, if possible, in a manner that gives 10 each section its due effect without inconsistency or repugnancy.” In re Sheehan, 253 F.3d 507, 514 11 (9th Cir. 2001) (citation omitted). Whereas the narrow reading would cause exemption from 12 registration to obviate liability for a defective registration, the broader reading makes it “possible to 13 interpret [Section 11] and [Section 4] without conflict, while giving meaning to both rules, [making 14 this] the correct interpretation.” Id. The Court also finds persuasive that an interpretation need not 15 be adopted if it would lead to “absurd or futile results . . . plainly at variance with the policy of the 16 legislation as a whole.” EEOC v. Commercial Office Prod. Co., 486 U.S. 107, 120 (1988) (Marshall, 17 J.) (plurality opinion) (rejecting an interpretation that would result in “the preclusion of any federal 18 relief for an entire class of discrimination claims”); see also Wenger v. Lumisys, Inc., 2 F. Supp. 2d 19 1231, 1242 (N.D. Cal. 1998) (rejecting interpretation of safe harbor provision in Private Litigation 20 Reform Act where interpretation would lead to absurd results). The elimination of civil liability 21 under the Securities Act, “among the central purposes of which is full and fair disclosure relative to 22 the issuance of securities,” would certainly lead to a futile result at variance with the policy of this 23 remedial legislation. Glenn W. Turner Enters., Inc., 474 F.2d at 480. 24 Therefore, this Court finds that in this unique circumstance—a direct listing in which shares 25

26 10 Section 4(a)(1) exempts from registration certain classes of transactions, including those “by a person other than an . . . underwriter.” 15 U.S.C. § 77d(a)(1). Section 2(a)(11) defines an 27 underwriter as “any person who has purchased from the issuer with a view to . . . distribution.” Id. 1 registered under the Securities Act become available on the first day simultaneously with shares 2 exempted from registration—the phrase “such security” in Section 11 warrants the broader reading: 3 “acquiring a security of the same nature as that issued pursuant to the registration statement.” 4 Barnes, 373 F.2d at 271. Accordingly, the Court DENIES defendants’ motion to dismiss for lack 5 of Section 11 standing. 6 7 B. “Offered to the public”/Damages 8 Defendants also contend that plaintiff’s Section 11 claim fails as a matter of law because 9 plaintiff has not and cannot allege an offering price from the direct listing, and therefore cannot 10 establish damages. Defendants argue that a necessary predicate for establishing damages under 11 Section 11 is the existence of a price at which a “security was offered to the public.” 15 U.S.C. 12 § 77k(g); see also id. § 77k(e) (damages “shall represent the difference between the amount paid for 13 the security (not exceeding the price at which the security was offered to the public)” and various 14 determinations of the security’s value before, at, or after the time of suit). Defendants argue that 15 unlike an IPO in which the initial offering price is established by the company and the underwriters, 16 here the NYSE established a reference price for Slack’s shares one day prior to the commencement 17 of trading and a designated market maker set the opening trading price without coordination from 18 Slack.11 Defendants argue that because Slack’s direct listing did not involve a public offering price, 19 plaintiff cannot recover damages under Section 11. 20 Plaintiff argues that he is not required to establish damages at the pleadings stage, and that 21

22 11 Because Slack went public with a direct listing and not an IPO, there was a “lack of an initial public offering price.” Kahn Decl. Ex. A at 172. The SEC-approved changes to the NYSE 23 Listed Company Manual included changes to Rule 15(c)(1), which specifies a security’s Reference Price and thus informs pre-opening indications; and Rule 104(a)(2), which provides for the 24 facilitation of openings and reopenings for securities. Order Granting Accelerated Approval of NYSE Proposed Rule Change Relating to Listing of Companies, Exchange Act Release No. 34- 25 82627, 83 Fed. Reg. 5650, 5652 (Feb. 2, 2018). The rule changes provided an alternative means for determining the Reference Price in a direct listing without an IPO: “a price determined by the 26 Exchange in consultation with a financial advisor to the issuer of such security.” Id. The rule changes also required the Designated Market Maker who facilitates openings to consult with the 27 issuer’s financial advisor, a requirement “based in part on Nasdaq Rule 4120(c)(9), which requires 1 a purported lack of damages is an affirmative defense upon which defendants have a heavy burden. 2 Plaintiff also asserts that he has adequately alleged an opening public price of $38.50 on the first 3 day of trading, and also that under a “value-based Section 11 damages theory” plaintiff “can show, 4 at a later stage, that the stock’s price at the time of the Offering should have been lower if not for 5 the omissions and misrepresentations.” Pl.’s Opp’n at 13 (citing In re Snap Inc. Sec. Litig., Case 6 No. 2:17-cv-03679-SVW-AGR, 2018 WL 2972528, at *8-9 (denying motion to dismiss Section 11 7 claim and holding that the plaintiff’s argument that “Snap’s actual stock price at IPO overestimated 8 the true value of the stock at that time because of the alleged material omissions and 9 misrepresentations . . . is a valid theory of damages”), and In re Fortune Sys. Sec. Litig., 680 F. 10 Supp. 1360, 1370 (N.D. Cal. 1987) (granting summary judgment in favor of defendants where after 11 “full and fair discovery” the “plaintiffs have failed to present any evidence indicating that the price 12 of Fortune stock on June 15 differed at all from its ‘value.’”). 13 “Damages are not an element” of a Section 11 claim. In re Countrywide Fin. Corp. Sec. 14 Litig., 588 F. Supp. 2d 1132, 1168 n.40 (citing Herman & MacLean v. Huddleston, 459 U.S. 375, 15 382 (1983)). Courts have treated Section 11’s damages measure as an affirmative defense. See id. 16 at 1169; In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1258, 1261 (N.D. Cal. 2000). 17 “For a complaint to be dismissed because the allegations give rise to an affirmative defense ‘the 18 defense clearly must appear on the face of the pleading.’” McCalden v. Cal. Library Ass’n, 955 19 F.2d 1214, 1219 (9th Cir. 1990) (citation omitted), superseded by rule on other grounds as 20 recognized in Konarski v. Rankin, 603 F. App’x 544, 546 (9th Cir. 2015); see, e.g., In re 21 Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201, 1203-04 (9th Cir. 2002) (affirming Rule 22 12(b)(6) dismissal of Section 11 claim where it was indisputable that all class members profited 23 from the sale of the relevant securities). 24 The Court concludes that defendants have not met their burden at the pleading stage to show 25 that plaintiff cannot recover damages as a matter of law. Courts have held that “[a] plaintiff is 26 required (1) to allege that he purchased the relevant securities; and (2) to allege facts creating the 27 reasonable inference that the value of the securities on the presumptive damages date – that is, either 1 still holds the securities—is less than the purchase price.” In re Countrywide, 588 F. Supp. 2d at 2 1169-70 (emphasis in original). Plaintiff has done that. 3 Defendants make much of the “Not applicable” answer on the Registration Statement’s 4 cover page, in the table for “Proposed Maximum Offering Price Per Share.” Kahn Decl. Ex. A. 5 They also emphasize the Registration Statement’s explanation that the “opening public price of 6 [Slack shares] on the NYSE will be determined by buy and sell orders collected by the NYSE from 7 various broker-dealers and will be set based on the [Designated Market Maker’s] determination” in 8 consultation with “Morgan Stanley and [Slack’s] other financial advisors” but, “in each case, 9 without coordination with [Slack].” Id. at 171. But the same explanation in the Registration 10 Statement describes how a pre-opening indication may be published in anticipation of the opening 11 public price, based on buy-and-sell orders on the NYSE, “[s]imilar to how a security being offered 12 in an underwritten initial public offering would open on the first day of trading.” Id. at 172. In the 13 NYSE rule changes as well as in the Slack Registration Statement, the unique direct listing process 14 is accommodated by analogy to the traditional IPO pricing process. Defendants’ reliance on an 15 overly narrow reading of Section 11’s “price at which the security was offered to the public” is thus 16 unavailing. Further, as plaintiff asserts in his opposition, plaintiff may pursue a value-based theory 17 of damages, which is a fact-intensive inquiry that is not appropriate for resolution at the pleadings 18 stage. 19 Accordingly, the Court DENIES defendants’ motion to dismiss for lack of damages under 20 Section 11. 21 22 II. Section 12(a)(2) 23 Next, defendants argue that plaintiff cannot plead standing under Section 12(a)(2) because 24 defendants are not statutory sellers within the scope of Section 12. Section 12(a)(2) provides that 25 any person who “offers or sells a security . . . by means of a prospectus or oral communication, 26 which includes an untrue statement of a material fact or omits to state a material fact necessary in 27 order to make the statements, in the light of the circumstances under which they were made, not 1 § 77l(a)(2). In the case of registered shares and exempted shares becoming available simultaneously 2 on the first day of a direct listing, this Court reads “such security” in accordance with the 3 construction of Section 11 discussed above. Therefore, the Court rejects defendants’ argument that 4 Section 12 liability in this case extends only to shares directly traceable to those registered under 5 the prospectus. That does not end the analysis, however. As both parties indicate, “purchasing . . . 6 from him” introduces a privity requirement not present in Section 11. 7 The Supreme Court has provided two ways to establish that someone is a statutory “seller” 8 under Section 12: (1) by directly passing title or (2) by actively soliciting the sale. See Pinter v. 9 Dahl, 486 U.S. 622, 642-44 (1988). “Soliciting” does not include “urg[ing] another to make a 10 securities purchase . . . merely to assist the buyer” or “the giving of gratuitous advice, even strongly 11 or enthusiastically.” Id. at 647. “[L]iability extends only to the person who successfully solicits the 12 purchase, motivated at least in part by a desire to serve his own financial interests or those of the 13 securities owner.” Id. In rejecting a “substantial factor” test, the Supreme Court emphasized that 14 liability under Section 12 requires more than “mere participation” because the language of the 15 statute “focuses on the defendants’ relationship with the plaintiff-purchaser.” Id. at 651. The Ninth 16 Circuit has not yet elaborated on what facts constitute more than “mere participation,” and district 17 courts have adopted different approaches. See In re Charles Schwab Corp. Sec. Litig., 257 F.R.D. 18 534, 549-50 (N.D. Cal. 2009) (citing divided lower court cases, and finding sufficient allegations of 19 signing a registration statement and actively participating in marketing events), with In re Harmonic, 20 Inc., Sec. Litig., No. C 00-2287 PJH, 2006 WL 3591148 at *13 (N.D. Cal. Dec. 11, 2006) (citing 21 divided lower court cases, and finding insufficient allegations of signing a registration statement or 22 prospectus). 23 Plaintiff contends that defendants are statutory sellers because: 24 [T]he Individual Defendants signed the Offering Materials (see, e.g., [ACAC] ¶ 20), actively solicited buyers through the Investor Day (see, e.g., ¶ 72), sold significant 25 amounts of shares (see, e.g., ¶ 20), and were financially motivated by a desire to serve their own financial interests (see, e.g., ¶¶ 23, 69-75). Further, Plaintiff also 26 adequately alleges privity with his sellers. As opposed to traditional underwritten IPOs, this was a direct offering in which Defendants sold Slack shares directly to 27 Plaintiff and other purchasers. ¶¶ 69-70. 1 2 Defendants rely on district courts cases holding that signing a registration statement is 3 insufficient to establish solicitation. See In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d 1080, 4 1101 (C.D. Cal. 2003); Harmonic, 2006 WL 3591148, at *10; Welgus v. TriNet Grp., Inc., Case No. 5 15-cv-03625 BLF, 2017 WL 167708, at *19 (N.D. Cal. Jan. 17, 2017). As to participation in 6 marketing activities such as a roadshow presentation, the IPO equivalent of the Investor Day here, 7 some courts have held this is also insufficient. See Infonet, 310 F. Supp. 2d at 1101 (even if oral 8 misrepresentations at roadshow presentations were not protected by bespeaks caution doctrine, 9 “Plaintiffs do not allege that Defendants . . . personally or directly solicited any of the named 10 Plaintiffs”); In re CytRx Corp. Sec. Litig., Case No. CV 14-1956-GHK (PJWx), 2015 WL 5031232, 11 at *15 (C.D. Cal. July 13, 2015) (“participation of some directors in a road show . . . is insufficient”); 12 Maine State Ret. Sys. v. Countrywide Fin. Corp., No. 2:10-CV-0302 MRP (MANx), 2011 WL 13 4389689, at *9 (C.D. Cal. May 5, 2011) (same). 14 Plaintiff relies primarily on Charles Schwab, which also notes the absence of Ninth Circuit 15 guidance and the split in district court opinions. 257 F.R.D. at 549. Finding support in district court 16 cases from within the Ninth, Second, and Seventh Circuits, the court in Charles Schwab found that 17 “[a]lthough the act of signing a registration statement, alone, may not always suffice, it is at least 18 suggestive of solicitation activity.” Id. & fn.3 (citing, e.g., In re Nat’l Golf Props., Inc., No. CV 02- 19 1383 GHK (RZX), 2003 WL 23018761 (C.D. Cal. 2003); and In re Portal Software, Inc. Sec. Litig., 20 No. C-03-5138 VRW, 2006 WL 2385250, at *4 (N.D. Cal. 2006)); see also In re Keegan Mgmt. 21 Co. Sec. Litig., Civ. No. 91-20084 SW, 1991 WL 253003, at *8 (N.D. Cal. Sept. 10, 1991) (“To one 22 who studies corporate filings and news releases before purchasing via a dealer on an impersonal and 23 anonymous market, the corporation, its officers and directors, and other promoters of the stock 24 appear to be the true ‘sellers.’”). Moreover, the plaintiffs in Charles Schwab also alleged that 25 “certain defendants were involved in marketing the fund. Whether or not defendants actually 26 solicited plaintiffs’ sales is a factual question which should generally be left to the jury; at this stage 27 plaintiffs need only satisfy Rule 8(a)’s lenient pleading standards.” Id. at 550. 1 theory against the Individual Defendants.12 Plaintiff alleges that all of the Individual Defendants 2 signed the Offering Materials, that certain defendants solicited sales at the Investor Day, and that all 3 of the Individual Defendants were financially motivated to solicit sales. The Court finds Charles 4 Schwab involved similar allegations and that Court agrees that the solicitation question is “a factual 5 question which should generally be left to the jury.” Id. 6 Accordingly, the Court DENIES defendants’ motion to dismiss for failing to state a claim 7 under Section 12. 8 9 III. Material Misstatement or Omission 10 To survive a motion to dismiss the Section 11 and Section 12(a)(2) claims, the complaint 11 must plead that the Offering Materials contained (1) a materially untrue statement or omitted a 12 material fact (2) required to be stated or (3) necessary to make the statements not misleading. 15 13 U.S.C. §§ 77k(a), 77l(a)(2). Items 105 and 303 of SEC Regulation S-K require to be stated, 14 respectively, “a discussion of the most significant factors that make an investment in the registrant 15 or offering speculative or risky,” and a description of “any known trends or uncertainties that have 16 had or that the registrant reasonably expects will have a material favorable or unfavorable impact 17 on net sales or revenues or income from continuing operations.” 17 C.F.R. §§ 229.105, 18 229.303(3)(a)(ii). Allegations which state a claim under Item 303 also state a claim under Sections 19 11 and 12(a)(2). See Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir. 1998). For an 20 omission to be misleading, “it must affirmatively create an impression of a state of affairs that differs 21 in a material way from the one that actually exists.” Brody v. Transitional Hosps. Corp., 280 F.3d 22 997, 1006 (9th Cir. 2002) (citation omitted). A misrepresentation or omission is material if “it would 23 have misled a reasonable investor about the nature of his or her investment.” In re Daou, 411 F.3d 24 at 1027 (citation omitted). “Generally, whether a public statement is misleading, or whether adverse 25 12 The parties’ briefing focuses largely on whether the Individual Defendants can be held 26 liable as statutory sellers under Section 12. It is not clear to the Court how plaintiff contends that Slack is a statutory seller. However, to the extent plaintiff contends that Slack sold shares directly 27 to plaintiff and the class members, the Court is not persuaded because, inter alia, the company did 1 facts were adequately disclosed is a mixed question to be decided by the trier of fact.” SEC v. Todd, 2 642 F.3d 1207, 1220 (9th Cir. 2011) (citations and internal quotation marks omitted). “Accordingly, 3 resolving an issue as a matter of law is only appropriate when the adequacy of the disclosure is ‘so 4 obvious that reasonable minds [could] not differ.’” Id. at 1220-21 (citations omitted). 5 Plaintiff alleges material misrepresentations or omissions in several sets of statements 6 concerning Slack’s: (A) outages and SLAs, (B) scalable architecture, (C) competition with 7 Microsoft, (D) key benefits, and (E) growth and growth strategy.13 8 9 A. Outages and SLAs 10 Plaintiff alleges that the Offering Materials misled investors regarding known vulnerabilities 11 related to outages and omitted to inform investors of the highly unusual and punitive SLAs the 12 company had entered into with many of its customers. Slack disclosed in the Offering Materials 13 that its 14 continued growth depends, in part, on the ability of existing and potential organizations on Slack to access Slack 24 hours a day, seven days a week, without 15 interruption or degradation of performance. We have in the past and may in the future experience disruptions, data loss, outages, and other performance problems. 16 We may not be able to maintain the level of service uptime and performance required by organizations on Slack, especially during peak usage times and as our user traffic 17 and number of integrations increase. For example, we have experienced intermittent connectivity issues and product issues in the past, including those that have prevented 18 many organizations on Slack and their users from accessing Slack for a period of time. 19 ACAC ¶ 95 (emphasis removed). Slack also disclosed, “We provide service level commitments 20 under certain of our paid customer contracts. If we fail to meet these contractual commitments, we 21 could be obligated to provide credits for future service, or face contract termination with refunds of 22 prepaid amounts related to unused subscriptions, which could harm our business, results of 23 operations, and financial condition.” Id. 24 Plaintiff contends that these statements were misleading and that they omit information 25 26 13 The parties’ briefing organizes the alleged misstatements and omissions into five 27 categories, which largely but not entirely align with the organization of the ACAC, which organizes 1 required by Items 105 and 303 because, inter alia, Slack’s reliability problem was not simply 2 hypothetical but a known issue to defendants and the company was automatically paying out 3 significant amounts of service credits regardless of whether customers were affected or requested a 4 refund. Plaintiff alleges that the Offering Materials did not disclose that the SLAs guaranteed an 5 uptime of 99.99%, which is significantly stricter than the 99.9% promised by competitors; moreover, 6 Slack did not disclose that the SLAs provided that failing to meet the guarantee would cost Slack a 7 credit payout multiplier of 100 times what each customer paid, regardless of whether the customer 8 complained or was even affected by the outage. Id. ¶¶ 63, 96, 109, 112, 120. Nor did the Offering 9 Materials disclose that during seven out of the twelve months of 2018, Slack had already failed to 10 meet its uptime guarantee. Id. ¶ 121. Plaintiff alleges that this information is material because of 11 the significant stock price drop following the September 4, 2019 conference call revealing the 12 policies that Slack admitted were “outrageously customer-centric,” “exceptionally generous,” and 13 not “in line with industry standards.” Id. ¶¶ 6, 96, 109, 112; 99-125. 14 The Court finds that plaintiff has plausibly pled that Slack’s disclosures omitted material 15 information as well as violations of Items 105 and 303. Although the disclosures do discuss the 16 existence of Slack’s SLAs, the unusual nature of the SLAs’ terms is an omitted and “significant 17 factor[] that make[s] an investment . . . risky.” See 17 C.F.R. § 229.105. And although the question 18 of whether the seven months of outages in 2018 constitute a “trend” is a factual inquiry for a later 19 stage of these proceedings, it is plausibly pled that Slack was aware of those outages at the time of 20 its disclosures, and that future outages would have an “unfavorable impact . . . on revenues” due to 21 the SLA terms. See 17 C.F.R. § 229.303(3)(a)(ii). 22 At minimum, the adequacy of Slack’s disclosures is not “so obvious that reasonable minds 23 [could] not differ.” See SEC v. Todd, 642 F.3d at 1220-21. The characterization of past outages as 24 “intermittent” is technically true, and Slack “could be obligated to provide credits” per the SLAs; 25 but omitting the considerable frequency of outages as well as their “exceptional[]” consequences 26 out of line with industry standards could plausibly “mis[lead] a reasonable investor about the nature 27 of his or her investment.” In re Daou, 411 F.3d at 1027. The nearly 12% drop in stock price to 1 in the quarter, and the unusual uptime commitment—followed by another 8.98% drop to $24.92 the 2 next trading day—indicate the materiality of this information to investors. See Backe v. Novatel 3 Wireless, Inc., 642 F. Supp. 2d 1169, 1183 (S.D. Cal. 2009) (“significance of this information is 4 illustrated by,” inter alia, “the market reaction to the alleged disclosures”). That the SLA terms 5 were already publicly available on Slack’s website does not make its omission from the Offering 6 Materials less material. See Miller v. Thane Int’l, Inc., 519 F.3d 879, 887 (9th Cir. 2008) 7 (“Ordinarily, omissions by corporate insiders are not rendered immaterial by the fact that the omitted 8 facts are otherwise available to the public.”). 9 Since the ultimate question of “whether adverse facts were adequately disclosed is a mixed 10 question to be decided by the trier of fact” and there is room for reasonable disagreement here, see 11 SEC v. Todd, 642 F.3d at 1220-21, the Court finds that plaintiff’s challenge to statements regarding 12 outages and the SLAs is adequate for the pleading stage. 13 14 B. Scalable Architecture 15 In a section of the Offering Materials describing Slack’s business, Slack stated that it “built 16 [its] technology infrastructure using a distributed and scalable architecture on a global scale.” 17 ACAC ¶ 92; see also Kahn Decl. Ex. A at 124. Plaintiff alleges that this statement was misleading 18 because “Slack was facing difficulty in scaling globally and attaining enterprise customers . . . as 19 evidenced by the Slack App’s widespread downtime.” Id. ¶ 94. Plaintiff also alleges that this 20 statement was misleading because in the September 4, 2019 earnings call, defendant Butterfield 21 stated that the June and July 2019 outages were caused by “scaling . . . we continue to hit limits that 22 we didn’t realize were built into the system.” Id. ¶ 111. 23 Defendants contend that there is nothing misleading about the statement that Slack “built 24 [its] technology infrastructure using a distributed and scalable architecture,” and they note that the 25 Registration Statement discloses, in the section on risks, that “as we continue to expand . . . we may 26 not be able to scale our technology to accommodate the increased capacity requirements, which may 27 result in interruptions or delays in service.” Kahn Decl. Ex. A at 29. Defendants also note that in 1 99.9% and 99.99% . . . every quarter and most quarters 99.99%.” Kahn Decl. Ex. D at 14 (Dkt. No. 2 54-4). 3 The Court agrees with defendants that the challenged statement is not misleading. Although 4 plaintiff contends that the 2018 and 2019 outages show that Slack was facing difficulty in scaling 5 globally, that does not make the general statement that Slack “built [its] technology infrastructure 6 using a distributed and scalable architecture,” misleading, particularly when Slack disclosed that as 7 the company grew “we may not be able to scale our technology to accommodate” increased 8 requirements, leading to possible outages. Asserting the existence of a “scalable architecture” is not 9 a representation that there have not been any problems with the infrastructure nor is it a promise that 10 there will not be any future problems with scaling. Compare In re Quality Sys., Inc. Sec. Litig., 865 11 F.3d 1130, 1143-44 (9th Cir. 2017) (finding actionable statements about a pipeline because 12 “Plochocki and the others did not just describe the pipeline in subjective or emotive terms. Rather, 13 they provided a concrete description of the past and present state of the pipeline. They repeatedly 14 reassured investors during the class period that the number and type of prospective sales in the 15 pipeline was unchanged, or even growing, compared to previous quarters.”), with In re Intel Corp. 16 Sec. Litig., Case No. 18-cv-00507-YGR, 2019 WL 1427660, at *9-12 (N.D. Cal. Mar. 29, 2019) 17 (holding various statements regarding chip security and performance to be too vague to be 18 actionable). Moreover, the disclosures noted that Slack may be unable to maintain service uptime 19 for exactly the reason stated in the September 4, 2019 call: “especially during peak usage times and 20 as our user traffic and number of integrations increase.” ACAC ¶ 95. The Court therefore GRANTS 21 defendants’ motion to dismiss on this ground. 22 23 C. Competition with Microsoft 24 Next, plaintiff challenges statements about the “strength of [Slack’s] market leadership,” and 25 statements that “only vaguely described the existing competition and downplayed the impact the 26 potential competitors may have on [Slack].” Id. ¶¶ 80, 83. Plaintiff alleges that Microsoft Teams 27 had already eclipsed Slack as the market leader before the direct listing, and continued to do so after 1 companies, and the post-listing evidence is based on a Vox article graphing a comparison of the 2 companies’ daily active users. Id. ¶¶ 57-58, 86-88. 3 The Court finds these allegedly misleading statements immaterial because the competitive 4 advantages of Microsoft were adequately disclosed. The Offering Materials expressly state, “Our 5 primary competitor is currently Microsoft Corporation,” and that “we expect competition to 6 intensify in the future.” Kahn Decl. Ex. A at 16. The Offering Materials also state that “[m]any of 7 our existing competitors have . . . substantial competitive advantages,” and list these advantages in 8 detail, including: “greater brand name recognition and longer operating histories, larger sales and 9 marketing budgets and resources, broader distribution, and established relationships with 10 independent software vendors, partners, and customers, greater customer experience resources, 11 greater resources to make acquisitions, lower labor, and development costs . . .” Id. at 17. 12 Moreover, Slack was under no duty to report the data and relative capacity of its competitors. 13 See In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1406 (9th Cir. 1996) (rejecting proposition that 14 defendant company “was obliged not only to report on its own product line and marketing plans, 15 but to report on and make predictions regarding Microsoft’s intentions,” even if Microsoft had 16 disclosed those intentions to the company). Although the pleadings plausibly demonstrate that Slack 17 was in fierce competition with Microsoft before the direct listing, and that Slack had data on its own 18 metrics, Slack did not omit material information by failing to include data or comparisons on 19 Microsoft’s metrics. 20 The Court therefore GRANTS defendants’ motion on this ground. 21 22 D. Key Benefits 23 Plaintiff also challenges Slack’s “Summary of Key Benefits,” which contained such 24 statements as: “People love using Slack and that leads to high levels of engagement”; “Slack 25 increases an organization’s ‘return on communication’”; “Slack increases the value of existing 26 software investment”; “An organization’s archive of data increases in value over time”; “Slack helps 27 achieve organizational agility”; and “Developers are better able to reach and deliver value to their 1 customers.” ACAC ¶ 91.14 Plaintiff alleges that these statements “in combination with other 2 statements in the Offering Materials . . . implied that the Slack App was a market leader with unique 3 advantages over its competitors and that the Company possessed the ability to scale up its services 4 to reach more lucrative enterprise customers.” Id. ¶ 92. “However, the statements in [¶ 91] were 5 materially false and/or misleading because: (1) Microsoft Teams had already overtaken Slack as the 6 market leader at the time of the Offering; (2) the Slack App’s reliability was regularly below the 7 promised 99.99% uptime; and (3) Slack was facing difficulty in scaling globally and attaining 8 enterprise customers due to problems in maintaining and expanding its infrastructure as evidenced 9 by the Slack App’s widespread downtime.” Id. ¶ 94. 10 Defendants contend that plaintiff fails to plead that these statements are misleading because 11 the statements about Slack’s “key benefits” have nothing to do with the allegedly omitted 12 information about Microsoft Teams, outages, or scalability problems. Defendants also argue that 13 the Registration Statement contained disclosures about these matters in other parts of the document. 14 The Court finds that the statements in the “Key Benefits” section are not actionable. Plaintiff 15 does not allege that any particular statement is false or misleading. For example, one of the seven 16 “key benefits” is: 17 An organization’s archive of data increases in value over time. As teams continue to use Slack, they build a valuable resource of widely accessible 18 information. Important messages are surrounded by useful context and users can see how fellow team members created and worked with the information and arrived a 19 decision. New employees can have instant access to the information they need to be effective whenever they join a new team or company. Finally, the content on Slack 20 is available through powerful search and discovery tools, powered by machine learning, which improve through usage. 21 Id. ¶ 92. Plaintiff does not allege that there is anything false or misleading about this statement or 22 any of the other statements found in the other six “key benefits.” Instead, plaintiff claims that by 23 touting its “key benefits” Slack “implied that the Slack App was a market leader with unique 24 advantages over its competitors and that the Company possessed the ability to scale up its services 25 to reach more lucrative enterprise customers,” when in fact the company was experiencing problems 26

27 14 These statements are the bolded statements within each bullet point paragraph quoted in 1 due to competition, reliability and infrastructure. Id. ¶¶ 92, 94. However, a review of the “Summary 2 of Key Benefits” section does not reveal any explicit or implicit statements about Slack’s market 3 position, competition, the reliability of its technology, or its infrastructure. While the Court has 4 concluded that plaintiff has sufficiently alleged that the risk disclosures omitted material information 5 about the outages and the SLAs, the Court is not persuaded by plaintiff’s contention that Summary 6 of Key Benefits is false or misleading simply because it described, in very general terms, the 7 company’s strengths. 8 Further, the Court notes that most, if not all, of the statements quoted in Paragraph 91 would 9 appear to be inactionable puffery. See, e.g., id. ¶ 91 (“People love using Slack and that leads to high 10 levels of engagement. Slack is enterprise software created with an eye for user experience usually 11 associated with consumer products. We believe that the more simple, enjoyable, and intuitive the 12 product is, the more people will want to use it. As a result, teams benefit from the aggregated 13 attention that happens when all members of a team are engaged in a single collaboration tool.”); see 14 Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014) (finding various 15 challenged statements to be inactionable puffery). 16 The Court GRANTS defendants’ motion to dismiss on this ground. 17 18 E. Growth and Growth Strategy 19 Lastly, plaintiff alleges that the Offering Materials contained materially false or misleading 20 statements about Slack’s “[d]ifferentiated go-to-market strategy” in three subsections of the 21 “Summary” part of the Registration Statement: “Our Business Model,” “What Sets Us Apart,” and 22 “Growth Strategy.” ACAC ¶¶ 77-81. Plaintiff alleges, 23 The statements in ¶¶ 77-81 were materially false and/or misleading and omitted material facts at the time of the Offering because: (1) the Company’s revenue growth 24 was trending downward while marketing expenses were increasing due to increasing competition from Microsoft Teams; (2) the Slack App’s reliability was compromised 25 due to scaling its technology to meet enterprise-level customer needs; (3) the Company’s financials were uniquely vulnerable due to its unique SLA which 26 included an “exceptionally generous credit payout multiplier” of 100 times the price paid by the customer during the downtime, which the Company provided whether or 27 not the customers were actually affected; and, (4) the Company’s growth was 1 Id. ¶ 82. 2 Defendants contend that these statements are not actionable because (1) they consist of 3 optimistic puffery (for example, statements about Slack “offering an exceptional product,” “[t]he 4 strength of our market leadership” and “[c]ustomer love leading to stickiness and organic 5 expansion”, id. ¶¶ 79-80); (2) they are forward-looking statements that are not actionable under the 6 “bespeaks caution” doctrine (for example, the statements in “Growth Strategy” such as “we will 7 continue to expand our marketing and sales efforts to reach more users” and “We plan to continue 8 to grow use and users within organizations on Slack by increasing our investments in our direct 9 sales force . . .”, id. ¶ 81)15; (3) the allegedly omitted information is unrelated to Slack’s discussion 10 of its strategy; and (4) the disclosures are not misleading because the information was actually 11 disclosed either in the challenged subsection (e.g., the slowing revenue growth numbers) or 12 elsewhere in the Registration Statement (such as information about increasing sales and marketing 13 expenses and numbers of users). 14 The Court agrees with defendants. As with the “Key Benefits” section, plaintiff does not 15 allege that any particular statements are false or misleading. Instead, plaintiff claims that certain 16 information was omitted, but as defendants note, information about revenue growth, sales and 17 marketing expenses, and numbers of users was disclosed either in the Business Model section or 18 elsewhere in the Registration Statement. To the extent plaintiff challenges statements in the 19 “Growth Strategy” section, plaintiff has not explained how these forward-looking statements are 20 actionable. Finally, although the Court has concluded that plaintiff has stated a claim that the risk 21 disclosures were misleading by omitting information about the outages and unique vulnerabilities 22 posed by the SLAs, the Court is not persuaded that a general summary of “What Sets Us Apart”16 23 15 This section also states, inter alia, “We will continue a relentless focus on product design 24 . . . We believe our market remains underpenetrated and we will continue to expand our marketing and sales efforts . . . We plan to continue to grow use and users . . . we believe adoption of [guest 25 accounts and shared channels features] will grow significantly in the coming years . . . We intend to increase investments in marketing . . . We plan to open offices and hire sales and customer 26 experience people . . .” Id.

27 16 The “What Sets Us Apart” section contains numerous statements that the Court views as 1 or even a more specific and factual description of “Our Business Model” is rendered misleading by 2 omitting unrelated information about risks. 3 Accordingly, the Court GRANTS this aspect of defendants’ motion. 4 5 IV. Section 15 Standing 6 Section 15 imposes secondary liability upon “[e]very person who . . . controls any person 7 liable under sections 77k [Section 11] or 77l [Section 12].” 15 U.S.C. § 77o. Plaintiff brings this 8 claim against the Individual Defendants and the VC Defendants. Defendants move to dismiss this 9 claim because of a failure to plead both an underlying violation and to adequately plead that the VC 10 Defendants controlled Slack. Since the Court has found that plaintiff states an adequate claim for 11 the underlying violations, only the second issue remains to be resolved.17 12 Control is defined as “the possession, direct or indirect, of the power to direct or cause the 13 direction of the management and policies of a person, whether through the ownership of voting 14 securities, by contract, or otherwise.” 17 C.F.R. § 230.405; see Howard v. Everex Sys., Inc., 228 15 F.3d 1057, 1065 n.9 (9th Cir. 2000).18 “Whether [the defendant] is a controlling person is an 16 intensely factual question, involving scrutiny of the defendant’s participation in the day-to-day 17 affairs of the corporation and the defendant’s power to control corporate actions.” Howard, 228 18 F.3d at 1065 (citation omitted). “[I]n order to make out a prima facie case, it is not necessary to 19 show actual participation or the exercise of power.” No. 84 Employer-Teamster Joint Council 20

21 people’s working lives simpler, more pleasant, and more productive”; “People love using Slack and many become advocates for wider use inside of their organizations”; and “As Slack usage increases 22 inside an organization, more value is created for each additional user who might join, as well as for all existing users.” Kahn Decl. Ex. A at 5; ACAC ¶ 80; see Or. Pub. Emps. Ret. Fund, 774 F.3d at 23 606 (“Feel good monikers” such as “good” and “well-regarded” are inactionable puffery).

24 17 The Individual Defendants do not contend that they are not controlling persons.

25 18 “[T]he controlling person analysis is the same” for Section 15 claims under the Securities Act, as for Section 20(a) claims under the Securities Exchange Act. Hollinger v. Titan Capital 26 Corp., 914 F.2d 1564, 1578 (9th Cir. 1990). Although Securities Exchange Act claims are typically analyzed under the heightened fraud pleading standard of 9(b), “district courts in the Ninth Circuit 27 have concluded that because fraud is not a necessary element of a control person claim, the pleading 1 Pension Tr. Fund v. Am. W. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003) (quoting Howard, 2 228 F.3d at 1065). “[A]t least some indicia of . . . control is a necessary element of ‘controlling 3 person’ liability.” Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1163 (9th Cir. 4 1996). “[T]raditional indicia” include a prior lending relationship with the accused company, 5 ownership of its stock, and a seat on its Board. Id. at 1162. 6 Plaintiff alleges that the three VC Defendants are controlling persons because they: infused 7 capital into Slack before its direct listing; owned respectively 23.8%, 13.2%, and 10.1% of Slack’s 8 supervoting shares at the time of the direct listing; each had a director on the Board, who reviewed 9 and signed the Offering Materials; “caused [Slack] to indemnify them from any liabilities arising 10 from the Securities Act” and “to obtain and maintain a directors and officers insurance policy for 11 them”; “caused Slack to effectuate the Offering” because they “wished to cash in their early 12 investment and stake in [Slack] as soon as possible”; and sold their shares in the direct listing, 13 respectively earning $329 million, $116 million, and $39.6 million. ACAC ¶¶ 22, 25, 26, 30-34, 14 45, 48, 73. 15 As an initial matter, the Court is not persuaded that being a beneficiary of the indemnity and 16 insurance policies is relevant to allegations of control in relation to the violation at issue here, 17 namely misrepresentations or omissions in the Offering Materials. See Paracor, 96 F.3d at 1158, 18 1161 (finding “evidence that [defendant lender] had a strong hand in Casablanca’s debenture 19 offering,” on which bridge loan had been conditioned, unrelated to “indicia of control of Casablanca 20 in a broader sense”). Thus, the Court turns to the other control allegations. 21 Defendants identify a line of cases within this district demonstrating that ownership of a 22 minority of shares, a position on the Board, or a combination of both are insufficient to establish 23 control. See In re Gupta Corp. Sec. Litig., 900 F.Supp. 1217, 1243 (N.D. Cal. 1994) (no 24 presumption of control from status as outside director, nor for minority shareholder with agent on 25 Board); In re Splash Tech. Holdings, Inc. Sec. Litig., No. C 99-00109 SBA, 2000 WL 1727405, at 26 *16 (N.D. Cal. Sept. 29. 2000) (no control for one defendant serving on Board, nor for another 27 defendant owning a 20% amount of shares that declined through class period); O’Sullivan v. Trident 1 (no facts demonstrating exertion of control through 9.5% stock ownership or through agent placed 2 on Board).19 3 Plaintiff responds with two lower court cases within this Circuit finding sufficient control 4 allegations comparable to the facts here. See Thomas v. Magnachip Semiconductor Corp., 167 F. 5 Supp. 3d 1029, 1048-49 (N.D. Cal. 2016) (defendant lost majority shareholder status shortly after 6 beginning of class period; placed designees on the Board, who signed the relevant documents; and 7 “used its control of [company] to cash out its investments . . . at enormous profits”); In re Am. 8 Apparel, Inc. S'holder Litig., Case No. CV 10-06352 MMM (RCx), 2013 WL 10914316, at *34 9 (C.D. Cal. Aug. 8, 2013) (defendant held 20% ownership stake and designated two Board members 10 who signed relevant report). 11 The Court concludes that plaintiff’s pleading is sufficient under the lenient standard of 8(a). 12 See In re Glob. Crossing, Ltd. Sec. Litig., 2005 WL 2990646, at *8 (S.D.N.Y. Nov. 7, 2005) (under 13 8(a) standard, “even if the specific facts alleged by plaintiffs, taken alone, would not be enough to 14 establish actual control . . . dismissal is improper as long as it is at least plausible that plaintiff could 15 develop some set of facts that would pass muster”) (discussed by Am. Apparel, 2013 WL 10914316, 16 at *37 n.262). Here, in addition to the plaintiff’s allegations of the traditional indicia of control, 17 plaintiff also alleges that a direct listing primarily enables the resale of existing shares by insiders 18 and early investors such as the VC Defendants. Plaintiff has alleged that the VC Defendants “caused 19 Slack to effectuate” this unusual listing in order to cash out their shares. The Court concludes that 20 it is plausible that a factual record of control can be developed through discovery here. 21 Accordingly, the Court DENIES defendants’ motion to dismiss for lack of Section 15 22 standing. 23 24 CONCLUSION 25 For the foregoing reasons and for good cause shown, defendants’ motion is GRANTED IN 26 19 In Golub v. Gigamon Inc., defendants had only a 15.3% ownership stake, and the alleged 27 contractual agreements granted defendants no control over the company. 372 F. Supp. 3d 1033, 1 PART and DENIED IN PART. If plaintiff wishes to amend the complaint, he must do so by May 2 || 6, 2020. 3 4 IT IS SO ORDERED. Sian belaten 6 || Dated: April 21, 2020 SUSAN ILLSTON 7 United States District Judge 8 9 10 11 12

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