As the number of publicly listed companies in the United States remains near 40-year lows, alternatives to traditional IPOs have brought new companies to the public markets that may have otherwise chosen to stay private. Direct listings—through which an issuer lists directly with an exchange to make a company’s existing shares available for public trading—is one such innovation. Direct listings offer unique benefits to companies and their shareholders by allowing existing shareholders to sell their shares on a public stock exchange without the delay and overhead associated with a traditional IPO. And by bringing more companies to the public markets, direct listings benefit companies by providing increased capital and benefit investors by providing increased transparency about the companies in which they invest.

The Ninth Circuit, however, issued an opinion breaking with decades of precedent that increases liability under Section 11 of the Securities Act of 1933 for alternative offering methods beyond its intended boundaries. Section 11 seeks to reduce the incidence of even unintentional falsehoods in a registration statement by holding issuers strictly liable for misstatements or omissions in a securities offering’s registration statement. But to prevent this demanding liability standard from chilling market activity, Section 11 requires a claimant to prove that the shares they purchased were those offered in the registration statement. The Ninth Circuit eliminated this requirement for direct listings, citing concerns that where registered and unregistered shares mingle in the market, as they do from the state of trading for direct listings, it would be impossible to prove that a purchaser bought a registered share. The Supreme Court has granted certiorari to consider whether a plaintiff must prove that he bought a registered share to establish liability under Section 11.

The Ninth Circuit’s expansive reading of Section 11 upsets Section 11’s balance of interests and usurps Congress’s exclusive role in enacting securities laws, significantly altering the calculus companies face when deciding whether to go public. Under the Ninth Circuit’s approach, any costs saved from avoiding underwriters and other IPO expenses in a direct listing could be replaced (or even overtaken) by the litigation costs of extending Section 11 standing to all post-offering purchasers.

Moreover, this policy-driven decision ignores the benefits of public offerings for entrepreneurs, start-up companies, investors, and the economy as a whole. The Ninth Circuit’s novel interpretation of Section 11 also will hinder innovation in public offerings, including the direct listing method that Slack used to go public here. If a change to the Securities Act’s comprehensive liability scheme is warranted, Congress should be responsible for determining the circumstances for Section 11 liability, not the Ninth Circuit.

The Supreme Court should the reverse Ninth Circuit’s erroneous decision and ensure that Section 11 liability stays within the boundaries that Congress intended.