Section 11 Liability
Section 11 Liability is the Securities Act civil-liability framework for material misstatements or omissions in a Registration Statement when the relevant part became effective.
How it works
Section 11 permits qualifying purchasers to sue specified participants when a Registration Statement contained an untrue statement of material fact or omitted a material fact required to be stated or necessary to make the statements not misleading. Potential defendants include the issuer, signers, directors or similar persons, named future directors, specified experts and underwriters. The issuer does not receive the same due-diligence defense available to qualifying non-issuer defendants under Section 11(b).
The claim focuses on the Registration Statement
The alleged material misstatement or omission must be in the relevant effective registration disclosure.
Multiple offering participants can be defendants
Section 11 identifies signers, directors, named future directors, experts and underwriters in addition to the issuer.
Materiality remains essential
An inaccurate statement does not create Section 11 liability merely because it is wrong; it must satisfy the statute’s materiality framework.
Non-issuer defendants can have due-diligence defenses
Section 11(b) provides reasonable-investigation and belief defenses depending on the type of disclosure and defendant.
Worked example: expertised financial statements
Audited financial statements contain a material error. The accountant’s exposure is analyzed with the expert-specific Section 11 provisions, while directors and underwriters have different defense standards.
Damages are statutory and subject to limits
Section 11(e) establishes a damages formula and permits defendants to show that some price decline resulted from factors other than the misstatement or omission.
Common mistakes
Calling every securities fraud claim a Section 11 claim; assuming scienter is always required; treating issuer and underwriter defenses as identical; and ignoring whether the securities can be tied to the Registration Statement.
Example
A public offering Registration Statement materially overstates revenue because of information existing when the statement became effective. A purchaser who acquires securities traceable to the Registration Statement can potentially assert a Section 11 claim subject to the statute’s requirements and defenses.
Example
A public offering Registration Statement materially overstates revenue because of information existing when the statement became effective. A purchaser who acquires securities traceable to the Registration Statement can potentially assert a Section 11 claim subject to the statute’s requirements and defenses.
Professional note
Section 11 is not identical for every defendant. The issuer’s liability framework differs materially from the reasonable-investigation and reasonable-belief defenses available to specified non-issuer participants.
Related terms
- Registration Statement
A registration statement is a filing with the SEC that provides required disclosures when a security or securities offering is registered under federal securities laws.
- Underwriting Agreement
An Underwriting Agreement is the contract between an issuer or selling security holders and one or more underwriters that sets the terms, conditions and responsibilities for a securities offering.
- Statutory Prospectus
A Statutory Prospectus is a prospectus that satisfies Securities Act Section 10(a), containing the disclosure required for use as the final prospectus in a registered securities offering.
- Securities Act Effective Date
The Securities Act Effective Date is the date a Registration Statement becomes effective under Securities Act Section 8 or an applicable SEC rule, allowing registered sales subject to the remaining offering requirements.
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