Section 12(a)(2) Liability
Section 12(a)(2) Liability is the Securities Act civil-liability framework for specified securities offers or sales made by means of a prospectus or oral communication containing a material misstatement or omission.
How it works
Section 12(a)(2) applies when a qualifying seller offers or sells a security through a prospectus or oral communication that contains an untrue statement of material fact or omits a material fact necessary to make the statements not misleading, and the purchaser did not know of the problem. The seller can avoid liability by proving it did not know and, in the exercise of reasonable care, could not have known of the untruth or omission. The statutory remedy can include rescission or damages.
The claim centers on a prospectus or oral communication
The statute addresses how the security was offered or sold rather than only the contents of the Registration Statement.
A material misstatement or omission is required
The communication must be materially misleading in the circumstances in which it was made.
The purchaser must lack knowledge of the defect
Section 12(a)(2) expressly addresses purchaser knowledge of the untruth or omission.
The seller has a reasonable-care defense
The defendant can avoid liability by proving lack of knowledge and that reasonable care would not have revealed the problem.
Worked example: inaccurate oral sales statement
A qualifying seller makes a materially inaccurate oral statement about a major customer during the public offering process. Section 12(a)(2) can reach oral communications, unlike a claim focused only on Registration Statement text.
The remedy can be rescission or damages
The statute provides a tender-based recovery framework for purchasers who still own the security and damages for securities already sold.
Common mistakes
Treating every private resale statement as automatically covered; assuming scienter is required; confusing the reasonable-care defense with Section 11 due diligence; and treating Section 12(a)(2) as identical to Section 12(a)(1).
Example
An underwriter sells securities in a public offering through offering materials that materially misstate a key contract. A purchaser who did not know of the misstatement can potentially assert Section 12(a)(2), subject to the statute’s seller, communication and defense requirements.
Example
An underwriter sells securities in a public offering through offering materials that materially misstate a key contract. A purchaser who did not know of the misstatement can potentially assert Section 12(a)(2), subject to the statute’s seller, communication and defense requirements.
Professional note
Section 12(a)(2) is not simply Section 11 applied to a prospectus. The provisions differ in covered communications, defendants, defenses and procedural requirements.
Related terms
- 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.
- Roadshow
A Roadshow is an offering presentation by one or more members of issuer management that discusses the issuer, its management or the securities being offered to prospective investors.
- 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.
- Section 12(a)(1) Liability
Section 12(a)(1) Liability is the Securities Act civil remedy against a person who offers or sells a security in violation of Securities Act Section 5.
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