Securities Act § 12 — Civil Liability for Selling (15 U.S.C. § 77l)
Overview
Section 12 imposes civil liability on sellers who either (a) sell unregistered securities in violation of Securities Act § 5 — Registration Requirement (15 U.S.C. § 77e), or (b) sell securities using a materially misleading prospectus or oral communication. It is narrower than Securities Act § 11 — Civil Liability (15 U.S.C. § 77k) in its standing requirements (privity) but broader in its application (covers oral communications).
§ 12(a)(1) — Strict Liability for § 5 Violations
Scope
Makes any person who offers or sells a security in violation of § 5 liable to the purchaser.
Standard: Strict Liability
No scienter, no intent, no fraud required. A good-faith belief that the security was exempt is not a defense.
Standing: Privity Required
Only the immediate buyer can sue the immediate seller. There is no claim against upstream parties (e.g., the issuer) unless the issuer was the direct seller to the plaintiff.
- Pinter v. Dahl (1988): The “seller” must be the person who directly sold to the plaintiff or who “successfully solicited” the purchase, motivated at least in part by a desire to serve their own financial interests or those of the securities owner. Mere participation in selling efforts is insufficient.
Remedy
- Rescission: Plaintiff may recover the consideration paid (purchase price) plus interest, less any income received, upon tender of the security back to the seller
- Damages: If plaintiff has already disposed of the security, may recover damages (difference between price paid and proceeds received)
§ 12(a)(2) — Liability for Misleading Prospectus or Oral Communication
Scope
Liability for any person who offers or sells a security by means of a prospectus or oral communication that includes a material misstatement or omission of fact necessary to make the statements not misleading.
Standard: Negligence-Like; Defendant May Prove Lack of Knowledge
Unlike § 12(a)(1), the defendant may avoid liability by proving:
- The defendant did not know and in the exercise of reasonable care could not have known of the untruth or omission
This is a due care / negligence standard rather than strict liability.
Materiality
The misstatement or omission must be material — a substantial likelihood that a reasonable investor would consider it important in making an investment decision (TSC Industries v. Northway).
Standing: Privity Required
Same as § 12(a)(1) — only the immediate buyer has standing to sue the immediate seller. Gustafson v. Alloyd Co. (1995): § 12(a)(2) applies only to public offerings by issuers, not to secondary market transactions. “Prospectus” in § 12(a)(2) has the same meaning as in § 10 — a formal document used in a registered offering.
Remedy
Same as § 12(a)(1): rescission or damages.
Statute of Limitations
- § 12(a)(1): 1 year from the violation; 3 years absolute from the date of sale
- § 12(a)(2): 1 year from discovery of the untruth or omission; 3 years from the date of sale
Comparison of § 12(a)(1) and § 12(a)(2)
| Feature | § 12(a)(1) | § 12(a)(2) |
|---|---|---|
| Predicate | § 5 violation | Misleading prospectus/oral communication |
| Standard | Strict liability | Negligence (lack of reasonable care) |
| Privity | Required | Required |
| Materiality | Not required | Required |
| Scienter | Not required | Not required |
| Context | Unregistered offerings | Registered public offerings |
Comparison with § 11
| Feature | § 11 | § 12(a)(2) |
|---|---|---|
| Subject matter | Registration statement | Prospectus or oral communication |
| Privity | Not required (traceable purchasers) | Required (immediate buyer/seller only) |
| Defendants | Multiple (issuer, directors, underwriters, experts) | Seller only |
| Scienter | None (strict for issuer) | None (reasonable care defense) |
| Context | Any registered offering | Public offerings only (Gustafson) |
Seller Solicitation Doctrine (Pinter v. Dahl)
The Supreme Court in Pinter v. Dahl (1988) interpreted “seller” in § 12 to include not just the person who passes title, but also any person who successfully solicits the purchase for financial gain. This allows § 12 claims against brokers and promoters who were active participants in the solicitation, even if they did not hold title to the securities.
Related Pages
- Securities Act § 5 — Registration Requirement (15 U.S.C. § 77e)
- Securities Act § 11 — Civil Liability (15 U.S.C. § 77k)
- Securities Act § 15 — Controlling Person Liability (15 U.S.C. § 77o)
- Exchange Act § 10 — Anti-Fraud (15 U.S.C. § 78j)
- Securities Act of 1933 (15 U.S.C. §§ 77a–77aa)