Securities Act § 11 — Civil Liability (15 U.S.C. § 77k)
Overview
Section 11 imposes civil liability for material misstatements or omissions in a registration statement. It is one of the most powerful private civil liability provisions in securities law. Issuers face absolute (strict) liability; other defendants may assert a due diligence defense.
Elements of a § 11 Claim
A plaintiff must establish:
- A registered security: The security must have been registered under the Securities Act (i.e., sold pursuant to a registration statement)
- Material misstatement or omission: The registration statement, as of its effective date, contained an untrue statement of a material fact or omitted a material fact required to be stated or necessary to make the statements not misleading
- Acquisition: Plaintiff acquired the security covered by the registration statement
- Loss: Plaintiff suffered a loss (subject to § 11(e) loss causation defense)
No scienter required for plaintiffs (unlike Rule 10b-5). No reliance required (unless plaintiff acquired the security after the issuer made an earnings statement for a 12-month period).
Plaintiffs — Standing
Any person who acquired the security is a potential plaintiff. However:
- Tracing requirement: Plaintiff must be able to trace their shares to the defective registration statement. In large aftermarket trades where registered and unregistered shares are commingled, tracing may be impossible (see Gustafson v. Alloyd Co.)
- Aftermarket purchasers have standing if they can trace to the registration statement
Defendants
1. Issuer — Absolute Liability
The issuer is absolutely liable — no defense is available. The issuer cannot assert due diligence or good faith. This makes the issuer a near-automatic defendant in any § 11 claim.
2. Signatories
Every person who signed the registration statement (including the CEO, CFO, and a majority of directors) may be held liable. Defense: due diligence.
3. Directors
Every director (or person named as about to become a director) at the time of filing. Defense: due diligence.
4. Underwriters
Every underwriter with respect to the security. Defense: due diligence (but the standard is higher — underwriters must conduct an independent investigation).
5. Experts (Accountants, Engineers, etc.)
Any person who consents to being named in the registration statement as having prepared or certified any part of it (most commonly independent auditors). Experts are only liable for the portions of the registration statement they prepared or certified (“expertised portions”). Defense: due diligence limited to their expert portion.
6. Controlling Persons
Persons controlling any of the above may be liable under Securities Act § 15 — Controlling Person Liability (15 U.S.C. § 77o).
The Due Diligence Defense
Non-issuer defendants may avoid liability by showing they conducted adequate due diligence. The standard differs based on whether the portion of the registration statement at issue was “expertised.”
Non-Expertised Portions (e.g., financial projections, management discussion)
A non-expert defendant must show:
- After reasonable investigation, had reasonable ground to believe, and did believe, the statements were true and not misleading
Reasonable investigation standard: What a prudent person would require in the management of their own property.
Expertised Portions (e.g., audited financial statements)
A non-expert defendant (e.g., underwriter reviewing auditor’s work) must show:
- Had no reasonable ground to believe, and did not believe, the statements were false or misleading
This is a lower standard — non-experts may rely on expert certification as long as there are no red flags.
For expert defendants reviewing their own portion:
- Must show reasonable investigation and reasonable belief in accuracy (same standard as non-experts for non-expertised portions)
Loss Causation — § 11(e) Defense
Defendants may reduce or eliminate damages by showing the decline in value was caused by something other than the misstatement or omission. This shifts the burden to defendants to prove loss causation once a plaintiff establishes the basic elements.
Damages
Formula: Price paid (not exceeding the offering price) minus:
- The value of the security at the time of suit, OR
- The price at which the security was sold before suit, OR
- The price at which the security was sold after suit but before judgment
Damages are limited — plaintiff cannot recover more than the price at which the security was offered to the public.
Expert vs. Non-Expert Portions — Chart
| Portion | Defendant Type | Standard |
|---|---|---|
| Non-expertised | Non-expert defendant | Reasonable investigation + reasonable belief |
| Expertised | Expert defendant | Reasonable investigation + reasonable belief (for their own portion) |
| Expertised | Non-expert defendant | No reasonable grounds to believe false/misleading |
Comparison to § 12(a)(2) and Rule 10b-5
| Feature | § 11 | § 12(a)(2) | Rule 10b-5 |
|---|---|---|---|
| Scienter | None (strict for issuer) | None | Required (intent/recklessness) |
| Reliance | Generally not required | Not required | Required (or presumed) |
| Standing | Traceable purchasers | Immediate buyer only | Purchasers and sellers |
| Context | Registration statement | Prospectus/oral offer | Any purchase or sale |
Related Pages
- Securities Act § 5 — Registration Requirement (15 U.S.C. § 77e)
- Securities Act § 12 — Civil Liability for Selling (15 U.S.C. § 77l)
- 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)