Elucidating Section 11 of the Securities Act of 1933

Introduction

• Section 11 of the Securities Act of 1933 (Securities Act): Is a fundamental piece of legislation that plays a critical role in protecting investors by ensuring transparency and accountability in the securities market.

• Private Right of Action: Section 11 of the Securities Act grants investors the right to seek legal recourse if they have suffered losses due to false or misleading statements in a registration statement.

• Registration Statement: A registration statement is a comprehensive document filed by companies planning to offer securities for sale to the public, containing essential information about the company’s financial status, business operations, and the nature of the security being offered.

• Standing Under Section 11: To establish standing under Section 11, investors must demonstrate that they purchased securities covered by the defective registration statement and that they incurred financial losses as a result. Standing is a legal term that refers to the right of an individual to bring a lawsuit, and in this context, it ensures that only those directly affected by the alleged misrepresentation can seek redress.

• Tracing: Is another critical concept under Section 11. It involves identifying and proving that the securities purchased by the investor were indeed issued under the specific registration statement alleged to contain false or misleading information.

• Complex Process: Tracing can be a complex process, especially in cases where securities have changed hands multiple times since their initial offering. However, it is an essential step in establishing a valid claim under Section 11, as it directly links the investor’s loss to the purportedly faulty registration statement.

• Investor Protection: In summary, Section 11 of the Securities Act of 1933 serves as a comprehensive and essential guide for investors seeking protection against inaccurate or deceptive information in registration statements. By providing clear pathways for establishing standing and tracing securities.

• Empowering Investorss: This section empowers investors to hold issuers accountable and promotes greater transparency within the securities market.

As we head into 2027, understanding and utilizing the provisions of Section 11 will remain crucial for safeguarding investor interests and fostering trust in financial markets.

If you wish to serve as a lead plaintiff in securitiesclass action lawsuits, or have questions about Section 11 of the Exchange Act, please contact attorney Timothy L. Miles of the Law Offices of Timothy L. Miles, at no cost, by calling 855/846-6529 or via e-mail at [email protected].(24/7/365).

Defining Section 11 of the Securities Act?

• Powerful Investor Remedy: Section 11 of the Securities Act provides a powerful legal remedy for investors who purchase securities in a public offering that has a materially false or misleading registration statement.

• Strict Liability: The law is designed to protect investors by holding key parties involved in the offering, including the issuing company, strictly liable for inaccuracies in the registration statement.

The Applicability of a Section 11 claim

• A material misstatement or omission: The registration statement must contain a statement of fact that is either false or omits information necessary to make the statement not misleading to a reasonable investor.

• No proof of reliance: A plaintiff does not need to prove they relied on the misstatement when deciding to purchase the security.

• No proof of intent (scienter): The plaintiff does not need to prove that the defendant intended to defraud investors. The issuer, in particular, is subject to strict liability, meaning it is automatically liable for material errors.

• Tracing requirement: The plaintiff must be able to trace their shares back to the specific public offering that contained the alleged misstatement. 

Section 11:  Tracing Requirment Rule 

• Specific Registration Statement: The tracing requirement under Section 11 of the Securities Act requires that a plaintiff must be able to prove their shares were acquired pursuant to the specific, allegedly misleading registration statement.

• Establishes Standing: This rule establishes standing for the lawsuit, ensuring the plaintiff is a legitimate party with a claim under the statute.

• Crucial and Challenging Aspect: This is a crucial and often challenging aspect of Section 11 litigation, especially in modern electronic trading.

Historical context

• Original intent: When the Securities Act was enacted, shares were primarily represented by physical certificates. The tracing r11uirement was straightforward: an investor could use their paper certificate to prove their ownership stemmed from a specific offering.

Modern Trading:

• Modern complexity: Today, most securities exist as electronic book-entry records and are held by third-party custodians in “fungible bulk”. This means that newly issued shares are commingled with previously issued or unregistered shares at a clearing house like the Depository Trust Company (DTC). This commingling can make it nearly impossible to identify the specific offering from which a market-purchased share originated.

The impact of modern trading on tracing requirement

• Initial Public Offerings (IPOs): Tracing is generally not an issue in a traditional IPO if a plaintiff buys shares before any pre-existing or unregistered shares enter the public market. Because all shares at that time are traceable to the same registration statement, the plaintiff can easily satisfy the requirement.

• Secondary offerings and direct listings: The tracing requirement becomes significantly more difficult in secondary offerings or direct listings, where registered and unregistered shares may enter the market simultaneously.

• Higher Burden of Proof: In these cases, a plaintiff purchasing on the open market has a much higher burden of proof to show their shares originated from the specific flawed registration statement rather than the pool of pre-existing shares.

Landmart Supreme Court Case: Slack v. Pirani (2023)

• The Holding: In this landmark unanimous decision, the Supreme Court re-affirmed that the tracing requirement is mandatory, even in direct listings.

• Facts: The plaintiff, Pirani, purchased shares in Slack’s direct listing, where both registered and unregistered shares entered the market at the same time.

• Supreme Court’s Reasoning: The Court rejected the argument that tracing requirment was unnecessary because it was impossible, ruling that Section 11 is not a remedy for all misleading statements, but only for those in the specific registration statement related to the purchased shares.

• Impact on direct listings: The decision in Slack v. Pirani makes it very difficult, and in some cases potentially impossible, for plaintiffs to bring Section 11 claims against companies that go public via a direct listing.

• The Strict Tracing Tequirement Rule: Efectively insulates these companies from Section 11 liability for open-market purchasers.

Consequences of failing the tracing requirement rule

If a plaintiff cannot satisfy the tracing requirement:

• They lose standing to pursue a claim under Section 11.

• The lawsuit is subject to dismissal.

• They may still be able to pursue claims under other securities laws, such as Section 10(b) of the Securities Exchange Act of 1934.but these claims require a higher burden of proof, including proving fraudulent intent or “scienter”. 

Section 11: Mandatory Disclosures  

• Material Misstatement or Omission:: Section 11 of the Securities Act  does not mandate specific disclosures itself; rather, it imposes civil liability on the parties involved in a securities offering for any material misstatements or omissions that exist in the registration statement when it becomes effective.

• Regulation S-K: The specific, mandatory disclosure requirements for registration statements are dictated by the SEC under Regulation S-K.

• Goal of the Exhange Act: The goal of the Securities Act is to ensure “full and fair disclosure” so that investors receive all material information about a security being offered to the public.

• Materiallty Requirement: A plaintiff can sue if the information provided in the registration statement is incomplete or contains false statements, even if the information was not explicitly required by Regulation S-K, as long as the omission or misstatement is considered “material”.

Key disclosures required by Regulation S-K

Another Mandatory Disclosure: Regulation S-K governs the non-financial portion of SEC filings, such as registration statements and annual reports. The following are some of the key areas of mandatory disclosure that can give rise to Section 11 liability if found to be materially misleading or incomplete:

• Description of the company’s business.

• • General development of the business.

• • Organizational structure and property. 

• • Significant legal proceedings.

• • Human capital resources.

• Risk factors: An explanation of the material factors that make the investment speculative or risky.

• Management’s discussion and analysis (MD&A): Management’s assessment of the company’s financial condition and results of operation, including known trends and uncertainties.

• Directors, executive officers, and corporate governance: Information on executive compensation, related party transactions, and director independence.

• Use of proceeds: A description of how the company intends to use the capital raised in the offering.

• Description of the security: Information on the security being offered, such as its market price and dividend policies.

The consequences of material misstatements or omissions

A plaintiff can claim a material misstatement or omission under Section 11 if:

• A required fact is omitted: If the registration statement fails to include information specifically required by Regulation S-K and that information is material.

• A statement is misleading: Even if a statement is factually true, it can be considered misleading if it omits a material fact necessary to prevent the statement from being deceptive.

For example, a company might disclose a positive revenue figure but fail to disclose that the revenue was generated by an unsustainable, one-time contract. In this case, the omission would make the overall statement about revenue misleading to a reasonable investor.

SEC Regulations Under Section 11 of the Securities Act

Primary SEC regulations

• Regulation S-K (17 CFR Part 229): This is the central body of rules that governs the non-financial content of registration statements. It dictates the specific information companies must disclose during a public offering, and liability under Section 11 arises when a registration statement fails to comply with these rules or contains material misstatements or omissions.

Examples of disclosures covered by Regulation S-K include:

• The company’s business

• Risk factors associated with the investment

• Management’s discussion and analysis (MD&A) of financial condition

• Regulation S-X (17 CFR Part 210): This regulation governs the form and content of the financial statements included in registration statements and other SEC filings. An inaccuracy in the financial statements can lead to liability under Section 11, particularly for the accountants who certified them.

• Rule 176 (17 CFR § 230.176):  Reasonable investigation and reasonable grounds for belief under section 11 of the Securities Act.

• Rule 158 (17 CFR § 230.158): This rule relates to the requirement for a plaintiff to prove reliance under certain circumstances in a Section 11 claim.
  • Specifically, if a plaintiff acquires a security more than 12 months after the effective date of the registration statement, they must prove they relied on the misstatement or omission.
  • Rule 158 defines when an earnings statement is considered “made generally available” to the public, triggering this reliance requirement.

SEC’s role in enforcing Section 11

The SEC’s involvement with Section 11 is primarily regulatory rather than a private enforcement action.

• Review of registration statements: The SEC’s Division of Corporation Finance reviews registration statements to ensure they comply with all disclosure requirements before an offering can proceed.

• Preventing misleading statements: Through this review process, the SEC issues “deficiency letters” to companies, pointing out disclosures that may be insufficient or misleading.

• No private action: The SEC does not bring lawsuits on behalf of private investors under Section 11. Instead, the statute creates a private right of action that allows individual investors to sue responsible parties directly.

• SEC enforcement actions: While the SEC does not enforce Section 11 for private individuals, it can bring its own enforcement actions under other provisions of the Securities Act (like Section 17(a)) or the Securities Exchange Act (like Rule 10b-5) for fraudulent activity associated with a registration statement.

Primary Law

1.SECTION 11 (Securities Act of 1933, § 11, 15 U.S.C. § 77k): This is the provision that grants an explicit right of action against issuers and other actors for material misstatements or omissions in aregistration statement. The following provisions are subsections of this statute or are sections that supplement it.

2. DEFENDANTS — (15 U.S.C. § 77k(a)(1)): The statute expressly lists possible defendants in a Section 11 cause of action. The possible defendants are:

A. ISSUERS

Issuers are held  strictly liable under the Act. For more information, see infra Cases, Defenses. An Issuer’s only statutory defenses are:

1. The purchaser knew of the inaccuracies (15 U.S.C. § 77k(a)).2. The inaccuracies are immaterial (15 U.S.C. § 77k(a)).

3. The depreciation of value is from sources other than the material misrepresentation. (15 U.S.C. § 77k(e)).

4. Statute of limitations has run (15 U.S.C. § 77m).

B. SIGNERS 

The appropriate signers are supplied in section 6 of the 1933 Act (15 U.S.C. § 77f(a)). They include the issuer, the issuer’s principal executive, financial, and accounting officers, and a majority of the issuer’s board
of directors.

C. DIRECTORS OR PARTNERS

The due diligence defense will be the main defense that a director or partner will use to avoid liability.

D. EXPERTS (Accountants, Engineers, or Appraisers)

Anyone that the issuer used to help create the registration statement may be held liable for any misstatement or omission as well. The due diligence defense will be the main defense that an expert will use to avoid liability.

E. UNDERWRITERS

The due diligence defense will be the main defense that an underwriter will use to avoid liability.

3.  STATUTORY DEFENSES

A. Whistle Blowing Defense ((15 U.S.C. § 77k(b)(1) and (2)): This statutory defense is available for defendants other than issuers.

• • Prior to a registration statement’s effective date, a person must resign from or take steps to resign from the position that connects her with the registration statement.

• • Along with resignation, she must advise the Commission and the issuer in writing that she has taken such action and is not responsible for the registration statement.

• • If the resignation occurs after the effective date, advise the Commission and give reasonable public notice according to that sub-section.

B. Due Diligence Defense ((15 U.S.C. § 77k(b)(3) and ((15 U.S.C. § 77k(c))

a. Statutory Factors

This is a statutory defense that has been interpreted by case law and SEC regulations. The statute provides that for:

• • i. Non-expert portions of a registration statement, a defendant must conduct a “reasonable investigation” and have a “reasonableground to believe … that the statements [in the registration statement] were true.”

• • ii. Expert portions of registration statement, a defendant must conduct a “reasonable investigation” and have a “reasonable groundto believe … that the statements [in the registration statement] were true.” The defendant may also show that the “registrationstatement did not fairly represent his statement as an expert.”

b. Standard of Proof ((15 U.S.C. § 77k(c)): An important aspect of the due diligence defense is contained in the statute and not just in case law and SEC regulations.

• • The statute explicitly defines the standard of reasonableness under a due diligence defense.

• • The statute states, “In determining … what  constitutes reasonable investigation and reasonable ground for belief, the standard of reasonableness shall be that of a prudent man in the management of his own property.”

4. RELIANCE (15 U.S.C. § 77k(a): Plaintiffs must prove reliance if the stock was acquired after twelve months of the effective date of the registration statement and if the issuer has  distributed an earnings statement for that period. However, reliance may be established without proof that the person actually read the registration  statement.

5. STATUTE OF LIMITATIONS (Securities Act of 1933 § 13, 15 U.S.C. § 77m):

• • A plaintiff has one year to bring an action after discovery of the misstatement of omission or if discovery should have been made after reasonableinvestigation.

• • The maximum limit is three years to bring an action “after the security was bona fide offered to the public.”

6. CLASS ACTION LIMITATIONS (Securities Act of 1933 § 16, 15 U.S.C. § 77p)

• • • This section places limitations on class actions being brought in federal and/or state court.

• • • Any private class actions claiming fraud with more than fifty members must bring the action in federal court.

7. DAMAGES AVAILABLE (Securities Act of 1933 § 11(e), 15 U.S.C. §77k(e))

Plaintiffs have three alternatives to compute damages under section 11.

Plaintiffs may recover “the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public)” and

• • (1) the value at the time the suit was brought, or

• • (2) the price when the plaintiff sold the security before the lawsuit, or

• • (3) the price when the plaintiff sold the security after the lawsuit but before judgment.

A court may also grant costs of lawsuit including attorney’s fees Section 11(g) places a limitation on the amount of damages. The statute provides, “In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public.” (15 U.S.C. §77k(g))

Section 11(g): Places a limitation on the amount of damages. The statute provides, “In no case shall the amount recoverable under this section exceed the price at which the security was offered to the public.” (15 U.S.C. §77k(g))

• • The Private Securities Litigation Reform Act of 1995 (15 U.S.C. §77k(f)) also added limitations on damages under Section 11.

• • When fraud is involved, only those defendants who are guilty of fraud are jointly and severally liable. When no fraud is involved, all the defendants are held jointly and severally liable except outside directors.

• • Outside directors are liable only to the extent of their relative fault. This is a proportionate liability scheme. Subsection f also grants a right of contribution against joint defendants.

Case Law Interpreting Section 11

1. Plaintiffs–Standing: 

• 15 U.S.C. § 77k(a):  Section 11 states that an action may be brought by “any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission).”

• Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (9th Cir. 1999): Section 11 allows standing for anyone who acquired a security containing a misstatement or omission.

• • In this case, the court explained that “‘any person’ is quite broad.”

• • The court used the  ordinary dictionary terms for “any person.”

• • The court noted that the only limitation is the person “must have purchase[d] ‘such security.’

• • Clearly, this limitation only means that the person must have purchased security under that, rather than some other,registration statement.”

• • The court held that persons who purchased securities in the aftermarket could assert a section 11claim if they could trace the shares to the registered offering.

• In re Number Nine Visual Technology Corp., 51 F. Supp.2d 1 (D. Mass. 1999): Plaintiff must be able to trace the securities purchased to the registration statement.

• Gustafson v. Alloyd Co., 513 U.S. 561 (1995): The Supreme Court held that Section 12(a)(2) actions under the 1933 Act could only be brought by plaintiffs purchasing securities out of the public offering as opposed to the aftermarket. This  raises the issue whether section 11 should also be limited to just the public offering and not aftermarket purchases.

• Demaria v. Anderson, 318 F.3d 170 (2d Cir. 2003): The court held that plaintiffs may have standing under section 11 even though they purchased the shares in the aftermarket. However, they must be able to trace the shares to the offering.

2. Defendants

• Section 11 lists the categories of persons and entities who may be liable .

• • The issuer: The company issuing the securities. The issuer has strict liability and cannot use the “due diligence” defense.

• • The underwriters: The investment banks that help the issuer sell the securities.

• • Directors and officers: Individuals who signed the registration statement or were directors or partners at the time of filing.

• • Experts: Professionals, such as accountants or engineers, who consented to be named in the registration statement for preparing or certifying parts of it.

• Hagert v. Glickman, Lurie, Eiger & Co., 520 F. Supp. 1028, 1033 (D. Minn. 1981): The court explained that “liability cannot be extended to those who do not fall into the specific categories of section 11.”

• Dorchester Investors v. PeakInternational, Ltd., 134 F. Supp.2d 569 (S.D.N.Y. 2001): The court explained that if an individual or entity does not fall within one of the listed categories in section 11, they do not incur liability. In this case, a large shareholder did not sign the registration statement. The court held that section 11 was not applicable because the shareholder did not sign the registration statement as required under section 11(a)(1). The court went on to note that liability could attach to the shareholder as a controlling person under section 15 of the 1933 Act. However, section 11 could not be used to attach liability.

• Pompano-Windy City Partners, Ltd.V. Bear Stearns & Co., Inc., 794 F. Supp. 1265 (S.D.N.Y. 1992): Describes the scope of signors as defendants. The court noted that for liability to attach, the person must sign the  registration statement in dispute. In this case, the allegedly misleading statement was not incorporated by reference into the registration statement that was signed by the defendant.

3. Elements

• 15 U.S.C. § 77k(a):  Liability attaches when untrue statements of material fact or omissions of material fact are in a registration statement “when such part became effective.”

A. Materiality:

• McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576 (2d Cir. 1990), certiorari denied 501 U.S.1249 (1991): Materiality is a question of fact.

• TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976): The Supreme Court described materiality in terms of whether the “reasonable investor” would view the lack of disclosure “as  having significantly altered the ‘total mix’ of information made available.”

• Cooperman v. Individual, Inc., 171 F.3d 43 (1st Cir. 1999): An omission is actionable only if the 1933 Securities Act requiredthe information to be disclosed.

• In re Sterling Foster & Co., 222 F.Supp.2d 216 (E.D.N.Y. 2002): The misstatements or omissions must be based on the written information within the registration statement. Section 11 does not apply when subsequent events make a registration statement
  misleading.

• Cautionary Statements Rendering Misstatement Immaterial: Sufficient cautionary language will render the “alleged omission or misrepresentation immaterial.” In re Donald J. Trump Casino, 7 F.3d 357, 371 (3d Cir. 1993). In In re Worlds of Wonder, 35 F.3d 1407 (9th Cir. 1994), the court applied the Bespeaks Caution Doctrine to section 11 actions. In EP Medsystems, Inc.
  v. EchoCath, Inc., 235 F.3d 865 (3d Cir. 2000), the court noted that cautionary language only applies to forward looking  statements and not historical facts. The cautionary language must sufficiently disclose necessary facts to help the investor not rely on the predictions.

B. Reliance

• 15 U.S.C. § 77k(a): Reliance is presumed prior to one year after the effective date. If  the plaintiff has acquired shares twelve months after the effective date and the issuer has issued an earnings statement.

• Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967): The court held that a presumption of reliance exists for any person purchasing securities prior to the twelve-month cut off  date.

C. Tracing Securities to the Registration Statement

• Slack Technologies, LLC v. Pirani, No. 22-200 (June 1, 2023): On June 1, 2023, the United States Supreme Court held in a unanimous decision that, under Section 11 of the Securities Act of 1933 (the “Securities Act”), plaintiffs must plead and prove that they purchased securities that were traceable to the registration statement that plaintiffs claim contained a material misstatement or omission.

• In re American Bank NoteHolographics, 93 F. Supp.2d 424 (S.D.N.Y. 2000). The court held that the tracing requirements could be satisfied if the stock was purchased in the aftermarket. However, the court explained that a purchaser still must trace the purchased shares to the offering covered by the registration statement. See also Lee v. Ernst & Young, LLP, 294 F.3d 969 (8th Cir. 2002)(holding same position that after market purchasers could trace securities back to the registration statement).

• Krim v. pcOrder.com, Inc., 210 F.R.D. 581, 587 (W.D. Tex. 2002). The court strictly construed the tracing requirement doctrine. In that case, the plaintiff argued that 91% of the publicly traded shared could be traced to the public offering. The court explained that a high percentage is irrelevant because the plaintiff must actually trace the shares to the public offering. The  court noted that an averment that the security “might have been, probably was, or most likely was, issued pursuant to a defective statement” was not enough.

• Harden v. Raffensperger, Hughes &Co., 933 F. Supp. 763 (S.D. Ind. 1996): The court explained that plaintiffs must show that the purchased securities are the “direct subject” of the registration statement.

D. Fraud and Scienter is Irrelevant

• 15 U.S.C. § 77k(a): Statute only requires “an untrue statement of a material fact or omitted to state a material fact required to be stated therein.”

• Escott v. BarChris Construction Co.,283 F. Supp. 643 (S.D.N.Y. 1968): The court explained that the “statute imposes liability for untrue statements regardless of whether they are intentionally untrue.”

• Haft v. Eastland Financial Corp., 755 F. Supp. 1123 (D.R.I. 1991): The court noted that scienter is not required under a section 11cause of action. The Supreme Court has defined scienter as “a mental state embracing intent to deceive, manipulate, ordefraud.”

• Pleading with Particularity: Even though fraud is not required, courts vary on requiring the plaintiff to plead with particularity as required under Fed. R. Civ. Proc. 9(b). In re NationsMart Corp., 130 F.3d 309 (8th Cir. 1997) (not requiring particularity in pleading). But see Haft v. Eastland Financial Corp., 755 F. Supp. 1123 (D.R.I. 1991) (requiring particularity in pleading).

4. Defenses

A. Issuers are Strictly Liable

• In re NationsMart Corp., 130 F.3d 309 (8th Cir. 1997). The court explained that issuers are strictly liable for any misstatements in the registration statement. Section 11 liability is “virtually absolute” for issuers.

• Issuer Defenses: Only defenses for issuers are statutory defenses, which are: (1) the purchaser knew of the inaccuracies, (2) the inaccuracies are immaterial, (3) the depreciation of value is not from inaccuracies, or (4) the statute of limitations has run.

B. Misstatement Had No Adverse Impact on Price

• Akerman v. Oryx Communications, Inc., 810 F.2d 336 (2d Cir. 1987): The court explained that a “defendant may, under section 11, reduce his liability by proving that the depreciation in value resulted from factors other than the material misstatement in the registration statement.” In that case the court held that “the misstatement was barely material and that the public failed to
  react adversely to its disclosure.”

C. Purchaser Knew of the Inaccuracies/Omissions

• 15 U.S.C. § 77k(a): The statute provides that any person that has properly acquired a security may sue “unless it is proved that at the time of such acquisition he knew of such untruth or omission.”

D. The Inaccuracies/Omissions are Immaterial

• 15 U.S.C. § 77k(a):

E. Whistle Blowing

• 15 U.S.C. § 77k(b)(1):

F. Due Diligence

• 15 U.S.C. § 77k(b)(3) and 15 U.S.C. § 77k(c)

• Rule 176 (17 C.F.R. § 230.176):  See also See also SEC Regulations. Escott v. BarChris Construction Co.,283 F. Supp. 643 (S.D.N.Y. 1968)

• • The court evaluated what constituted a “reasonable investigation.” This case is the fountainhead for the due diligence defense in section 11 cases. The court gave a sliding scale on  the level of investigation required depending on the category of the defendant.

• • The categories discussed by the court included (1)  Officers and Directors, (2) Outside Directors, (3) Underwriters, and (4) Accountants. The highest standard of care applied to insiders who signed the registration statement.

• • The level of expertise of insiders will also factor into the level of investigation required. Insiders with an expertise in law or accounting have higher investigation requirements to satisfy a reasonable investigation than those without such expertise.

• • The court also explained that non-expert defendants may rely on the expert’s portion of the registration  statement. Anytime a due diligence defense is used, a court will likely cite to the BarChris case.

G. Class Action Limitations

• 15 U.S.C. § 77p(b)-(c):
  (b) Class action limitations

  • No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging—

    (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

    (2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

    (c)  Removal of covered class actions

    Any covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b).

H. Statute of Limitations

• 15 U.S.C. § 77m: No action shall be maintained to enforce any liability created under section 77k or 77l(a)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77l(a)(1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 77l(a)(1) of this title more than three years after the security was bona fide offered to the public, or under section 77l(a)(2) of this title more than three years after the sale.

SEC RELEASES:

1. Exchange Act Release No. 6335, 1981 WL 31062 (Aug 06, 1981).

This SEC release discussed what constitutes reasonable investigation and reasonable grounds for belief under Section 11. Some of this information can also be found at 46 Federal Register 42015 (Aug 18, 1981).

2. Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 68 Federal Register 5110-5132 (Jan 31, 2003).

• • This SEC final rule explains the background of the Sarbanes-Oxley Act as it relates to disclosure obligations.

• • The SEC discussed the audit committee’s role in a Section 11 action.

• • The SEC explained that “a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for purposes of Section 11 of the Securities Act, as a result of being designated or identified as an audit committee financial expert pursuant to the new disclosure item.” Id. at 5116 –5117.

The SEC went on to note,

• • “Our new rule provides that whether a person is, or is not, an audit committee financial expert does not alter his or her duties, obligations or liabilities.” Id. at 5117.

• • This SEC action is useful to a researcher trying to understand how the Sarbanes-Oxley Act affects Section 11.

Conclusion

• Section 11 of the Securities Act of 1933 is a pivotal piece of legislation that plays a crucial role in protecting investors in public offerings. By providing investors with the right to sue for damages if they have been misled by false or misleading statements in a registration statement, Section 11 ensures a level of transparency and accountability in the securities market.

• Standing as one of the most significant provisions, it empowers investors with the legal standing to hold issuers, directors, and underwriters accountable for any inaccuracies that could potentially harm their investments. Public offerings, which involve the sale of securities to the general public, must adhere strictly to the disclosures required under Section 11.

• This section mandates that all material information be accurately presented to prevent any form of fraud or misrepresentation. The comprehensive nature of this section underscores its importance in maintaining investor confidence and promoting fair practices within the financial markets.

• By ensuring that all parties involved in public offerings are bound by stringent disclosure requirements, Section 11 serves as a critical safeguard against the dissemination of false information.

• In conclusion, Section 11 of the Securities Act of 1933 stands as an indispensable guide for investors navigating public offerings. It not only provides a mechanism for redress in cases of misinformation but also fosters a culture of integrity and transparency in the securities market.

• As we look ahead to 2027, it remains essential for investors to be well-versed in the protections afforded by Section 11. Understanding this provision is crucial for making informed investment decisions and ensuring that market participants are held to the highest standards of honesty and accountability.