An IPO closes Friday. Six months later the stock has halved, the registration statement turns out to have understated a liability, and plaintiffs sue everyone who signed. Who is liable, who has a defense, and how the syndicate that sold the deal was built and paid are the two halves of this lesson.
The Securities Act of 1933 governs the new-issue market, and Section 11 is its core liability provision. If a registration statement, at its effective date, contained an untrue statement of material fact or omitted a material fact, a purchaser of the registered security may sue. Liability is near strict: the plaintiff need not prove reliance or even that they read the document.
The potential defendants are wide. They include the issuer, every person who signed the registration statement, every director, every named expert (such as the auditor, for the audited financials), and the underwriters.
The issuer is effectively without a defense. Everyone else gets the due-diligence defense: liability is avoided by proving a reasonable investigation and a reasonable belief that the statements were true.
Common mistakes
- Thinking the issuer can use the due-diligence defense. It cannot. Only the other defendants (directors, signers, underwriters, experts) may prove a reasonable investigation under Section 11 and Rule 176.
- Confusing Section 12(a)(1) with 12(a)(2). 12(a)(1) is for selling an unregistered security; 12(a)(2) is for a material misstatement in a prospectus or oral communication.
- Saying a deal is "SEC-approved." Section 23 makes that unlawful; the SEC never approves or vouches for a security.
Bottom line
- Section 11 imposes civil liability for a materially false or misleading registration statement; defendants other than the issuer escape via the due-diligence defense, and Rule 176 lists factors for a reasonable investigation
- Section 12(a)(1) covers unregistered sales; Section 12(a)(2) covers material misstatements in a prospectus or oral communication; Section 17 bars fraud in interstate offers and sales; Section 23 bars claiming the SEC approved a security
- Rule 172 allows access-equals-delivery of the final prospectus; Rule 174 sets aftermarket delivery periods; Rule 460 governs reasonable distribution of preliminary prospectuses for acceleration
- Rule 175 and Rule 3b-6 give a safe harbor for forward-looking issuer statements made in good faith with a reasonable basis
Exam shortcut
Map the liability sections fast: Section 11 is the registration statement, Section 12(a)(2) is the prospectus and the spoken word, Section 17 is general offer-and-sale fraud, Section 23 is the "no SEC approval" rule. Spread order of size: selling concession (largest) > underwriting fee = management fee in most deals; gross spread is the sum, and the issuer's net is price minus spread.
The full lesson (about 2,798 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B15
- B16
Browse all free Series 79 lessons or jump into free Series 79 practice questions.