SECURITIES REVIEW 101

A. Securities Act and Securities Exchange Act Liability

Provisions: Overview

I. General Terms
a. Securities Act = 1933
i. Definition: Protects investors by requiring full and
fair disclosure in connection with the public offerings
of securities, including primarily for IPOs
ii. Scope of Liability: Sections 11, 12(a)(1), 12(a)(2),
and 15
b. Exchange Act = 1934
i. Definition: Regulates the securities marketplace by
identifying and penalizing improper conduct in
subsequent securities transactions, including for
sales on the open market, proxy solicitations, and
tender offers
ii. Scope of Liability: 9(f), 16(b), 18(a), 20(a), 20A,
and 29(b)
c. Private Right of Action
i. Yes: Exchange Act Sections 10(b), 14(a), and
14(e), together with certain rules that the SEC
promulgated under those provisions (15 U.S.C. §
78n(a)).
ii. No: Courts have expressly declined to infer an
implied private right of action under Exchange Act
Sections 10(a), 14(a), 16(a), and 17(a)
d. PSLRA
i. Definition: Arises mainly on behalf of putative
actions on behalf of a class
ii. Steps:
1. The plaintiff must satisfy a heightened
pleading standard that requires the plaintiff to
identify:
2. Each statement alleged to have been
misleading;
3. The reason or reasons why the statement is
misleading; and
4. All facts on which that belief is formed.

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 iii. Damages: Damages cannot exceed the difference
between the plaintiff’s purchase price and the
security’s average trading price in the 90 days
following the last disclosure correcting the fraud
iv. Other Requirements:
1. Requirements for the selection of lead
plaintiffs in class actions.
2. An automatic stay of discovery during the
pendency of any motion to dismiss
3. A safe harbor for an issuer’s forward-looking
statements. Sanctions provisions.
e. Overlapping Claims
i. Liability under one provision or act usually does not
preclude liability under another.
1. Almost all securities actions involve a class
action claim under Section 10(b) and Rule
10b-5 under the Exchange Act, which, unlike
certain provisions of the Securities Act, are
not limited to specific categories of defendants
(see Practice Note, Exchange Act: Section
10(b) Elements and Defenses: Overlap with
Other Liability Provisions).
ii. Ancillary claims in lawsuits under the federal
securities laws may also include:
1. State law claims under Blue Sky laws.
2. Common law claims for:
3. Fraud;
4. Aiding and abetting common law fraud;
5. Equitable fraud; and
6. Negligent misrepresentation
II. Securities Act
a. Goal: Protect investors through accurate and complete
information
b. Liability:
i. Section 12: allows a private plaintiff to rescind a
purchase of securities in certain circumstances,
including if the securities were offered or sold in
violation of the registration requirements of the
Securities Act (see Section 12(a)(1) and Section
12(a)(2)).

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 ii. Section 15: imposes control person liability for
violations of Sections 11 and 12 (see Section 15).
III. Section 11
a. Defined: Civil liability for material misstatements or
omissions in registration statements
i. Imposes liability based only on statements of fact,
NOT opinions
ii. Allows private plaintiffs to recover damages from a
broad range of defendants, including issuers and
underwriters, for misstatements or omissions in
registration documents (see Section 11).
b. Plaintiffs: (1) Purchased the securities at time of IPO or
(2) aftermarket purchases and can trace their shares to
the allegedly misleading registration statement
c. Defendants:
i. The issuer.
ii. Every person who signed the registration statement,
including, generally, the issuer, its principal
executive and financial officers, its controller, and at
least a majority of its board of directors.
iii. Every person who was a director of the issuer at the
time of the registration statement’s filing.
iv. Every underwriter in the offering
v. Any expert who is named with its consent in the
registration statement as having prepared or
certified any report or valuation used with the
registration statement, including accountants and
engineers. While a credit rating agency may be
named as an expert if its ratings are included in the
registration statement for offerings of debt
securities, credit rating agencies generally withhold
consent to avoid incurring liability.
d. Elements:
i. The registration statement, at the time it became
effective, contained a misstatement or omission.
ii. The misstatement or omission was material.
e. Defenses:
i. Resignation: Available to a named party who
resigns and informs the SEC of the materially false
or misleading statement before the registration

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 statement becomes effective (15 U.S.C. § 77k(b)
(1)).
ii. Effectiveness without knowledge: Available to a
named party who informs the SEC and the public
that a registration statement has become effective
without its knowledge (15 U.S.C. § 77k(b)(2)).
iii. Due Diligence: Available to persons who can
demonstrate that after a reasonable investigation,
they had reason to believe, and did believe at the
time the registration statement became effective,
that the registration statement was true and
contained no material misstatement or omission
1. Expert: For expertized sections of a
registration statement, meaning those
prepared by experts, defendants other than
the applicable expert have a lower burden to
meet.
2. Non- Expert: Non-expert defendants need
only show that they had no reasonable
grounds to believe that the statements in the
expertized sections were untrue or did not
fairly represent the statement of the expert
f. Can Avoid Liability if………
i. The plaintiff’s actual knowledge of the untruth or
omission at the time it acquired the securities (15
U.S.C. § 77k(a)).
ii. Non-causation, which is available to all defendants
who can prove that the decline in the security’s
value was due to a general decline in the market
and was not a result of any untruths or omissions in
the registration statement (15 U.S.C. § 77k(e)).
g. Damage Calculation:
i. The value of the securities at the time of the lawsuit.
ii. The price at which the plaintiff sold the securities
before the lawsuit.
iii. The price at which the plaintiff sold the securities
after the lawsuit was brought but before judgment.
IV. Section 12(a)(1)
a. Defined: imposes strict liability on any person who offers
or sells a security if certain registration requirements are

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 not complied with and no exemption from registration
applies (15 U.S.C. §§ 77d, 77e).
b. Plaintiffs: Purchasers of a security sold in violation of
certain registration requirements where no exemption
applies
c. Defendants: Strict liability extends to any person who
sells a security in violation of certain registration
requirements where no exemption applies.
i. Liability generally falls on: (1) The buyer’s
immediate seller (not remote sellers); (2) Other
parties who successfully urged the buyer to
purchase securities for financial gain, such as
underwriters, broker-dealers, selling agents, and
others directly involved in the selling process.
d. Elements:
i. A sale or offer to sell securities by the defendant.
ii. The absence of a registration statement or failure to
meet prospectus requirements.
iii. The use of the mail or facilities of interstate
commerce in connection with the sale or offer.
iv. Damages
v. NOTE: STRICT LIABILITY SO STATE OF MIND
IRRELEVANT
e. Defenses:
i. That the plaintiff is an active, voluntary participant in
the unlawful activity and is at least equally at fault
(in pari delicto) (Pinter, 486 U.S. at 636).
ii. That the security at issue was exempt from
registration (15 U.S.C. §§ 77c and 77d). The issuer
has the burden of showing that an exemption is
available.
f. Damages:
i. (1) Rescission: Recovery of the amount paid for a
security with interest less any income received on
returning the securities to the issuer.
ii. (2) If P no longer owns: If a defendant can show
that any or all of the plaintiff’s damages arose from
something other than the alleged misstatement or
omission, then the amount can be reduced or may
not be recoverable

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V. Section 12(a)(2)
a. C
VI. F