Section 11 refers to Section 11 of the Securities Act, formally 15 U.S.C. § 77k, which allows purchasers of a security in a public offering to bring a civil action against the issuer, underwriter, or anyone who signed or helped prepare the registration statement for any misrepresentations in the registration statement.
Section 11 provides that issuers, underwriters, officers and directors of the issuer, and any other expert who helped prepare the registration statement (e.g. accountants, lawyers) are strictly liable for any misrepresentation or omission of material information, i.e. securities fraud, in their registration statement. Compared to Rule 10b-5, Section 11 relaxes the mental state requirement by making defendants strictly liable, as opposed to Rule 10b-5 which requires sellers of securities to have knowledge of the fraud. Section 11 applies only to public offerings, while Rule 10b–5 applies to public offerings and private placements.
Pleading Under Section 11
To bring a Section 11 cause of action, the plaintiff must have standing, the defendant must be one of the possible defendants enumerated in the statute, and the plaintiff must satisfy the elements of Section 11 securities fraud.
A plaintiff has standing under Section 11 when they can trace their acquisition of a security to an offering with a registration statement that contained a misrepresentation. For example, in Krim v. pcOrder.com, Inc., 402 F.3d 489 (5th Cir. 2005), the Fifth Circuit ruled that plaintiffs alleging Section 11 liability lacked standing where they only showed that it was statistically likely that they purchased their securities in the offering with a fraudulent registration statement. The Court instead required that plaintiffs show that they could actually trace their purchase to the offering to the fraudulent registration statement. Circuit courts, however, are split on how particularly the plaintiff must tie their purchase to the fraudulent registration statement.
The defendant must also fall within one of the following categories of defendants in Section 11. This includes the issuer, underwriters, directors and officers of the issuer, and any expert who helped prepare the registration statement. The defendant, except for issuers, may be able to plead a due diligence defense and avoid liability, however.
If the plaintiff satisfies standing and the defendant has no due diligence defense, then the plaintiff must only show that the registration statement contained a material misstatement or omission. The U.S. Supreme Court in Omnicare v. Laborers District Council (US 2015) clarified that statements predicated by “we believe” which eventually prove to be untrue are generally pure opinion, and cannot create the basis for Section 11 liability. The Court emphasized that “whether a statement is ‘misleading’ is an objective inquiry that depends on a reasonable investor’s perspective,” and a reasonable investor would know that statements predicated by “we believe” are opinion, not statements of fact.
[Last updated in January of 2022 by the Wex Definitions Team]