Section 11 of the securities act: The cornerstone needs some tuckpointing

Section 11 of the Securities Act provided for civil liability for the sale of securities pursuant to a materially false or misleading registration statement. Developments since enactment necessitate revision of section 11, particularly as the focus of litigation involving initial public offerings shifts to section 11 in reaction to the burdens imposed by Congress under Rule 10b-5 of the Securities Exchange Act. The 1995 amendment of section 11 that modified joint and several liability by providing for proportionate liability only for outside directors created inconsistencies in the statutory scheme that should be cured. The special protection afforded outside directors vis-à-vis other categories of defendants should be re-examined in view of recent corporate scandals. Moreover, sound policy supports extending proportionate liability to all nonexpert individuals who are subject to suit under section 11 who do not act with actual knowledge of the misrepresentation or omission. The statutory safe harbor for forward-looking statements that was enacted in 1995 does not apply to an initial public offering. That safe harbor should protect statements made in that context; there is no convincing rationale for the exclusion, and the other protections for forward-looking statements are not adequate for this purpose. Further, in the rare case where the issuer of securities did not know and could not have known of the material deficiency in disclosure, issuer strict liability should be relaxed. Concurrent state and federal jurisdiction of section 11 claims should be re-examined. These and other suggested reforms would harmonize section 11 with other provisions of the federal securities laws.