Second Circuit Clarifies Scope of Liability for Securities Act Claims

In a matter of first impression, the Second Circuit recently affirmed the district court’s dismissal of Securities Act claims in Knapp v. Barclays PLC, No. 25-1631, 2026 WL 806009 (2d Cir. Mar. 24, 2026). The court concluded that (1) a reverse split did not constitute a “sale” under Section 12 of the Securities Act of 1933, and (2) a supplemental pricing statement was not sufficiently traceable to establish Section 11 liability. This holding cabins the scope of Securities Act liability and provides meaningful defenses for defendants facing similar challenges.

Background

Plaintiffs held exchange-traded notes (ETNs). These ETNs were subsequently condensed through a 4:1 “reverse split” that swapped every four outstanding notes for a single note of equal value. Knapp, 2026 WL 806009 at *1.

Following the reverse split, Plaintiffs sued Defendant, its subsidiary and its executives (collectively, the Bank). Id. Plaintiffs asserted that the Bank violated Section 12 of the Securities Act by selling the ETNs to Plaintiffs without registering them with the Securities and Exchange Commission (SEC). Id. They also alleged violations of Section 11 by attempting to tie the ETNs to a registration statement containing allegedly misleading statements. Id.

The district court dismissed both claims in 2025. Plaintiffs appealed.

Second Circuit Decision

On appeal, the Second Circuit considered two issues of first impression. First, the court assessed whether the reverse split qualified as a statutory “sale” sufficient to give rise to Section 12 liability.[1]

The court explained that the critical question “‘[i]n determining whether changes in the rights of a security holder involve a purchase or sale’—as opposed to a not-for-value re-shuffling of assets” was “whether there has occurred such significant change in the nature of the investment or in the investment risks as to amount to a new investment.” Id. at *3 (quoting Gelles v. TDA Indus., Inc., 44 F.3d 102, 104 (2d Cir. 1994)).

Here, the court observed that “[g]arden-variety splits” merely “recast the number of securities the investor holds” and “rarely bring about such ‘significant changes.’” Id. (emphasis in original). Such splits alter only the “form” of securities, not the underlying assets. Id. The court accordingly held that the reverse split was “exactly the kind of non-substantive exchange that ‘will not be treated as a sale.’” Id.

The court also looked to the Securities Act’s purpose of promoting full disclosure of information necessary for informed investment decisions. Because investors made no investment decision in the face of a mandatory split, extending liability here to the split would not further the Act’s purpose. Id.

Second, the court assessed the viability of Plaintiffs’ Section 11 claims. Under Section 11, investors who have acquired securities pursuant to a “registration statement . . . contain[ing] . . . an untrue statement of material fact,” 15 U.S.C. § 77k(a), may “sue certain enumerated parties” involved in issuing those securities. Id. at *4.

Citing the Supreme Court’s decision in Slack Technologies, LLC v. Pirani, 598 U.S. 759, 767, 770 (2023), the court explained that Section 11 focuses on securities issued under a “particular registration statement.” Knapp, 2026 WL 806009 at *4. Therefore, plaintiffs asserting Section 11 claims must show that they acquired securities “traceable to [that] allegedly defective . . . statement.” Id. (emphasis in original). 

Plaintiffs argued that the post-split ETNs were traceable to the pricing supplement for two reasons. First, the pricing supplement referenced the reverse split and noted the post-split ETNs’ new electronic identifying number. Id. at *5. Second, Plaintiffs argued the pricing supplement was circulated to comply with SEC Rule 416(b), which requires issuers to “amend” registration statements after reverse splits. Id.

The court disagreed, finding that Plaintiffs failed to plead any facts tracing their post-split ETNs to the pricing supplement. Id. The court explained that Rule 416(b) required issuers to amend the registration statement before issuing any undistributed securities following a split, not before effecting the split itself. Id. The court also looked to the pricing supplement’s own terms, which demonstrated that it governed the “initial sale of the [post-split] ETNs” that the Bank still held in inventory and had not distributed via the split. Id. The court further observed that the supplement referred to the split in the past tense, did not list the reverse split among a series of previous “issu[ances],” and that another pricing supplement covering a separate batch of ETNs similarly omitted any mention of the reverse split as a previous issuance. Id. The Second Circuit, in conclusion, affirmed the judgment of the district court dismissing Plaintiffs’ claims in their entirety. Id. at *6.

Key Takeaways

The Second Circuit’s decision provides meaningful limits to issuer liability under the Securities Act. Several key points emerge from the ruling:

First, the court affirmed that a reverse split cannot constitute a “sale” under Section 12. The court also left open the possibility that other “non-substantive” transactions may similarly fall outside the definition of “sale” and be exempt from Section 12 liability.

Second, issuers facing Section 12 claims should assess whether the challenged transactions significantly changed the “nature . . . or risk” of the investment, or whether the transactions are “non-substantive.” Issuers should also consider whether the challenged transactions were mandatory or involved active investor decision-making.

Third, the court’s application of the Supreme Court’s traceability test from Slack v. Pirani confirms that courts continue to scrutinize whether plaintiffs have met their burden of tracing securities to allegedly defective statements under Section 11.

Finally, while the decision does not change the need for issuers to ensure compliance with registration requirements and make clear and accurate disclosures, it provides meaningful tools for defendants seeking to counter expansive liability theories under the Securities Act.

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* Kerrigan McCabe, a Commercial Litigation Associate and candidate for the New York State Bar, contributed to this article.