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Series 79 practice questionmediumDue Diligence Defense

What is the 'due diligence defense' under Section 11 of the Securities Act?

  1. AA defense available only to the issuer when the registration statement contains material misstatements
  2. BA defense based on the investor's failure to read the prospectus
  3. CA defense available to underwriters, directors, and experts, where they can demonstrate they conducted a reasonable investigation and had reasonable grounds to believe the registration statement was accurate✓ Correct answer
  4. DA defense that applies only when the SEC has approved the registration statement
Explanation

Why C — A defense available to underwriters, directors, and experts, where they can demonstrate they conducted a reasonable investigation and had reasonable grounds to believe the registration statement was accurate

The due diligence defense under Section 11(b)(3) allows defendants other than the issuer (such as underwriters, directors, officers who signed the registration statement, and experts for non-expertised portions) to avoid liability by demonstrating they conducted a reasonable investigation and had reasonable grounds to believe the statements in the registration statement were true and that there were no material omissions. The standard of reasonableness is that of a prudent person in the management of their own property. The issuer has strict liability and cannot assert a due diligence defense.

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