Disclosures as Warranties

The US federal securities laws are usually described as a disclosure regime: rules that force information into the market to protect investors and promote efficiency. But disclosure means little without liability. Provisions such as Sections 11 and 12(a)(2) of the Securities Act give those rules their teeth by making issuers strictly responsible for accuracy. What has gone mostly unnoticed is how this liability actually works.

The Securities Act of 1933 is often portrayed as a New Deal invention, drafted in a weekend and born from crisis rather than from centuries of legal evolution. Yet its substance is not as radical as that origin story implies. The Act replicates, almost perfectly, the structure of express warranty law, the set of common-law rules that make sellers strictly liable for factual claims about what they sell. Both warranty law and the Act were trying to solve the same engineering problem of modern commerce: how to make large-scale, mass-advertised, impersonal transactions reliable when fraud liability alone can’t keep up. In both, the answer is the same: strict liability for factual affirmations, backed by rescissory remedies that restore the bargain when those affirmations prove false.

Three claims follow from this framing. First, certain issuer disclosures—registration statements, prospectuses, and other offering materials—create liability even apart from the Securities Act because they operate as express warranties: factual assurances that form part of the bargain. Second, the Securities Act’s famously rigid liability provisions, Sections 11 and 12(a)(2), function as a duplicative warranty regime, echoing warranty law’s near-strict liability and remedial design. Third, by channeling investors into impersonal transactions without negotiated contracts, the Act created the very conditions in which such warranties can bind without exclusion. Paradoxically, warranty-style liability can thrive in public markets precisely because those markets rely less on written contracts.

Disclosures, in other words, are affirmations of fact. Under ordinary contract law, express warranties are similarly affirmations that become the ‘basis of the bargain’. Such statements appear—indeed, are required—in registration statements and prospectuses. Private companies issue similar materials, like private placement memoranda or offering circulars, containing factual assurances. In the private context, it is virtually uncontested that the liability attaching to these materials is contractual, while for public securities, accuracy is generally enforced by the liability provisions of the Securities Act.

The parallels between Securities Act liability and express warranty liability are striking. Section 11 imposes near-strict liability for false statements in a registration statement, just as a seller is bound by an express warranty regardless of intent. Section 12(a)(2) enforces the accuracy of a prospectus without requiring scienter. Even the remedies align: both rely on rescission or rescissory damages to restore parties to their original position when benefit-of-the-bargain damages are impossible to calculate. Similarly, both regimes have evolved mechanisms to tether the item sold to the affirmation the seller made about it (and is thus strictly liable for), preventing the accidental creation of an insurance regime.  This role has been performed at various times in express warranty law by privity, reliance, and identification doctrines; the Securities Act links affirmations to securities sold using the tracing requirement.

But express warranty liability is fragile. Warranties that appear outside the four corners of a contract, like disclosures or marketing materials, can be excluded almost effortlessly through boilerplate integration clauses. Sophisticated buyers sometimes succeed in incorporating such warranties, but doing so requires bargaining power and careful drafting. This asymmetry means that claims brought for breach of express warranties based on disclosures and marketing materials in private securities transactions are rarely successful. And in the context of public securities, such claims are virtually nonexistent because lawyers and courts rely on Securities Act claims.

The irony is that the Act itself created the market structure in which express warranty liability can actually work. Exchange-traded and widely held securities must be registered under the Act and are rarely purchased through negotiated contracts. Public investors therefore generally buy only in settings where disclosures ‘stick’, precisely because no written contract exists to disclaim them. Although the Act’s liability scheme is redundant—duplicating warranty law—it built the environment that allows true warranty liability to flourish.

Seen this way, the Securities Act’s achievement is not just that it compels disclosure, but that it stabilizes the architecture of a market where disclosures can function as enforceable promises. Though drafted in a weekend rather than evolved over centuries, the Act solved the same problem warranty law was struggling to address elsewhere: sustaining trust in mass, anonymous exchange. Recasting the Act in this light complicates the familiar view of it as a sui generis New Deal innovation. Its mechanism is older than its story. The Act did not invent a new kind of liability so much as transpose an existing one into the public securities marketplace. In that sense, the Securities Act is not an exception to the evolution of private law but part of it: a statutory branch of warranty law adapted to the distinctive problems of modern capital markets.

The full paper is available here.

Emily Strauss is an Associate Professor of Law at UC Law San Francisco.