A negative assurance letter, often called a 10b-5 letter, is a document that securities counsel delivers to underwriters at the closing of a securities offering stating that nothing came to the lawyers’ attention during their review that leads them to believe the offering documents contain an untrue statement of material fact or omit a material fact needed to make the disclosure not misleading. Underwriters require it because federal law exposes them to personal liability for misleading disclosure, and this letter documents that counsel scrutinized the offering with that liability in mind. Both SEC-registered offerings and Rule 144A private placements routinely require one as a closing condition.
What the Letter Actually Says
The defining feature of the letter is its deliberately negative phrasing. Counsel does not affirm that every fact in the offering document is accurate. Instead, counsel states that nothing came to their attention during their review that causes them to believe the document contains an untrue statement of material fact or omits something material.
The difference matters. An affirmative guarantee would put the law firm in the position of vouching for every number, projection, and business description in a document that can run hundreds of pages. The negative format communicates the scope and outcome of the review without turning attorneys into guarantors of the issuer’s disclosure.
This is not a formal legal opinion. A legal opinion in a securities offering typically addresses whether the securities are validly issued, whether the issuer is properly organized, and whether the transaction documents are binding. The negative assurance letter addresses a different question: whether the disclosure reads clean after professional scrutiny. Both documents appear in the closing package, but they serve distinct functions and carry different levels of legal exposure for the firm delivering them.
Materiality is the standard that governs the review. Information is material if a reasonable investor would consider it important when deciding whether to buy or sell, meaning there is a substantial likelihood it would alter the total mix of available information. That is the lens attorneys apply to every statement and every potential omission in the offering document.
What the Letter Covers and What It Excludes
Every negative assurance letter contains carve-out paragraphs listing categories of information the attorneys did not review. Financial statements are the most significant exclusion. Audited and unaudited financials are the responsibility of independent accountants, who provide their own comfort letters under separate professional standards.1National Association of Bond Lawyers. Model Letter of Disclosure Counsel – 2018 Edition Statistical data, mathematical computations, forecasts, and projections are also excluded because lawyers have no professional basis for evaluating numerical accuracy.
These exclusions track a broader distinction in securities law between “expertized” and “non-expertized” portions of a registration statement. Expertized portions are sections prepared or certified by a named expert, most commonly the audited financial statements certified by the accounting firm. The auditor bears primary responsibility for those sections. Non-expertized portions include everything else: the business description, risk factors, management discussion, and legal proceedings. The underwriter’s due diligence obligation is heaviest for the non-expertized portions, and the negative assurance letter covers that same territory. Courts have been sharply critical of underwriters who rely on management’s word alone without independent verification of these sections.
Why Underwriters Insist on It
The letter exists because of Section 11 of the Securities Act of 1933. That statute allows anyone who buys a security to sue if the registration statement contained a material misstatement or left out a material fact. The list of potential defendants is broad: every person who signed the registration statement, every director of the issuing company, every expert who certified part of the filing, and every underwriter involved in the offering.2Office of the Law Revision Counsel. 15 USC 77k – Civil Liabilities on Account of False Registration Statement
Section 11 does not require investors to prove the defendant knew the statement was false or intended to deceive anyone. Liability is essentially strict for the issuer. For everyone else on that list, the only escape hatch is the due diligence defense. To invoke it, an underwriter must prove that after conducting a reasonable investigation, they had reasonable grounds to believe the registration statement was accurate and complete at the time it became effective.2Office of the Law Revision Counsel. 15 USC 77k – Civil Liabilities on Account of False Registration Statement The negative assurance letter is the primary evidence underwriters point to when showing they took that investigation seriously.
The letter takes its common name from Rule 10b-5 under the Securities Exchange Act of 1934, the broadest antifraud provision in federal securities law. The rule makes it illegal, in connection with buying or selling any security, to make an untrue statement of a material fact, omit a fact that makes other statements misleading, or engage in any scheme that operates as fraud.3Legal Information Institute. Rule 10b-5 Unlike Section 11, Rule 10b-5 applies to all securities transactions, not just registered offerings.
Registered Offerings and Rule 144A Placements
In a registered offering, Section 11 creates the statutory liability that makes the due diligence defense necessary, and the letter directly supports that defense. In a Rule 144A placement sold only to qualified institutional buyers, Section 11 does not apply because there is no registration statement. The Supreme Court also held in Gustafson v. Alloyd Co. that Section 12(a)(2) of the Securities Act does not extend to private transactions, further narrowing the statutory liability framework for unregistered deals.
Underwriters still insist on the letter in 144A offerings because Rule 10b-5 itself applies to every securities transaction, registered or not. Underwriters face potential fraud liability under the rule if the offering memorandum contains material misstatements. The letter documents that counsel reviewed the disclosure and found no red flags, and it reflects market practice: institutional buyers expect underwriters to have conducted this level of diligence regardless of the regulatory framework.
The Investigation Behind the Letter
A law firm cannot sign a negative assurance letter based on a casual read of the offering document. The letter represents the end product of an investigation that often spans several weeks and involves senior attorneys billing significant hours. The depth of the review is what gives the letter its weight.
Attorneys review the issuer’s corporate records, including board minutes, shareholder resolutions, and organizational documents, to confirm that the company’s governance history matches what the disclosure describes. They examine material contracts such as significant debt agreements, customer and supplier arrangements, intellectual property licenses, and real estate leases. They compare these documents against the descriptions in the offering memorandum or registration statement, looking for discrepancies or omissions.
Management interviews are where the real probing happens. Attorneys sit down with senior executives and ask pointed questions about undisclosed liabilities, threatened or pending litigation, regulatory investigations, and any recent developments that could change the company’s financial picture. A skilled securities lawyer will press on vague answers and cross-reference what management says against what the documents show. The interviews also cover internal controls and any known weaknesses in financial reporting.
The investigation extends to reviewing correspondence with regulators, recent SEC filings for reporting companies, and any publicly available information that might contradict the offering document. For an IPO, where there is no prior public filing history, the review tends to be more intensive because the company has never been subjected to SEC scrutiny before.
When the Letter Is Delivered
The letter is not a one-time deliverable. The underwriting agreement typically requires it at two key moments: first at the signing or pricing of the deal, and again at closing when the issuer delivers the securities in exchange for payment. The closing-date letter is often called a “bring-down” because it brings the original letter’s conclusions forward to the closing date, confirming that nothing has changed since the initial delivery.4U.S. Securities and Exchange Commission. Underwriting Agreement – Exhibit 1.1 to Form S-1/A
If the deal involves a delayed draw-down or a shelf offering with multiple takedowns, additional bring-down letters may be required at each subsequent issuance. The underwriting agreement specifies these delivery conditions, and failure to deliver a satisfactory letter on time is grounds for the underwriters to walk away from the transaction.
Who Can Rely on It
Underwriters are the primary audience. They need the letter to support their due diligence defense, and the underwriting agreement names it as a required closing deliverable. In a typical deal, two negative assurance letters are produced: one from the issuer’s counsel covering the registration statement or offering memorandum, and one from the underwriters’ own counsel providing an independent review.4U.S. Securities and Exchange Commission. Underwriting Agreement – Exhibit 1.1 to Form S-1/A This dual-layer approach means both sides of the transaction have documented their diligence separately.
The letter is addressed to specific parties, and it explicitly states that no one else can rely on it. That restriction is deliberate. Expanding reliance expands the universe of people who could sue the law firm if the offering later turns out to contain misstatements. The issuer’s disclosure counsel represents the issuer, not the underwriters, and the letter makes that distinction clear. If an underwriter wants to rely on the issuer’s counsel’s letter rather than obtaining its own, a separate reliance letter with additional disclaimers is the standard approach.
Requests for reliance from other parties, such as bond insurers, credit enhancers, or the ultimate purchasers of the securities, are generally considered inappropriate. These parties have different roles in the transaction and different liability exposures. They are not in the same position as an underwriter defending against a Section 11 or Rule 10b-5 claim, and extending the letter to them would create liability exposure that the law firm’s engagement was never designed to cover.
Liability Risks for the Law Firm
Issuing the letter is not without risk for the firm, but the current legal framework provides substantial protection for attorneys who stay within their traditional advisory role. In Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court held that the “maker” of a statement under Rule 10b-5 is the person or entity with ultimate authority over the statement’s content and whether to communicate it. Someone who merely prepares or drafts a statement on behalf of another is not its maker.5Justia US Supreme Court. Janus Capital Group Inc v First Derivative Traders, 564 US 135 Since securities lawyers typically draft offering documents for the issuer to publish under the issuer’s name, private plaintiffs usually cannot hold the law firm liable as a primary violator.
That protection has limits. In Lorenzo v. SEC, the Court held that a person who disseminates a false statement with intent to defraud can be liable under subsections (a) and (c) of Rule 10b-5, even if they did not “make” the statement and thus fall outside subsection (b).6Supreme Court of the United States. Lorenzo v SEC, No 17-1077 An attorney who goes beyond drafting and actively distributes misleading information to investors crosses the line from protected adviser to potential primary violator.
The SEC adds another layer of exposure. While private plaintiffs face the high bar set by Janus, the SEC can bring enforcement actions against attorneys as aiders and abettors if they recklessly or knowingly provided substantial assistance to securities fraud. Enforcement consequences can include financial penalties, injunctions barring participation in future offerings, and mandatory retention of independent compliance consultants. In the most serious cases, the Department of Justice may pursue criminal charges that carry prison time and professional disbarment.
Malpractice liability is the more practical concern for most firms. If a letter is issued after a deficient investigation and the offering later results in losses, the underwriters who relied on it may pursue claims against the law firm for professional negligence. The carve-outs and limitations in the letter help manage this risk, but they do not eliminate it when the underlying due diligence was genuinely inadequate. This is why reputable firms treat the investigation process with the seriousness it demands, and why partners, not junior associates, typically sign the letter.