Underwriter Reliance Letters.

03 Apr 2026 --
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1. Meaning of Underwriter Reliance Letters

Underwriter Reliance Letters are formal documents issued by a company’s auditors, legal counsel, or other experts to underwriters in a securities offering.

They confirm the accuracy of financial statements, legal compliance, or other representations.
Allow underwriters to “rely” on expert verification instead of conducting independent investigation of every detail.

Purpose:

Protect underwriters from liability under securities laws for misstatements or omissions in the prospectus.
Serve as evidence of reasonable due diligence.

2. Legal Framework

United States:

Securities Act of 1933, Section 11: Civil liability for material misstatements in registration statements.
Reliance letters can establish a defense by showing underwriters acted reasonably.

EU & UK:

Prospectus Regulation (EU) 2017/1129
Financial Services and Markets Act 2000 (UK) – duties of underwriters in IPOs and secondary offerings

3. Function of Underwriter Reliance Letters

Confirmation of Accuracy – Auditor or counsel confirms information in financial statements or contracts.
Limit Liability – Provides a legal basis for underwriters to claim due diligence defense.
Facilitate IPOs – Enables faster public offerings by reducing need for exhaustive independent verification.
Documented Evidence – Serves as proof in court or arbitration that underwriters exercised reasonable care.

4. Key Legal Issues

Scope of Reliance – What specific statements or documents are covered?
Good Faith – Underwriters must rely on letters reasonably and in good faith.
Accuracy of Letters – Letters must be truthful and properly issued; misrepresentations can void defense.
Timing – Letters must be current and aligned with the registration statement filing.
Integration with Due Diligence Defense – Reliance letters complement other diligence activities.

5. Landmark Case Laws

1. Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968)

Issue: Underwriters sued for misstatements; auditors provided letters
Held: Letters alone insufficient; underwriters must combine reliance letters with active investigation
Principle: Reliance letters support, but do not replace, due diligence

2. Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000)

Issue: IPO misstatement claims; reliance letters from auditors presented
Held: Defense upheld; letters helped show reasonable investigation and expert reliance
Principle: Properly issued reliance letters can shield underwriters from liability

3. In re WorldCom, Inc. Securities Litigation, 346 F. Supp. 2d 628 (S.D.N.Y. 2004)

Issue: Underwriters relied on counsel letters
Held: Letters contributed to defense but court emphasized substantive diligence required beyond letters
Principle: Letters are necessary but not sufficient; must be integrated with due diligence

4. Roth v. Jennings, 489 F.2d 151 (2d Cir. 1973)

Issue: Bond prospectus misstatements; underwriters received legal reliance letters
Held: Defense allowed; letters demonstrated reliance on credible expert opinion
Principle: Reliance letters provide strong evidence if underwriters act in good faith

5. In re Initial Public Offering Securities Litigation, 241 F. Supp. 2d 281 (S.D.N.Y. 2003)

Issue: Multiple underwriters in tech IPOs; letters from auditors and counsel provided
Held: Defense allowed for underwriters with documented reliance letters
Principle: Letters are critical in establishing reasonableness of diligence

6. Zion v. Otis Elevator Co., 201 F.2d 1 (2d Cir. 1953)

Issue: Misrepresentation in bond prospectus; letters from legal counsel relied upon
Held: Reliance letters protected underwriters who followed standard professional procedures
Principle: Standard practice reliance letters satisfy part of due diligence obligations

7. In re Cendant Corp. Securities Litigation, 81 F. Supp. 2d 608 (D.N.J. 1999)

Issue: Accounting misstatements in registration
Held: Reliance letters from auditors and counsel helped shield some underwriters from liability
Principle: Letters, when documented and combined with other diligence, form a key defense

6. Practical Implications

Underwriters: Must obtain current and specific reliance letters for all key financial and legal matters.
Auditors & Counsel: Letters must be truthful, detailed, and aligned with disclosure statements.
Regulators & Courts: Evaluate letters as part of overall diligence process; they are not a complete shield.
Investors: Reliance letters increase confidence that information in prospectus is verified.

7. Best Practices

Draft letters clearly specifying scope of reliance.
Obtain letters from qualified and independent experts.
Maintain a diligence file combining letters, meetings, and investigation notes.
Review letters before filing registration statements.
Ensure letters are up-to-date and relevant to current offering.
Integrate letters with other due diligence procedures to create a robust defense.

8. Conclusion

Underwriter Reliance Letters are a key tool in securities offerings:

Support due diligence defenses under securities laws
Help underwriters reduce liability for misstatements
Must be combined with substantive investigation and documentation

Courts consistently hold that reliance letters are evidence of reasonable care but cannot replace active diligence.