In Knapp v. Barclays PLC, No. 25-1631, 2026 WL 806009 (2d Cir. Mar. 24, 2026), the United States Court of Appeals for the Second Circuit handed down an important win for issuers, underwriters and other participants in the structured-products market. In a precedential opinion addressing issues the Court described as matters of first impression, the three-judge panel held that Barclays PLC’s (“Barclays”) mandatory 4:1 reverse split of certain exchange-traded notes (“ETNs”) did not constitute a “sale” under Section 12(a)(1) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77l(a)(1), and that investors also failed to satisfy tracing requirement for a claim under Section 11 of the Securities Act, 15 U.S.C. § 77k. The ruling reinforces meaningful limits on private Securities Act claims, particularly where plaintiffs attempt to recharacterize mechanical corporate actions as new securities transactions.
The decision arises from Barclays’ widely reported over-issuance of securities under its U.S. shelf registration program. After losing seasoned issuer status, Barclays Bank PLC was required to track available registered capacity in real time. According to the Securities and Exchange Commission (“SEC”), Barclays failed to establish adequate controls for that purpose and ultimately offered and sold approximately $17.7 billion in unregistered securities. Barclays disclosed the issue in March 2022, announced a rescission offer for certain investors, and later agreed to an SEC resolution involving a $200 million civil penalty plus disgorgement and prejudgment interest deemed satisfied by the rescission offer. Barclays separately disclosed that the shelf over-issuance had exceeded registered capacity by approximately $15.2 billion and that it expected significant financial impact from the rescission process.
Against that backdrop, the investor-plaintiffs in Knapp focused on one Barclays product: VXX ETNs. In April 2021, Barclays implemented a mandatory 4:1 reverse split, exchanging every four outstanding notes for one note of equivalent value. Plaintiffs contended that this reverse split itself was an unregistered “sale” actionable under Section 12(a)(1). They also argued that the post-split notes were traceable to an April 2021 pricing supplement, which they said could support a Section 11 claim. The United States District Court for the Southern District of New York dismissed those claims, and the Second Circuit affirmed in full.
A mandatory reverse split is not automatically a Securities Act “sale”
The most significant aspect of the opinion is the court’s analysis of whether a mandatory reverse split can qualify as a “sale” under the Securities Act. Relying heavily on the Second Circuit’s earlier decision in Gelles v. TDA Industries, Inc., 44 F.3d 102 (2d Cir. 1994), the panel framed the question functionally: courts must determine whether there has been “such significant change in the nature of the investment or in the investment risks as to amount to a new investment.” Applying that standard, the court concluded that Barclays’ reverse split did not meaningfully change the underlying investment. It merely altered the number of notes investors held while leaving the economic substance of the position intact.
The panel also stressed a second point that may prove equally consequential in future cases: the importance of investor choice. In the court’s words, “the presence of an investment decision is crucial to the finding of a purchase or sale.” Here, investors had no choice whether to participate. The reverse split was mandatory and arose from rights embedded in the original terms of the ETNs. That absence of volition strongly supported the conclusion that the transaction was not a new sale, but instead an “involuntary and immaterial swap.” For issuers and market participants, that language is significant because it suggests that courts in the Second Circuit will focus on substance and investor decision-making, not merely formal changes in the number or denomination of securities.
Plaintiffs attempted to avoid that result by arguing that the split had practical consequences for redemption rights and liquidity. But the court was unpersuaded. It held that those arguments did not transform the reverse split into a new investment or a materially different asset. The opinion therefore draws an important doctrinal line: a split, consolidation, or similar mechanical adjustment does not become a Securities Act sale unless it meaningfully changes the nature of the holder’s investment, rather than simply changing the number of units held.
Knapp also reinforces the rigor of Section 11 tracing after Slack Technologies, LLC v. Pirani
The Second Circuit’s tracing analysis is also likely to resonate beyond the ETN context. After the Supreme Court’s decision in Slack Technologies, LLC v. Pirani, 598 U.S. 767 (2023). those asserting Section 11 claims must show that the securities they purchased are traceable to a specific allegedly defective registration statement. In Knapp, plaintiffs argued that the April 2021 pricing supplement covered the notes they held after the reverse split. The court rejected that theory based on the supplement’s own terms, concluding that it governed only the initial sale of post-split ETNs that Barclays still held in inventory for market-making transactions, not the already-outstanding ETNs that investors continued to hold in split-adjusted form.
That holding matters because it treats tracing as a genuine statutory limitation rather than a pleading formality. The court would not allow plaintiffs to bridge the gap by pointing to product continuity or by arguing that the split somehow transformed existing ETNs into newly registered securities.
Nor did SEC Rule 416(b), 17 C.F.R. § 230.416(b), save the claim; the panel agreed that the rule addresses anti-dilution adjustments for securities not yet distributed, not already-issued securities simply affected by a split. The message is clear: in the Second Circuit, plaintiffs cannot satisfy Section 11 merely by identifying a later offering document associated with the same security if their holdings are not actually traceable to that document.
Why this decision matters for issuers and disclosure counsel?
For public companies, banks, and structured-products issuers, Knapp provides useful clarity on two recurring risk areas. First, it narrows the circumstances in which a mandatory corporate or product-structure adjustment can be reframed as a new Securities Act sale. Second, it confirms that Section 11 tracing remains a meaningful obstacle to liability, particularly in cases involving securities that trade in the market over time and are later subject to supplemental offering materials.
The decision should not, however, be read as minimizing the importance of registration compliance and internal controls. Barclays still faced substantial regulatory exposure, financial cost, and reputational harm from the underlying over-issuance. The SEC’s settlement makes plain that failures in real-time registration-capacity tracking can carry severe consequences even where private plaintiffs later struggle to fit those facts into Sections 11 or 12.
For legal and compliance teams, the practical takeaway is twofold: Knapp is a favorable defense precedent on the scope of private Securities Act liability, but it also underscores the continuing importance of robust controls around shelf registrations, structured-note issuance, and disclosure governance.
In short, Knapp v. Barclays is a narrow but important opinion. It limits efforts to treat mandatory reverse splits as actionable “sales,” reinforces the post-Slack discipline of tracing, and offers issuers a stronger basis to challenge expansive Securities Act theories untethered to the economic substance of the transaction at issue. For companies operating in the capital markets and for the lawyers who advise them, that makes Knapp a decision worth close attention.