Corporate Counsel Daily, ETN split was not a ‘sale,’ can’t be traced to registration, (Mar 25, 2026)

By Mark S. Nelson, J.D.

The purposes of the Securities Act and recent U.S. Supreme Court precedent cautioned against finding that a “split” resulted in securities traceable to a particular registration statement.

A New York federal appeals panel held that Barclays PLC did not violate federal securities laws when it conducted a reverse split of exchange-traded notes (ETNs) while also conducting a sale of similar ETNs pursuant to a supplemental registration statement. The district court found no sale of securities and that the plaintiff investors could not trace their ETNs to the pricing supplement. The Second Circuit, addressing the “sale” and traceability issues in this context as questions of first impression, affirmed the lower court in its entirety (Knapp v. Barclays PLC, No. 25-1631 (2d Cir. Mar. 24, 2026)).

The ETNs at issue were debt securities that tracked an underlying index which allows for the hedging of the risk of market volatility. Investors could hold the ETNs to maturity, redeem them in blocks, or trade them on a secondary market. Barclays eventually conducted a 4:1 reverse split of the ETNs, but that event followed a period of alleged confusion on the part of the bank because, at the time when it issued the ETNs it had also settled SEC enforcement proceedings that deprived it of its well-known seasoned issue (WKSI) status, which affected its ability to conduct ongoing shelf offerings and led to the bank issuing unregistered securities. The disputed split occurred nearly simultaneously with the issuance of post-split ETNs under a more recent pricing supplement.

No “sale” of securities. The court began its analysis with an examination of Securities Act Section 12, which holds issuers liable if they fail to register securities under Section 5 of the Act. The question was whether the 4:1 split of the ETNs amounted to a purchase or sale of securities.

The court explained that the Act defines “sale” to mean every disposition of a security for value. As a result, for an existing security to undergo a sale, there must be some change in the underlying investment or its attendant risks. A leading treatise cited by the court also explained that a sale hinges on whether there was an investment decision and, in particular, in the context of splits, a consideration of whether the split was involuntary.

The court noted that the issuer of the ETNs had the right to split them. The court further observed that finding no “sale” here would be consistent with the purposes of the Securities Act.

In finding that no “sale” occurred when the ETNs were split, the court also rejected arguments made by the plaintiff investors that tried to analogize the ETN split to SPAC and de-SPAC transactions, and rejected arguments that suggested differences between sales in the context of debt and equity securities should have resulted in liability here.

No traceability. Section 11 of the Securities Act provides for issuer liability for misleading statements made under a registration statement. The U.S. Supreme Court recently clarified that this provision requires traceability of shares to a particular registration statement consistent with the language of Section 11. For example, the shareholder in the Supreme Court case could not trace his shares when he bought both registered and unregistered shares.

Here, the plaintiff ETN investors argued that a pricing supplement under which post-split ETN shares were issued amounted to a new registration statement to which the plaintiff’s ETNs could be traced. The court, however, said that was inaccurate because the supplement only addressed the ETN inventory Barclays still held and did not otherwise affect ETNs already issued and subject to the split. As a result, the plaintiff investors’ ETNs were not traceable to the supplement.

The case is No. 25-1631.

Judge: Per curiam.

Attorneys: Jonathan Bridges (Sbaiti & Co. PLLC) for Jeffrey Knapp. Matthew J. Porpora (Sullivan & Cromwell) for Barclays PLC.

Companies: Barclays PLC

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