Sections 11 and 12(a)(2) should be considered in parallel, despite textual differences between the statutes.The justices also suggested that Section 12(a)(2) is broader than Section 11 because its reach goes beyond registered shares. Justice Ketanji Brown Jackson noted in her interpretation that Section 12(a)(2) is broader because it also includes some exempt shares. Justice Kavanaugh agreed that “there are differences between [Sections] 11 and 12 over the exact same language.” Justice Elena Kagan went further, commenting that “everything about Section 12 reads differently from Section 11” and gave four “key differences,” including the broader scope of Section 12(a)(2) in referring to sales by oral communication, taking it outside the scope of a registration statement.The Supreme Court appeared unconvinced that Gustafson controlled in this case.In support of its argument that Sections 11 and 12 should “rise and fall together,” Slack’s counsel relied heavily on Gustafson v. Alloyd Co., 513 U.S. 561 (1995), arguing that Gustafson confirmed that because Sections 11 and 12 were intended to enforce the registration and prospectus requirements in Section 5, the term “such security” should have the same meaning under both sections. Justice Kavanaugh, however, expressed that having read Gustafson “a lot,” he “didn’t come away with…[a] clear answer to [the] Section 12 issue.” Justice Kagan voiced that there are “contested views of what Gustafson means” and that the Court will “always look at the language of the statute.”Ultimately, the scope and impact of a decision in Slack is unclear. If the Court issues a decision confined to direct listings, then its impact may be limited given only a handful of companies have gone public via a direct listing since 2018. But, if the Court’s decision extends beyond direct listings to other public offerings — such as IPOs and special purpose acquisition company (SPAC) transactions — its implications could be far-reaching in expanding liability. Some commenta
the merit of the policy considerations, they are no basis for changing the settled interpretation of the statutory text.” Rather, the place to make changes is in the legislature.SCOTUS oral argumentHere is the question presented:“Section 11 of the Securities Act of 1933 permits suits alleging misrepresentations in a registration statement only if the plaintiffs ‘acquir[ed] such security.’ Section 12(a)(2) of the Act provides that someone who ‘offers or sells a security … by means of a prospectus’ may be liable for misstatements in that prospectus ‘to the person purchasing such security.’ For more than 50 years, every court of appeals to consider the question has held that ‘such security’ in Section 11 means a share registered under the registration statement the plaintiffs claim is misleading. And this Court has held that Section 12 (a)(2) applies only when there is an obligation to distribute a prospectus-an obligation that exists only for registered shares. Gustafson v. Alloyd Co., 513 U.S. 561, 584 (1995). Departing from that well-established law, a divided panel of the Ninth Circuit read ‘such security’ to mean any share, registered or unregistered, and held that plaintiffs suing under Sections 11 and 12(a)(2) need not prove that they bought registered shares. The question presented is: Whether Sections 11 and 12(a)(2) of the Securities Act of 1933 require plaintiffs to plead and prove that they bought shares registered under the registration statement they claim is misleading.” [statutory citations omitted]At oral argument, counsel for Slack contended that Sections 11 and 12 of the ’33 Act expressly refer to the registration requirements in Section 5 of the Act,where “it’s undisputed that ‘such security’ … refers only to shares that are subject to registration, never to exempt shares.” Accordingly, the term “such security” should have the same meaning in Sections 11 and 12, as confirmed in Gustafson. “Respondent’s contrary interpretation” Slack counsel contended, “would run roughshod
com/dictionary (last visited Mar. 30, 2022).United States v. Williams, 553 U.S. 285, 294 (2008); See also, Gustafson v. Alloyd Co., 513 U.S. 561, 575 (1995). Food & Drug Admin., Notice, “Merck Sharp & Dohme Research Laboratories; Reclassification of Lacrisert as an Approved New Drug,” 47 Fed. Reg. 46,139 (Oct. 15, 1982) (emphasis added).
9 The word “prospectus” is a “term of art” that refers to “a document soliciting the public to acquire securities from the issuer.” Gustafson v. Alloyd Co., 513 U.S. 561, 1070 (1995). A prospectus is “treated as part of the company’s registration statement for purposes of § 11.”
The U.S. Supreme Court, however, has limited the scope of Section 12(a)(2) to public offerings. Gustafson v. Alloyd Co., 513 U.S. 561 (1995).Recently, I was surprised to see Section 25110 of the California Corporations Code described as "corresponding" to Section 12(a).
The U.S. Supreme Court, however, has limited the scope of Section 12(a)(2) to public offerings. Gustafson v. Alloyd Co., 513 U.S. 561 (1995). Recently, I was surprised to see Section 25110 of the California Corporations Code described as "corresponding" to Section 12(a).
Further, disappointed investors in a Rule 506 offering cannot sue, under the federal securities laws, for negligent misrepresentation (that is, lack of due care or due diligence). As a result of a 1995 Supreme Court decision, Gustafson v. Alloyd (513 U.S. 561 (1995)) which held that the liability provisions of Section 12(a)(2) of the Securities Act do not extend to a private sale, investors in Rule 506 offerings may assert federal claims only under section 10(b) of the Exchange Act and Rule 10b-5, which require that the investor prove actual intent to defraud, or reckless indifference to the truth of the representations made in the offering. The practical effect of Gustafson has been to make it much harder for lawsuits to be maintained by investors in Rule 506 offerings.
However, there is a significant difference. Under Gustafson v. Alloyd Co., 513 US 561 (1995), Section 12(a)(2) did not apply to private placements. Section 4(A)(c) now provides strong liability provisions similar to 12(a)(2) for certain private transactions exempted by §4(a)(6), 15 USC § 77d(a)(6).
Most other liability under federal securities law requires a much greater degree of seller intent to defraud or scienter than under Section 12(a)(2). This section lost a lot of its punch after Gustafson v. Alloyd, 513 U.S. 561 (1995), when the U.S. Supreme Court ruled it applied only to “public” offerings. Congress breathed new life into the provision in the JOBS Act when it made those who offer and sell under Regulation A (and the crowdfunding exemption, whenever those enabling rules are promulgated) subject to Section12(a)(2) liability.
The claims have typically included: •Claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “1933 Act”): These claims may be brought only by investors that purchased securities as part of the initial public offering (rather than on the secondary market or in a private transaction). See 15 U.S.C. § 77k; Gustafson v. Alloyd Co., 513 U.S. 561, 583-84 (1995). The claims do not require any proof that an investor relied on the misrepresentation or that a defendant acted with scienter or even negligence.