Gustafson v. Alloyd Company, Incorporated

Brief Fact Summary.

Under § 12(2) of the Securities Act of 1933, Alloyd Co., Inc. (Plaintiff) wanted to annul its purchase of Alloyd, Inc. from Gustafson (Defendant) as a result of mistakes in the contract of sales.

 

Synopsis of Rule of Law.

As defined in the Securities Act of 1933, the term “prospectus†references documents related to public offerings and not secondary sales, for reasons of deciding
aright of rescission under § 12(2)

 

Facts.

The sole shareholders of Alloyd, Inc., a producer of plastic packaging and heat sealing machinery, were Gustafson and two other persons. In 1989, investors now known as Alloyd Co. committed to buy out Gustafson and the coshareholders. As a result of the doubts regarding the present financial status of Alloyd Co, the agreement stipulated that if assessments failed to be true, when new numbers were available, the party that was dissatisfied was allowed an alteration.Alloyd Co. was eligible to receive $815,000 a year later under this clause, but opted to bring suit in district court to withdraw the agreement under § 12(2) of the Securities Act of 1933. Even though Gustafson paid the adjustments, Alloyd Co. persevered, alleging that the contract of sale was a “prospectus†so that any mistakes in it would permit § 12(2) liability. Depending on a Third Court ruling, the district courtgranted Gustafson’s summary judgment motion, holding that § 12(2) claims cannot come from secondary sales, only from IPOs. Reading the Act’s § 2(10) description of “prospectus†to include any communication offering of securities for sale,the Seventh Circuit reversed. The Supreme Court granted certiorari to solve the disagreement.

 

Issue.

For reasons of deciding a right of rescission under § 12(2), as utilized in the Securities Act of 1933, is the term “prospectus†only referring to documents relating to public offerings?

 

Held.

(Kennedy, J.) Yes.For reasons of deciding a right of rescission under § 12(2), as utilized in the Securities Act of 1933, the term “prospectus†is only referring to documents relating to public offerings. Three sections of the 1933 Act are pertinent to deciding the meaning of the word “prospectusâ€: § 2(10), the definition; § 10, the informationnecessary in one; and § 12, whichenforces liability for errors in one. The definition needs to be the same all the way through.  § 10 limits the definition to documents that need to contain the information from the registration statement, whereas, a registration statement is necessary but only in public offerings.Only when there is an § 10 obligation to issue the prospectus, as in a public offering, does  § 12(2) liability attach. The contention that all offers areconsidered a prospectus under § 12 would necessitate a holding that the definition is more expansive in § 12 than in § 10. This contention comes from the definition of the word in § 2(10), which states that “[t]he term ‘prospectus’ means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security.†Alloyd Co. and the dissent depend on the term “communication†to provide prospectus an expansivedescription, but they disregard the public makeup of the § 2(10) record. Within this framework, the record references documents of vastdistribution, but excludes face to face and phone conversation.  During an investigation, documents organized with recognized procedures in the perspective of a public offering, were presented by Congress in § 12 (2), the right to rescind. It is not reasonable to think that Congress envisioned allunintended communication in the secondary market to grant a right of rescission without proof of fraud or reliance. Legislative history confirms this explanation. Reversed and remanded.

 

Dissent.

(Thomas, J.) The congressionally given expansive menacing of “prospectus†in § 2(10) should be utilized to determine the meaning of the word, as opposed to utilizing the 1933 Act to support the meaning as the majority does. The majority assessment is fueled by the conjecture that Congress would failed to enforce § 12(2) liability on the secondary market, and that public policy prefers to elude undesirable rises in litigation. The majority appears to forget that we are only imposing Congress’ determination regarding standards of conduct for sellers and that the other branches of government are responsible to restrict the 1933 Act.
(Ginsburg, J.) The Securities Act was based on the British Companies Act of 1929. In embracing a description of “prospectus†from that Act, the language restricting it to communications “offering [securities] to the public†is noticeably absent. This absence recommends that the writers of the 1933 Act planned on the term “prospectus†extending past public offerings.

 

Discussion.

§ 10b(5) would be eclipsed and the entire legal system overwhelmed if § 12(2) included secondary sales while still maintaining its negligence standard. It is clear that only the plaintiffs desired this, however the contention is if the majority amended the meaning of “prospectus†or simply deciphered it. Even though this case is fresh and the full outcome it is not complete, we can say for sure that the definition of “prospectus†will not be altered as it has not been for the past sixty years.