Brief Fact Summary. Â An offering of 450,000 shares on an all or nothing basis, Manor Nursing Centers (Defendant) were to hold the funds on escrow and not utilized until all terms of offering were fulfilled.Â Manor was unable to sell all shares yet did not return funds to investors as per the terms of the offering.
Synopsis of Rule of Law. If factual developments occur after the effective date of registration, the registrant must divulge said developments if they make the registration significantly misleading.
Issue. Must the registrant reveal developments occurring after effective registration date if those developments make the initial disclosures disingenuous?
Held. (Timbers, J.) Yes. If an occurrence develops following the effective registration date, the prospectus must be amended when said occurrences make precedingprospectus information deceiving. Â§ 10(a) states that a prospectus must disclose information to public investors that is substantial and true.Â Manor and selling stockholderswere in violation of Â§ 10(a) because their prospectus failed to meet the requirements set forth by Â§ 10(a).To abide by Â§ 10(a), the following must be included in the prospectus: use of proceeds, estimated net profits, price of the public offering (and any variations from set price), and all paid discounts and commissions to underwriters. Manor failed to inform the public that some shares were being sold for other than cash and that certain individuals were being paid extra for participating in the sale. The aforementioned rendered the prospectus misleading. Manor was also obligated to disclose to the public investors that an escrow account was not opened, that the funds were not returned and the issue was not fully subscribed. These developments occurred after the effective registration date, yet the prospectus was never amended. The SEC held the decision that the prospectus must be amended to include such changes. Finally, misuse of proceeds created a fraud on public investors in violation of S 17(a) of the 1933 Act. Manor violated Rule 10b-9 as a result of (1) failing to sell all the offered shares within specified time frame and failing to return funds to investors when (1) was not met. Judgment affirmed. Disgorgement of income and profits, reversed and remanded.
The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits.View Full Point of Law