OCTOBER TERM, 1994
certiorari to the united states court of appeals for the seventh circuit
No. 93-404. Argued November 2, 1994—Decided February 28, 1995
Petitioners (collectively Gustafson), the sole shareholders of Alloyd, Inc., sold substantially all of its stock to respondents and other buyers in a private sale agreement. The purchase price included a payment reflecting an estimated increase in the company's net worth from the end of the previous year through the closing, since hard financial data were unavailable. The contract provided that if a year-end audit and financial statements revealed variances between estimated and actual increased value, the disappointed party would receive an adjustment. As a result of the audit, respondents were entitled to recover an adjustment, but instead sought relief under § 12(2) of the Securities Act of 1933 (1933 Act or Act), which gives buyers an express right of rescission against sellers who make material misstatements or omissions "by means of a prospectus." In granting Gustafson's motion for summary judgment, the District Court held that § 12(2) claims can only arise out of initial stock offerings and not a private sale agreement. The Court of Appeals vacated the judgment and remanded the case in light of its intervening decision that the inclusion of the term "communication" in the Act's definition of prospectus meant that the latter term includes all written communications offering a security for sale, and, thus, a § 12(2) right of action applies to private sale agreements.
Held: Section 12(2) does not extend to a private sale contract, since a contract, and its recitations, that are not held out to the public are not a "prospectus" as the term is used in the 1933 Act. Pp. 567-584. (a) On the assumptions that must be made as the case reaches this Court, respondents would have a right to obtain rescission if Gustafson's misstatements were made "by means of a prospectus or oral communication" related to a prospectus. Three sections of the 1933 Act are critical in resolving the issue whether the contract is a "prospectus": § 2(10), which defines a prospectus as "any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television" that offers any security for sale or confirms its sale; § 10, which specifies what information must be contained in a prospectus; and § 12, which imposes liability based on misstatements in a prospectus. The term
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