513 U.S. 561 (U.S. Supreme Court 1995)
Gustafson v. Alloyd Co., Inc.
Does Securities Act §12(2) (now §12(a)(2)) apply to a private, negotiated sale of securities such that a stock purchase agreement and related communications in a non-registered transaction qualify as a "prospectus" or covered "oral communication" under the statute?
Section 12(2) of the Securities Act of 1933 imposes civil liability on any person who offers or sells a security "by means of a prospectus or oral communication" that includes an untrue statement of material fact or omits a material fact necessary to make the statements not misleading, to a purchaser who does not know of the untruth or omission. Interpreting that text in pari materia with §§2(10) and 10, the Supreme Court held that "prospectus" in §12(2) means the statutory prospectus associated with a registered, public offering—not private sales. Consequently, §12(2) liability is limited to public offerings and the oral communications that accompany them; it does not extend to private, negotiated transactions.
No. Section 12(2) does not apply to private, negotiated securities sales. A stock purchase agreement and related private communications are not a "prospectus" within the meaning of §12(2), and the statute's reference to "oral communication" is tethered to the public-offering context of a statutory prospectus. The Court reversed the lower court's judgment permitting §12(2) liability in this private sale.
Gustafson narrows §12(a)(2) to public offerings, profoundly influencing litigation strategy and due diligence. Purchasers in private placements, M&A deals, and other exempt transactions generally cannot sue under §12(a)(2) and must rely on Rule 10b-5, common law fraud, contractual representations and warranties, and state blue sky remedies. For exam and practice purposes, Gustafson requires threshold analysis of the offering's character: if the sale is private or exempt, §12(a)(2) likely does not apply. The decision also preserves the complementary roles of §11 (registered offerings) and §12(a)(2) (public offers by prospectus) while avoiding redundancy, and it underscores how terms of art and statutory context can constrain the apparent breadth of a definition found elsewhere in the statute. Note: §12(2) was later renumbered §12(a)(2) without a substantive change relevant here.