Securities Act - Liability
Section 12(a)(1)
• Strict liability
• “Statutory sellers”
(last updated 19 Feb 13)
Liability for selling
“unregistered, non-exempt”
securities?
§ 12 Civil liabilities arising in
connection with prospectuses
and communications
(a) In general
Any person who-(1) offers or sells a security in
violation of section 5 of this act,
....
shall be liable, subject to
subsection (b) of this section, to
the person purchasing such
security from him, who may sue
either at law or in equity in any
court of competent jurisdiction,
to recover the consideration paid
for such security with interest
thereon, less the amount of any
income received thereon, upon
the tender of such security, or
for damages if he no longer
owns the security.
Compare this to 10b-5 and
§11 liability …
Rule 10b-5
§11
“icw” purch/ sale
security
Part of RS
Purchaser or
seller
Purchaser
(tracing)
Purchaser
Defendant
Primary violator
List (I, Ds, Os,
UWs, expert)
“statutory
seller”
(1) Material
misrepresentation
Pl BOP (or duty
to speak)
Pl BOP (or
omission)
n/a
(2) Scienter
Pl BOP (facts /
strong E)
Def BOP (“due
diligence”)
n/a
(3) Reliance
Pl BOP (unless
FOM)
Def BOP (Pl
“knew”) *
n/a !!!
(4) Causation
Pl BOP (prox
cause)
Def BOP
(“other than”)
n/a
(5) Damages
Pl BOP (O/P or
rescission)
Rescission (up
to offering $)
Rescission
Federal
Federal or
state
Federal or
state
2 yrs + 5yrs
1 yr + 3 yrs
1 yr
Transactional
nexus
Plaintiff
Court
Limitations
§12(a)(1)
Violation of
§5
§12(a)(2)
Pinter v. Dahl (US 1988)
Pinter v. Dahl (sung to the tune of “The Ballad of the Beverly Hillbillies”)
Come and listen to my story bout that guy Maurice,
California boy just a-waitin’ to be fleeced.
Then one day put some money in with Bill
Out in Oklahoma where the wildcatters drill.
Oil, that is, black gold. Texas tea.
Well, the next thing you know Maurice is on the dole,
Askin’ lots of friends he knows to throw cash down the hole
Said Beej Pinter is the guy you wanna see
And they each put some money in without an SEC
Filing, that is. Form S-1.
Well, now it’s time to figure out if anyone can claim
That someone not the issuer can bear part of the blame
For selling shares unregistered with no gratuity,
To share a heapin’ helpin’ of some liability.
Section 12(a)(1) that is. 33 Act. Write a check.
Y’all invest now, hear?
© Jeffrey Lipshaw 2007. All rights reserved.
Pinter v. Dahl (US 1988)
Black Gold Oil Company
(what a name) is in the oil
and gas business. One
B.J. Pinter runs the
business and is the
principal
shareholder. Pinter looks
for more investors and
finds Maurice Dahl, a
California real estate
developer. Dahl looks at
Pinter's drilling logs and
exclaims: "This can't
lose!" Dahl tell his friends,
who invest in Black Gold
Oil.
Investors
Dahl
sue
Pinter
counterclaim
Is Pinter liable,
though he never
passed title?
§ 12 Civil liabilities arising in
connection with
prospectuses
and communications
(a) In general
Any person who-(1) offers or sells a security in
violation of section 5 of this act,
....
shall be liable, subject to
subsection (b) of this section, to
the person purchasing such
security from him, who may sue
either at law or in equity in any
court of competent jurisdiction,
to recover the consideration
paid for such security with
interest thereon, less the
amount of any income received
thereon, upon the tender of
such security, or for damages if
he no longer owns the security.
§ 15 Liability of controlling persons
Every person who, by or
through stock ownership,
agency, or otherwise, or who,
pursuant to or in connection
with an agreement or
understanding with one or more
other persons by or through
stock ownership, agency, or
otherwise, controls any person
liable under section 11 or 12,
shall also be liable jointly and
severally with and to the same
extent as such controlled
person to any person to whom
such controlled person is liable,
unless the controlling person
had no knowledge of or
reasonable ground to believe in
the existence of the facts by
reason of which the liability of
the controlled person is alleged
to exist.
Pinter v. Dahl (US 1988)
Black Gold Oil Company
(what a name) is in the oil
and gas business. One
B.J. Pinter runs the
business and is the
principal
shareholder. Pinter looks
for more investors and
finds Maurice Dahl, a
California real estate
developer. Dahl looks at
Pinter's drilling logs and
exclaims: "This can't
lose!" Dahl tell his friends,
who invest in Black Gold
Oil.
Investors
Dahl
sue
Pinter
counterclaim
Is Dahl liable to the
investors, though
he never passed title?
§ 12 Civil liabilities arising in
connection with
prospectuses
and communications
(a) In general
Any person who-(1) offers or sells a security in
violation of section 5 of this act,
....
shall be liable, subject to
subsection (b) of this section, to
the person purchasing such
security from him, who may sue
either at law or in equity in any
court of competent jurisdiction,
to recover the consideration
paid for such security with
interest thereon, less the
amount of any income received
thereon, upon the tender of
such security, or for damages if
he no longer owns the security.
Pinter v. Dahl (US 1988)
“The language and purpose of §
12(1) suggest that liability extends
only to the person who
successfully solicits the purchase,
motivated at least in part by a
desire to serve his own financial
interests or those of the
securities owner.”
Justice Harry
Blackmun
§2(a) Definitions
(3) The term "sale" or "sell" shall
include every contract of sale or
disposition of a security or
interest in a security, for value.
The term "offer to sell," "offer for
sale," or "offer" shall include
every attempt or offer to dispose
of, or solicitation of an offer to
buy, a security or interest in a
security, for value.
And now let’s apply this
Court-made law …
Hypothetical #1
Your law firm represents Saintine
Drilling & Exploration, which raised
money in a private placement.
Your firm prepared the private
placement memo and, at the client’s
request, you sent a cover letter and
copies of the memo to certain
investors -- along with the drilling
logs (see side panel).
Your firm was paid handsomely for
its work, a fact disclosed in the
offering memo.
Pinter v. Dahl (US 1988)
“Indeed, [the substantial-factor
test] might expose securities
professionals, such as
accountants and lawyers, whose
involvement is only the
performance of their professional
services, to § 12(1) strict liability
for rescission. The buyer does
not, in any meaningful sense,
"purchas[e] the security from"
such a person.”
Justice Harry
Blackmun
Hypothetical #2
Oil & Gas Ltd. sells
unregistered common shares
at $15 per share to 45
purchasers in violation of § 5.
Alice is one of the
purchasers. Two months after
the Oil & Gas offering, Alice
sells her 1,000 shares to Bob
for $10/share. The value of the
shares declines further to $7.
Alice
Bob
Oil & Gas
The end