Gustafson v. Alloyd Co.

Supreme Court of the United States · 1995 · Corporations

513 U.S. 561 (1995)

Updated August 1, 2026

CorporationsSection 12prospectusSecurities Act of 1933Section 12(2)public offeringprivate salesecondary transaction

Facts

The sellers were the sole shareholders of Alloyd, Inc. and agreed in 1989 to sell substantially all outstanding stock to Alloyd Holdings, a newly formed corporation backed by Wind Point and individual investors. The buyers conducted extensive analysis before the sale, and the stock purchase agreement included representations and warranties about Alloyd's financial condition plus a post-closing adjustment mechanism. After the year-end audit showed earnings lower than estimated, the buyers received the contractual adjustment but still sought rescission under § 12(2), arguing that inaccuracies in the agreement made it a misleading prospectus. The transaction was a private sale of already-issued stock, not a public offering.

Issue

Does § 12(2)'s rescission remedy for material misstatements made 'by means of a prospectus' extend to a private secondary sale of securities on the theory that statements in a stock purchase agreement are part of a prospectus? More specifically, is a privately negotiated stock purchase agreement a 'prospectus' within the meaning of the Securities Act of 1933?

Rule

In the Securities Act of 1933, the term 'prospectus' is a term of art referring to a document that describes a public offering of securities by an issuer or controlling shareholder. Because 'prospectus' has the same meaning in §§ 10 and 12, § 12(2) liability is limited to public offerings and does not apply to private resale or secondary sale agreements not held out to the public.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Dallas, Olivia Mercer agreed to buy all outstanding shares of a closely held software company from its three founders through a heavily negotiated stock purchase agreement. The agreement contained detailed financial warranties, and after closing Olivia discovered that one warranty about deferred revenue was materially false.

If Olivia sues the founders for rescission under § 12(2) based solely on the misstatement in the stock purchase agreement, what is the best result?

Explanation. The majority held that § 12(2) applies only to misstatements made by means of a prospectus, and a prospectus is a term of art tied to public offerings by an issuer or controlling shareholder. A privately negotiated agreement for the sale of already-issued shares is not such a document, so § 12(2) does not reach it.