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Senate Proposal in House-Senate Conference on Financial Reform Would Overrule Supreme Court Gustafson Opinion

By Jim Hamilton

A Senate counteroffer in the House-Senate conference reconciling the two versions of financial reform legislation would amend the Securities Act to address the effects of a 1995 Supreme Court ruling in the Gustafson case that has left investors in private securities offerings without protection from material misstatements or omissions in the security?s prospectus. This was the Levin Amendment in the Senate , SA 3969.

In Gustafson v. Alloyd Co., 513 US 561 (1995), the Supreme Court ruled that Section 12(2) of the Securities Act 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.

According to Senator Levin, the Gustafson ruling interpreted the securities laws as depriving purchasers in private offerings of the same protections against material misstatements or omissions that apply to public offerings. The amendment would restore Congressional intent and close that loophole. Cong. Record, May 11, 2010, S3530. The amendment would bring investors in private securities offerings under within the scope of Section 12(2) of the Securities Act by amending the definition of prospectus in the 1933 Act.

Full post as published by Jim Hamilton's World of Securities Regulation on June 17, 2010 (boomark / email).