## Facts

- Ben Diskin discussed purchasing securities with Myron A. Lomasney of Lomasney & Co., a brokerage partnership involved with offerings of Ski Park City West, S.I. and Continental Travel, Ltd.
- Continental filed a preliminary registration statement with the SEC on August 28, 1968; it did not become effective until February 11, 1969.
- On September 17, 1968, Lomasney sent Diskin a Ski Park prospectus and a letter stating that if Diskin bought 1,000 Ski Park shares, the firm would “commit” to sell Diskin 5,000 Continental shares at the public offering price “when, as and if issued.”
- Diskin ordered and paid for 1,000 Ski Park shares; that purchase was not contested.
- On February 12, 1969, the firm sent Diskin a confirmation of sale for 5,000 Continental shares at $12 per share, without prior delivery of Continental’s statutory prospectus.
- Diskin later received Continental’s final prospectus and registration materials and paid $60,000 by February 28, 1969, receiving the shares.
- On November 19, 1969, Diskin demanded rescission of the Continental purchase; after no response, he sued seeking rescission under Securities Act § 12(a)(1) based on alleged § 5(b)(1) violations.
- The district court dismissed the complaint, reasoning the transaction fell within an exclusion in Securities Act § 2(3).
- Diskin appealed.

## Issues

1. Whether the September 17, 1968 letter promising future sale of Continental shares constituted a prohibited written “prospectus” or “offer” under Securities Act § 5(b)(1) while Continental’s registration statement was not yet effective.
2. Whether Securities Act § 2(3) excluded the challenged arrangement from actionable “sales” so as to bar § 12(a)(1) liability.
3. Whether later delivery of a final Continental prospectus before payment and delivery of the shares cured any earlier § 5(b)(1) violation.
4. Whether the February 12, 1969 confirmation of the Continental sale, sent before delivery of a statutory prospectus, was a separate § 5(b)(1) violation.

## Decision

- The Second Circuit reversed the dismissal and remanded.
- The court held the September 17 letter was a written communication offering Continental shares and therefore a “prospectus” under Securities Act § 2(10), violating § 5(b)(1) because it preceded effectiveness and did not comply with § 10.
- The court held the § 2(3) exclusion did not apply because Diskin’s claimed right to Continental shares arose from a separate bargain, not from rights inherent in the Ski Park securities.
- The court held subsequent delivery of a compliant prospectus did not eliminate § 12(a)(1) rescission exposure for an earlier unlawful written offer.
- The court also treated the February 12 confirmation as an additional violation because confirmations fall within the statutory definition of “prospectus” and may not precede delivery of a statutory prospectus.

## Legal Principles

- A “prospectus” under Securities Act § 2(10) includes letters and other written communications that offer a security for sale, as well as confirmations of sale.
- Securities Act § 5(b)(1) bars transmitting such written offers relating to a registered offering unless the communication meets § 10’s prospectus requirements; this restriction applies during the waiting period before effectiveness.
- Conditioning the purchase of one security on a promised future allocation of another security can constitute an offer of the second security subject to § 5’s restrictions.
- The § 2(3) exclusion is limited and does not cover side agreements unrelated to rights inherently attached to the purchased security.
- Delivery of a proper prospectus after an unlawful written offer does not cure the earlier violation for purposes of § 12(a)(1) rescission liability.
- Sending a confirmation of sale before furnishing the statutory prospectus can independently violate § 5(b)(1).

## Conclusion

The Second Circuit held that a pre-effective tie-in letter promising future shares and a post-effective confirmation sent before delivery of a statutory prospectus could violate Securities Act § 5(b)(1), and that neither § 2(3) nor later prospectus delivery barred a purchaser’s § 12(a)(1) rescission claim; the dismissal was reversed and the case remanded.


Diskin v. Lomasney & Co., 452 F.2d 871 (2d Cir. 1971)