## Facts

- Gustafson and two other individuals, the sole shareholders of Alloyd, Inc., sold substantially all of the company’s stock to a buyer group in a privately negotiated transaction.
- The purchase price included an estimate of the company’s net-worth increase up to closing, with a contractual adjustment mechanism tied to a later audit.
- The year-end audit showed the company’s net worth had been overestimated, entitling the buyers to a downward price adjustment under the contract.
- The buyers sought rescission under § 12(2) of the Securities Act of 1933, alleging the written sale agreement contained material misstatements and qualified as a statutory “prospectus.”

## Issues

1. Whether a privately negotiated stock sale agreement can be a “prospectus” under § 12(2) of the Securities Act of 1933.
2. Whether § 12(2) liability extends beyond public offerings to misstatements in private, secondary transactions.

## Decision

- The Supreme Court reversed the court of appeals and held that § 12(2) does not apply to the private sale contract at issue.
- The Court concluded the contract was not a “prospectus” because it was not a document held out to the public in connection with a public offering.
- The ruling effectively reinstated summary judgment for the selling shareholders, leaving the buyers to contractual remedies (including the adjustment clause) rather than § 12(2) rescission.

## Legal Principles

- “Prospectus” in § 12(2) is construed consistently across the Securities Act and is tied to the Act’s public-offering disclosure regime.
- Section 10’s specification of required prospectus content links “prospectus” to registered public offerings; § 12(2) liability tracks that category of documents.
- A private, negotiated contract of sale not disseminated to the investing public is not a “prospectus” for § 12(2) purposes, even if it is a written “communication” confirming a sale.
- Section 12(2)’s express rescission remedy is not available for alleged misstatements in purely private stock-sale contracts outside a public distribution.

## Conclusion

The Court held that § 12(2) rescission for misstatements in a “prospectus” is limited to public-offering materials and does not reach privately negotiated sale agreements not held out to the public.


Gustafson v. Alloyd Co., 513 U.S. 561 (1995)