36. What is civil liability under “Section 12” of the ’33 Act?
Section 12 of the ’33 Act provides for civil liability for issuers of securities in two situations.
• Section 12(a)(1) – This provision provides a civil cause of action for purchasers of securities against issuers who sell securities without registering the securities or perfecting an exemption. Within the applicable statute of limitations, the purchaser must show that she purchased the shares from the issuer.
⁃ Note: This includes a situation where an issuer attempts to perfect one or more registration exemptions that fail.
• Section 12(a)(2) – This provision provides a cause of action for purchasers against issuers who makes a material misstatement or omission in a prospectus or other communication made as part of the sale of securities to the purchaser. The purchaser must not know that the information is incorrect at the time of purchase.
⁃ Note: Liability under Section 12(a)(2) is in addition to liability under Section 11.
As a remedy for violation under either subsection, the purchaser may rescind the purchase and receive interest on the money invested and any damages incurred by the investment. Generally, these causes of action are only available to purchasers in the original issuance of the securities. Individuals who purchase the securities in a subsequent sale cannot bring these actions. The issuer is potentially liable under Section 12, which makes anyone controlling the issuer potentially liable. The SEC may also bring a civil action against the issuer.
• Discussion: Why do you think that failure to register or perfect an exemption may lead to civil liability for an issuer? Should a purchaser who is not negatively affected by a failure to register or a misstatement of material information be able to force the company to repurchase the securities? Why or why not?
• Practice Question: ABC, LLC issues securities pursuant to a Rule 506(b) exemption. Unfortunately, some of the investors did not meet the accredited investor or sophistication requirements. No other registration exemptions apply to the offering. What does this potentially means for ABC?