Commission Legal Brief: In re P. Stolz Family Partnership L.P.

P. STOLZ FAMILY PARTNERSHIP L.P., On behalf of itself and
others similarly situated,

On Appeal from the United States District Court
for the Southern District of New York

BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE,
SUBMITTED AT THE REQUEST OF THE COURT

I. "OFFER" MEANS FIRST, NOT LAST, OFFER, AND ACCORDINGLY THE THREE-YEAR PERIOD BEGINS WHEN THE SECURITY IS FIRST BONA FIDE OFFERED TO THE PUBLIC.

A. The "Last-Offered" Construction Is Inconsistent with the Statutory Intent and Purpose.

B. The Statutory History Indicates that Congress Intended the Three-Year Period to Begin to Run When the Security Is First Bona Fide Offered to the Public.

1. The Securities Act, as Originally Enacted, Provided a Ten-year Period of Repose for Section 12(a)(1) Liability, Indicating That Congress Intended the First-Offered Construction.

2. The 1954 Amendments to the Investment Company Act Indicate Congress's Recognition That the Three-Year Period Begins When the Public Offering Begins.

C. The Commission Has Interpreted the Three-Year Period to Begin to Run When the Offering Begins.

1. In 1941 the Commission Recognized Section 13 as Meaning First-Offered When It Recommended an Amendment, Jointly with the Securities Industry, That Would Have Eliminated the Anomaly Caused by the First-Offered Construction.

2. In 1981, the Commission Adopted Item 512(a)(2) of Regulation S-K, Which Reflects the Commission's Recognition That the Three-Year Period Begins When the Public Offering Begins.

II. MEANING OF "BONA FIDE" AND "TO THE PUBLIC"
IN SECTION 13'S "BONA FIDE OFFERED TO THE PUBLIC" PROVISION.

A. "Bona Fide" Does Not Mean That the Three-Year Period Starts Only Once the Securities Have Been Offered Legally by the Issuer's Having Registered the Securities.

B. The Three-Year Period Does Not Start Until a "Bona Fide" Offer Is Made "To the Public" and Therefore Is Not Triggered While an Offering Is Conducted as a Private Offering.

TABLE OF AUTHORITIES

CASES

Anixter v. Home-Stake Production Co., 939 F.2d 1420 (10th Cir.), amended for other reasons, 947 F.2d 897 (10th Cir. 1991)

In re Bestline Products Securities & Antitrust Litigation, [1974-75 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,070, 1975 WL 386 (S.D. Fla. March 21, 1975)

Boone v. GLS Livestock Management, Inc., [1976-77 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶97,174, 1976 WL 904 (D. Utah April 9, 1976)

Hudson v. Capital Management International, Inc., [1982-83 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,221, 1982 WL 1384 (N.D. Cal. Jan. 6, 1982)

Norris v. Wirtz, 818 F.2d 1329 (7th Cir. 1987), overruled on other grounds, Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990)

Slagell v. Bontrager, 616 F. Supp. 634 (W.D. Pa. 1985), aff'd, 791 F.2d 921 (3d Cir. 1986)

Sowell v. Butcher & Singer, Inc., No. 84-714, 1987 WL 10712 (E.D. Pa. May 13, 1987)

Waterman v. Alta Verde Industries, Inc., 643 F. Supp. 797 (E.D.N.C. 1986), aff'd, 833 F.2d 1006 (4th Cir. 1987)

STATUTES

Section4(2), 15 U.S.C. 77d(2)
Section 5, 15 U.S.C. 77e
Section 11, 15 U.S.C. 77k
Section 12(a)(1), 15 U.S.C. 77l(a)(1)
Section 12(a)(2), 15 U.S.C. 77l(a)(2)
Section 13, 15 U.S.C. 77m

Rule 504, 17 C.F.R. 230.504
Rule 505, 17 C.F.R. 230.505
Rule 506, 17 C.F.R. 230.506

Item 512(a)(1), 17 C.F.R. 229.512(a)(1)
Item 512(a)(2), 17 C.F.R. 229.512(a)(2)

Section 4(1) of the Securities Act, now Section 4(3) of the Act,
15 U.S.C. 77d(3) (original at 48 Stat. 74)

LEGISLATIVE MATERIAL

1934 Amendments to the Securities Act of 1933, 48 Stat. 905,
Pub. L. No. 73-291, at 905-08 (June 6, 1934)

1954 Amendments to the Investment Company Act, 68 Stat. 689,
Pub. L. No. 83-577 (Aug. 10, 1954) (since amended)

MISCELLANEOUS

R.W. Jennings, H. Marsh, J.C. Coffee & J. Seligman,
Securities Regulation(8th ed. 1998)

Report of the SEC on Proposals for Amendments to the
Securities Act of 1933 and the Securities Exchange
Act of 1934 (Aug. 7, 1941)

Report on the Conferences with the Securities and Exchange
Commission and Its Staff on Proposals for Amending
the Securities Act of 1933 and the Securities Exchange
Act of 1934 (July 30, 1941)

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

No. 02-7680

P. STOLZ FAMILY PARTNERSHIP L.P., On behalf of itself and
others similarly situated,

On Appeal from the United States District Court
for the Southern District of New York

BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE,
SUBMITTED AT THE REQUEST OF THE COURT

INTRODUCTION

The Securities and Exchange Commission submits this brief as amicus curiae in response to the Court's request that the Commission submit a brief on the interpretation of Section 13 of the Securities Act of 1933, 15 U.S.C. 77m. Section 13 provides a statute of limitations for actions brought under Sections 11, 12(a)(1), and 12(a)(2) of the Act, 15 U.S.C. 77k, 77l(a)(1), and 77l(a)(2).¹ The complaint in this action seeks recovery under Section 12(a)(1) for the sale of unregistered securities. The Court's letter asks when the three-year outer limit in Section 13 for bringing actions under Sections 11 and 12(a)(1) begins to run. Section 13 reads as follows:

No action shall be maintained to enforce any liability created under section 11 or section 12(a)(2) unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 12(a)(1), unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 11 or section 12(a)(1) more than three years after the security was bona fide offered to the public, or under section 12(a)(2) more than three years after the sale.

The Court specifically asks "what event triggers the running of the three-year period of repose established in [Section 13 of the Securities Act] with respect to liability created under [Section 12(a)(1) of the Act], which prohibits the sale of unregistered securities." The Court listed three positions that have been argued in this case:

(1) that the three-year period begins to run only once the security is registered, and therefore once the offer to the public is "bona fide" in the sense of being legally valid;

(2) that the period begins to run when the security is first offered to the public, thus barring any liability under [Section 12(a)(1)] for securities sold any time later than three years after the first offer; and

(3) that the period begins to run when the security is last offered to the public, thus not barring any liability under [Section 12(a)(1)] until three years after the seller stops selling the unregistered securities.

Of the three suggested interpretations, one is easily disposed of. Since the only conduct for which Section 12(a)(1) provides a remedy is conduct that violates Section 5 and is thus illegal, including the sale of an unregistered security, the term "bona fide" in "bona fide offered to the public" cannot reasonably be interpreted to mean that the three-year limitation does not apply unless the security was offered legally by the issuer's having registered the offering of the security. The other two interpretations, however -- first-offered and last-offered -- present a troubling choice. Although we believe that the Court should follow the longstanding and generally accepted first-offered interpretation, that approach produces an anomalous and harsh result for purchasers in certain circumstances. But the last-offered interpretation is inconsistent with the statutory intent and purpose and produces its own illogical results, preventing the certainty intended by a statute of repose and rendering the three-year provision superfluous. The commentators and most judicial decisions adhere to the first-offered interpretation, apparently viewing that approach as compelled by the statute. Without legislation to correct what has long been viewed as an unfortunate legislative decision in 1934, the statute does not lend itself to an additional, more desirable, construction.

When Congress in 1934 reduced the limitation period from ten years to three years, the anomalous result, under the first-offered construction, was that the period can often expire before the investor even purchases the security. The Commission and the securities industry in 1941 unsuccessfully sought legislation that would have changed this result by eliminating the three-year limitation altogether, leaving only the limitation of one year from the violation. In 1980, the American Law Institute's proposed Federal Securities Code, which likewise was not enacted, would have addressed the problem in the same way as the 1941 proposal. Because these legislative proposals were unsuccessful, the courts are left with the task of applying a statute as to which the legislative intent can lead to an undesirable result.

The harshness of the first-offered approach is ameliorated, however, by the requirement in Section 13 that the security be offered "bona fide * * * to the public." As explained below, a security should not be viewed as being so offered while an offering is being conducted as a private offering.

DISCUSSION

I. "OFFER" MEANS FIRST, NOT LAST, OFFER, AND ACCORDINGLY THE THREE-YEAR PERIOD BEGINS WHEN THE SECURITY IS FIRST BONA FIDE OFFERED TO THE PUBLIC.

The Court identified three alternative constructions of Section 13 that are argued by the parties on appeal: (1) that the three-year period for Section 12(a)(1) commences only when the security is registered and the offering thus is "bona fide" or legal; (2) that the period begins to run when the security is first offered; and (3) that it begins when last offered. We disagree with the first and third constructions. We agree with the second - - "first-offered" - - construction. While harsh in result at times, it is consistent with the intent and purpose of the statute.²

A. The "Last-Offered" Construction Is Inconsistent with the Statutory Intent and Purpose.

1. Under the last-offered construction, there would be no certain time when the three-year period ends. This would be inconsistent with the intent of Section 13 and the purpose of a repose period in general as well as the purpose, reflected in the legislative history, of this repose period.

Section 13 contains two periods of limitation applicable to Section 12(a)(1). An action must be brought "within one year after the violation" upon which it is based, but "[i]n no event shall any such action" be brought "more than three years after the security was bona fide offered to the public." Consistent with the "[i]n no event" admonition, courts have interpreted the three-year provision as a statute of "repose" -- an absolute cutoff, not subject to tolling, after which Section 12(a)(1) liability is terminated. See 3C H.S. Bloomenthal & S. Wolff, Securities and Federal Corporate Law §17:37, at 17-109 (2002).

"Section 13 sets forth a statute of limitations [one year] framed by a statute of repose [three years]." Anixter v. Home-Stake Production Co., 939 F.2d 1420, 1434 (10th Cir.), amended for other reasons, 947 F.2d 897 (10^th Cir. 1991). See also Caviness v. Derand Resources Corp., 983 F.2d 1295, 1300 n.7 (4th Cir. 1993). "The difference between statutes of limitations and statutes of repose is substantial in securities litigation." Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385, 1392 (7th Cir. 1990). Limitation periods for bringing actions are generally referred to as statutes of limitations, of which a statute of repose is a category. A non-repose type of limitation often has an uncertain starting date. See generally Caviness v. Derand Resources Corp., 983 F.2d. at 1300 n.7. A statute of repose, on the other hand, runs from a fixed date readily determinable by the defendant. "[S]tatutes of repose" "prescribe the periods within which actions may be brought" and "terminate[ ] the right to bring an action after the lapse of a specified period." Eddings v. Volkswagenwerk, A.G., 835 F.2d 1369, 1371 (11th Cir. 1988). The fixed date provides the defendant repose from the risk of litigation. See generally Caviness v. Derand Resources Corp., 983 F.2d at 1300 n.7.

It is understandable that Congress would have wanted Section 11 and Section 12(a)(1) claims to be subject to the certainty of a fixed repose period. These sections impose strict liability. Inadvertent, non-culpable violations can give rise to liability. The three-year provision assures businesses that are subject to liability under these sections that after a certain date they may conduct their businesses without the risk of further strict liability for non-culpable conduct. "Using a fixed date easily determined by the defendant allows for 'repose' from the cause of action and serves the need for finality in certain financial and professional dealings." Caviness v. Derand Resources Corp., 983 F.2d. at 1300 n.7.

The legislative history of Section 13 shows what Congress intended in 1934 when it reduced the ten-year period of repose, as initially enacted in 1933, to the present three years. Regarding the former ten-year provision, Senator Fletcher told the Senate:

The effort has been made to meet objections and criticisms and complaints which have come to the committee that the present act is too drastic, and is interfering with business. We have tried to meet those objections by this amendment * * *.

73 Cong. Rec. S8668 (May 12, 1934). See also 73 Cong. Rec. S10186 (June 1, 1934) (where Senator Byrnes later added that "the amendments adopted today give greater assurance to the honest officials of a corporation"). It has been said that "[t]he legislative history in 1934 makes it pellucid that Congress included statutes of repose because of fear that lingering liabilities would disrupt normal business and facilitate false claims." Norris v. Wirtz, 818 F.2d 1329, 1332 (7th Cir. 1987) (citing 73 Cong. Rec. 8198-8203 (May 7, 1934)), overruled on other grounds, Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990).

The last-offered construction does not carry out the purpose of Section 13's three-year period of repose because it does not afford certainty as to when a person can expect to be free from the risk of liability. A defendant may be unable to tell when an offering ends because the offering may be slow and the contemplated number of shares or other instruments may not be sold. An offering also may be open-ended where there is no specific number of shares to be sold and the offering is continuous.³

2. In addition to its uncertainty, the last-offered construction would render the three-year repose period superfluous, since the one-year period - - one year from the time of the violation for Section 12(a)(1) claims - - would always end before the end of the three-year period of repose. This would happen under the last-offered construction because the earliest date of the last offer (the date of the offer to the plaintiff) and the dates of the violative events (offer, sale, and delivery to the plaintiff) would occur around the same time.

If, however, "tolling" applies to the one-year limitation, then the one-year period could be extended and the three-year period would become relevant. While this Court has held equitable tolling applicable to Section 12(a)(1)'s one-year limitation, see Katz v. Amos Treat & Co., 411 F.2d 1046 (2d Cir. 1969), "the apparent majority of courts have indicated that section 12(a)(1)'s one-year period should not be tolled." 1 T.L. Hazen, The Law of Securities Regulation §7.10[3] at 664 (4^th ed. 2002). See also 3C H.S. Bloomenthal and S. Wolff, Securities and Federal Corporate Law §17:37, at 17-109 (2002) ("Generally the courts have taken the position that the one-year period is an absolute one."). The often-stated rationale behind the majority rule is that "Congress by not including an express tolling period as it did with sections 11 and 12(a)(2) should be deemed to have decided that none should apply in actions under section 12(a)(1)." 1 Hazen, Securities Regulation, §7.10[3] at 665 (and cases cited therein). See also Cook v. Avien, Inc, 573 F.2d 685, 691 (1^st Cir. 1978)(holding that the one-year provision applicable to Section 12(a)(1) is not subject to tolling). We do not believe it is necessary here to decide whether the one-year period is subject to tolling because, even if it is, there is no indication that Congress in 1933 and 1934 thought that tolling would apply to Section 12(a)(1) claims, particularly since it expressly provided for tolling in the "discovery" element of the one-year limitation for claims under Sections 11 and 12(a)(2) but said nothing about tolling in the case of Section 12(a)(1).

3. Finally, the last offered construction would create a result that is unlikely to have been intended by Congress for another reason. Sections 11 and 12(a)(1), which are subject to the three-year provision involved here, impose strict liability. Section 12(a)(2), on the other hand, is a negligence provision. Section 13 terminates liability under Sections 11 and 12(a)(1) after three years from the time a security is "bona fide offered to the public." This is in contrast to Section 12(a)(2) liability, which is terminated "three years after the sale." Because the three-year provision for Section 12(a)(2) runs from the time of the sale, if the last-offered construction of "bona fide offered to the public" were adopted for the three-year period applicable to Sections 11 and 12(a)(1), those strict liability provisions would have a longer period of repose than that provided for negligence claims brought under Section 12(a)(2). Congress would not likely have intended this result.

B. The Statutory History Indicates that Congress Intended the Three-Year Period to Begin to Run When the Security Is First Bona Fide Offered to the Public.

1. The Securities Act, as Originally Enacted, Provided a Ten-year Period of Repose for Section 12(a)(1) Liability, Indicating That Congress Intended the First-Offered Construction.

As originally enacted in 1933, the present three-year repose period for Section 12(a)(1) claims was ten years. Securities Act of 1933, 48 Stat. 74, Pub. L. No. 73-22, at 84 (May 27, 1933). (The following year, when the Exchange Act was enacted, Congress cut the period to three years. See 1934 Amendments to the Securities Act of 1933, 48 Stat. 905, Pub. L. No. 73-291, at 905-08 (June 6, 1934)). When the period was ten years, the first -offered construction would hardly ever have presented the anomaly of a plaintiff's purchase occurring after the expiration of the period and accordingly would not have presented a problem. The last -offered construction at that time, however, would have presented a significant problem of lingering liability. This strongly suggests that, as originally enacted in 1933, the ten-year period meant ten years from the beginning of the offering. Congress in 1934 changed only the number of years, giving no indication that it intended to change the starting point.

2. The 1954 Amendments to the Investment Company Act Indicate Congress's Recognition That the Three-Year Period Begins When the Public Offering Begins.

In 1954, Congress added subsection (e) to Section 24 of the Investment Company Act, 15 U.S.C. 80a-24(e). The provision permits the registration of additional securities of open-end investment companies to be effected by amending an earlier registration statement, instead of filing a new one. The amendment further provides that "[f]or the purposes of section 13 of the Securities Act * * * no such security shall be deemed to have been bona fide offered to the public prior to the effective date of the latest amendment filed pursuant to this subsection." 1954 Amendments to the Investment Company Act, 68 Stat. 689, Pub. L. No. 83-577 (Aug. 10, 1954) (since amended). The latter provision would not have been needed if the three-year period did not start until the end of the offering. If, on the other hand, the three-year period starts at the beginning of the offering, the amendment's permission to register by amending an earlier registration statement created a risk that the three-year period would start from the earlier effective date.

The 1954 amendment therefore shows that Congress construed the three-year period to commence when the security is first bona fide offered to the public, since otherwise the new provision would not have been needed. See R.W. Jennings, H. Marsh, J.C. Coffee & J. Seligman, Securities Regulation 1318 (8^th ed. 1998) ("In 1954 Congress amended the Investment Company Act to eliminate this problem [when an offering extends beyond three years] in connection with the sale of mutual fund shares, where it was most acute."). See also 10 L. Loss & J. Seligman, Securities Regulation 4497 n.7 (3d ed. 1998).

C. The Commission Has Interpreted the Three-Year Period to Begin to Run When the Offering Begins.

The Commission, on at least two occasions, has construed the three-year period of repose applicable to Sections 11 and 12(a)(1) as commencing when the security is first bona fide offered to the public.

In 1941, the Commission joined with the securities industry in recommending that Congress drop the three-year period for Section 12(a)(1) claims in order to eliminate the anomaly caused when the three-year provision is construed as beginning to run when a security is first offered.

That year the Investment Bankers Association, National Association of Securities Dealers, New York Curb Exchange, and New York Stock Exchange joined with the Commission to examine the securities laws and propose several amendments to Congress. This joint effort was a response to several legislative proposals pending in Congress to amend the securities laws. The Commission's staff worked with representatives of the industry to produce several drafts and the Commission held several conferences with industry representatives to consider the drafts. See Report on the Conferences with the Securities and Exchange Commission and Its Staff on Proposals for Amending the Securities Act of 1933 and the Securities Exchange Act of 1934 at iii-iv (July 30, 1941) ("Industry Report") (relevant pages reproduced in the addendum to this brief). The results of these conferences were published in a report to Congress by the industry in which the industry proposed several amendments to the securities laws. The Commission agreed with most of the proposals submitted in the Industry Report and any differences were noted in the Industry Report. See Industry Report, p. v. Shortly after the Industry Report, the Commission issued a separate report in which it discussed the proposals included in the Industry Report. See Report of the SEC on Proposals for Amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934 (Aug. 7, 1941) ("SEC Report") (relevant pages reproduced in the addendum to this brief).

As described in the Loss-Seligman treatise, one of the proposals sought to remedy the situation caused by Section 13 where "it is literally possible for the statute to expire before the purchaser acquires the security in the case of a very slow offering that may still be going on after three years!" 10 Loss & Seligman, Securities Regulation 4497 n.78. "To avoid this result the Commission and the securities industry agreed in 1941 upon an appropriate amendment." Id. The Commission and the industry agreed to amend Section 13 to separate the limitation for Section 11 from that for Section 12.

The Industry Report's "explanatory statement" on the proposed amendment states that Section 13's three-year period of repose is "based on the time of the offering" and "it happens that in the case of certain open-end offerings and in the case of some slow offerings the statute may have run before the issuer or the underwriter has disposed of the securities." The explanatory statement goes on to recognize that "this result is not a fair one, and the proposals accordingly have been drawn to provide a fair substitute." Industry Report, at 161. The SEC's Report likewise states:

Undoubtedly through inadvertence the statute of limitation provided in section 13 of the act was so phrased that in some instances the period within which suit may be brought expires before the purchaser acquires his security. It seems appropriate to the Commission - - and representatives of the securities industry concur - - that section 13 be amended to set a definite time limit upon the liabilities of issuers and underwriters without cutting off any purchaser's right of recovery until a reasonable time after the right accrues.

SEC Report, at 15. The details of the proposed amendment to Section 13 were contained in the Industry Report. The explanatory statement in this report indicates that the amendment originated with the Commission, stating that "[t]he Commission has proposed that this Section be amended and the representatives of the industry have concurred in the draft amendments." Industry Report, at 161.

As to the specific amendment, the Commission proposed a new Section 13(a) to apply to Section 11 and a new Section 13(b) to apply to Section 12. The explanatory statement in the Industry Report, in which drafts of all the proposed amendments were included, notes that under the Commission's proposal, Section 13(a) retains the limitation requiring Section 11 actions to be brought within one year after discovery of the misstatement or after such discovery should have been made. But the Commission proposed to replace the three-year provision. Significantly, in explaining the substitute provision, the Industry Report shows that Section 13's three-year period of repose was construed as starting to run when the security is first offered to the public:

As a substitute for the present limitation requiring suits to be brought within three years after the first offering of the security, it is provided that no suit to enforce the Section 11 liability may be brought against anyone later than three years after the sale and delivery by the issuer or associate of all of the registered securities which are the subject of a particular offering (other than any as to which the offering has been withdrawn) except that a suit may be brought against an underwriter for three years from the date on which he sold the particular security on which the suit is based.

Industry Report, at 161 (emphasis added). As to Section 12(a)(1) liability, the explanatory statement on the Commission's proposed amendment to Section 13 (at page 163) states:

The present statute provides that no suit for violation of Section 5 may be brought more than one year after the violation or more than three years after the security was bona fide offered to the public. Proposed subsection 13(b) eliminates this second limitation.

The 1941 proposed amendment demonstrates that the Commission, in its description of the problem and its proposed solution, construed Section 13's period of repose as commencing to run when the securities are first bona fide offered to the public.

2. In 1981, the Commission Adopted Item 512(a)(2) of Regulation S-K, Which Reflects the Commission's Recognition That the Three-Year Period Begins When the Public Offering Begins.

In 1981, the Commission adopted Items 512(a)(1) and 512(a)(2) of Regulation S-K, 17 C.F.R. §229.512(a)(1) and (a)(2). Item 512(a)(1) requires issuers of shelf offerings to undertake to amend the registration statement "to reflect * * * any facts or events arising after the effective date of the registration statement * * * which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement." Item 512(a)(2) then requires that

for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Like the provision in Section 24(e) of the Investment Company Act discussed above, the provision in Item 512(a)(2) concerning the initial bona fide offering with respect to Securities Act liability would not have been needed if the three-year period in Section 13 did not start until the end of the offering. The provision in Item 512(a)(2) was adopted to assure that, with respect to sales made after a post-effective amendment, the three-year period would not run from the earlier effective date of the underlying registration statement. But that would not have been a problem unless the three-year period runs from the beginning of the offering. See Jennings, Marsh, Coffee & Seligman, Securities Regulation 1318 ("The Commission by the device of an undertaking' has attempted to achieve the same result [as the 1954 amendment to the Investment Company Act] in other situations involving continuous or shelf' registrations.").

Thus the Commission in adopting Item 512(a)(2) understood that the three-year limitation of Section 13 runs from the time the security is first offered to the public.

The treatises on the federal securities laws agree with the first-offered construction. See 10 Loss & Seligman, Securities Regulation 4494, 4497 n.78; Jennings, Marsh, Coffee & Seligman, Securities Regulation 1318; 1 T.L. Hazen The Law of Securities Regulation §7.10[4], at 667; 2 A.A. Sommer, Federal Securities Act of 1933 §9.05[4][b], at 9-74 (2002). Similarly, the American Law Institute's Federal Securities Code understood that Section 13's three-year period commences when the security is first offered. Its commentary notes that "in the case of a slow offering * * *, a particular buyer might be barred by the statute of limitations before he bought." Its solution, like that of the SEC-Industry recommendation in 1941, was to drop the three-year period of repose for Section 12(a)(1) claims. See 2 ALI, Federal Securities Code §1727 at 810-13 (1980). Most of the court decisions considering the issue likewise have held that the three-year period begins from the time the securities are first offered.⁴ To our knowledge, only three cases - - of which only one is officially reported - - have adopted the last-offered construction.⁵

II. MEANING OF "BONA FIDE" AND "TO THE PUBLIC" IN SECTION 13'S "BONA FIDE OFFERED TO THE PUBLIC" PROVISION.

A. "Bona Fide" Does Not Mean That the Three-Year Period Starts Only Once the Securities Have Been Offered Legally by the Issuer's Having Registered the Securities.

Plaintiff's argument that the term "bona fide" means that the offer that starts the three-year period must be a "legal" offer would render the three-year period meaningless. It makes no sense to conclude, as plaintiff contends, that the three-year period for bringing a claim for the sale of unregistered securities does not start until the securities have been registered. There appears to be only one court that has construed "bona fide" in Section 13 to mean legal, see Bradford v. Moench, 809 F. Supp. 1473, 1487 (D. Utah 1992), and at least two have rejected it. See Sowell v. Butcher & Singer, Inc., No. 84-714, 1987 WL 10712, at *8 (E.D. Pa. May 13, 1987); Slagell v. Bontrager, 616 F. Supp. 634, 636-37 (W.D. Pa. 1985), aff'd 791 F.2d 921 (3d Cir. 1986). Cf. Kubik v. Goldfield, 479 F.2d 472, 475 (3d Cir. 1973) (holding that "'a bona fide' offer to the public may occur when a stock first appears in the 'pink sheets,' even though the stock may be 'illegally' unregistered").

The leading treatise on the securities laws also has concluded that "[t]he phrase bona fide certainly does not refer to a legal offering." 1 Loss & Seligman, Securities Regulation 514 n.285. The treatise explains that the term "bona fide" was copied from Section 4(1) of the original Securities Act, which included the original prospectus delivery requirement and exemption for dealers. Id. As described by the House Committee on Interstate and Foreign Commerce, the prospectus delivery requirement was to remain in force "a year after the public offering of the securities." H. Rep. 73-85, at 16 (1933). The term "bona fide offering" was the drafter's device "for ensuring" that the prospectus delivery requirements would be in force for an entire year "from the date of the first genuine rather than simulated offering to the public." 1 Loss & Seligman, Securities Regulation 514 n.285 (emphasis added).⁶

B. The Three-Year Period Does Not Start Until a "Bona Fide" Offer Is Made "To the Public" and Therefore Is Not Triggered While an Offering Is Conducted as a Private Offering.

In order that an offering be made "bona fide * * * to the public," so as to start the three-year repose period, the offering should be made in a manner that puts the public on notice that a public offering is occurring and, thus, that registration may be required. Under the plain language of the statute, it is not enough that the security has been offered; the offer must, in addition, have been bona fide made to the public. This means that, if an offering is being conducted as a private offering (but in violation of the registration provisions), the repose period should not start. The explicit reference to a "bona fide" offer "to the public" in Section 13 indicates that Congress did not intend those who act in a manner consistent with a private offering to benefit from the three-year period of repose when so acting. Thus, for example, an issuer that represents to investors or suggests through its actions that securities are being sold to only a small group or to only sophisticated investors (characteristics of a private offering exempted from registration by Section 4(2), 15 U.S.C. 77d(2)) should not benefit from the repose period reserved by Congress for those who make a bona fide offering to the public⁷

As noted above, the leading treatise on the securities laws states that Congress used the term "bona fide" to distinguish between "genuine" and "simulated" offerings to the public. See 1 Loss & Seligman, Securities Regulation 514 n.285. Where an issuer, by its conduct or representations, leaves purchasers with the erroneous impression that they have purchased in a private offering, as opposed to a genuine public offering, the period of repose should not start running because the purchasers may only discover the truth after the period, and Section 12(a)(1) liability, has expired. This construction, which we believe is apparent on the face of the statute, ameliorates the anomaly and harshness of the first-offered construction by delaying the start of the three-year period in situations where the public lacks notice that a public offering has commenced.

In practice this construction of Section 13 works as follows. In the case of an unregistered offering conducted in a manner consistent with a public offering, investors have notice that the offering may require registration. In that situation the seller gets the benefit of the repose period, which starts to run when the security is first offered. These public, but unregistered, offerings include offerings that were conducted under the mistaken impression that an exemption other than the private offering exemption (for example, the intrastate exemption or the Rules 504 and 505 exemptions) was applicable and also public offerings that were not intended to comply with the registration requirements.

In contrast, in cases where an offering is made to the public, but is conducted in a manner that appears consistent with a private offering, the public receives no notice that the offering may require registration. In such offerings, the event that triggers the three-year period of repose never occurs and the repose period therefore never begins to run. In addition, where an offering commences as an offering exempted from registration by the private offering exemption in Section 4(2), but the offering includes later offers that are conducted as a public offering, the period of repose would run from the time of the later offers; where the later public offers are conducted as a private offering, the period would never start. In each of these instances the seller would still have the benefit of the one-year limitation period (one year from the violation).⁸

CONCLUSION

For the foregoing reasons, the Commission is of the view that the three-year period of repose begins to run from the time a security is first bona fide offered to the public and that an issuer that conducts an offering in a manner consistent with a private offering, such that notice has not been given that a public offering is being made, should not benefit from Section 13's repose period reserved for those who make "bona fide" offerings "to the public."

Legal Brief:
P. Stolz Family Partnership L.P.
(Amicus Curiae)

TABLE OF CONTENTS

TABLE OF AUTHORITIES

CASES

STATUTES

LEGISLATIVE MATERIAL

MISCELLANEOUS

INTRODUCTION

DISCUSSION

I. "OFFER" MEANS FIRST, NOT LAST, OFFER, AND ACCORDINGLY THE THREE-YEAR PERIOD BEGINS WHEN THE SECURITY IS FIRST BONA FIDE OFFERED TO THE PUBLIC.

II. MEANING OF "BONA FIDE" AND "TO THE PUBLIC" IN SECTION 13'S "BONA FIDE OFFERED TO THE PUBLIC" PROVISION.

CONCLUSION

Modified: 09/17/2003

Legal Brief: P. Stolz Family Partnership L.P. (Amicus Curiae)

TABLE OF CONTENTS

TABLE OF AUTHORITIES

CASES

STATUTES

LEGISLATIVE MATERIAL

MISCELLANEOUS

INTRODUCTION

DISCUSSION

I. "OFFER" MEANS FIRST, NOT LAST, OFFER, AND ACCORDINGLY THE THREE-YEAR PERIOD BEGINS WHEN THE SECURITY IS FIRST BONA FIDE OFFERED TO THE PUBLIC.

II. MEANING OF "BONA FIDE" AND "TO THE PUBLIC" IN SECTION 13'S "BONA FIDE OFFERED TO THE PUBLIC" PROVISION.

CONCLUSION

Modified: 09/17/2003

Legal Brief:
P. Stolz Family Partnership L.P.
(Amicus Curiae)