Opinion ID: 315788
Heading Depth: 1
Heading Rank: 1

Heading: Exemption from Registration

Text: 27 Defendants claim that the issuance of Colorado & Western stock to the plaintiff was not a public offering within the meaning of Section 4(2) of the Securities Act of 1933, 1 which exempts private offerings from the consequences of the registration requirements, thus making Section 12(1) inapplicable. 2 28 The trial court ruled that Andrews was not a knowledgeable investor and that he did not have access to the available information. 3 29 The trial court's conclusion was entirely in accord with the Supreme Court's decision in S.E.C. v. Ralston Purina, 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953). The Securities and Exchange Commission had in that case tried to enjoin Ralston Purina from offering unregistered stock to its employees. The court was called on to determine the meaning of the term 'public offering'. In doing so the court looked to the purpose of the statute which was to protect the investor by promoting full disclosure of information considered necessary to make informed investment decisions. 346 U.S. at 124, 73 S.Ct. 981. It interpreted Section 4(2) in accordance with its purpose, concluding that the transaction is exempt from registration only when an offeree has had sufficient access to information similar to that made available to the offeree in a registration statement. So considered, an offering is private when made 'to those who are shown to be able to fend for themselves.' 346 U.S. at 124, 73 S.Ct. at p. 984. 4 30 Defendants argue that plaintiff was a sophisticated investor with access to all relevant information. This argument fails, not only because the trial court's findings to the contrary were based on substantial evidence, but also because of the fiduciary relationship and the duty to disclose arising therefrom. The duty was particularly clear in view of the repeated specific inquiries directed by plaintiff to the defendants. Plaintiff had a basis for believing that his 20 percent interest in the enterprise would be protected. He was not placed on notice that defendants were carrying out legal maneuvers designed to depreciate plaintiff's interest and enhance their own. 31 Was the offering exempt because the other offerees might have been able to fend for themselves? We conclude that it was not. The statute is intended to promote full disclosure to every investor regardless of his particular business background. See Hill Corp. v. American International Franchises, Inc., 448 F.2d 680, 690 (5th Cir. 1971). Ralston Purina rejects the idea that an exemption exists based only on the individual sophistication of the offeree and without regard to his actual knowledge concerning the issuer. 5 32 Our court has held that the Ralston Purina standard of disclosure applies to all offerees. See Lively v. Hirschfeld, 440 F.2d 631, 633 (10th Cir. 1971). So the situation is not altered by the fact, if it be a fact, that the other offerees of Colorado & Western were able to fend for themselves. 33 The small number of shares issued does not cause the offering to be private. The Ralston Purina decision deals with this also. See 346 U.S. at 125, 73 S.Ct. at p. 981; see also S.E.C. Securities Act Release No. 285: Jan. 24, 1935. 34 Nor does the restrictive legend on the face of the shares serve to make the offering private. It is said that the legend is a precaution to prevent illegal distributions. It does not serve as a basis for exemption from registration. 6 35 Defendants also claim that the offering was exempt because they were neither issuers nor underwriters and hence are within the sweep of Section 4(1) of the 1933 Act. Section 2(11) of the 1933 Act provides that an issuer includes any person directly or indirectly controlling the issuer. Here defendants controlled the issuer Colorado and Western. As a legal consequence they were issuers. But they were also 'underwriters.' The shares distributed to plaintiff were first issued to the Blues, who in name at least were the sole shareholders of Cherry Creek Drive, Inc. Under Section 2(11) of the 1933 Act they were underwriters because they received Colorado and Western shares for redistribution, and Austin was also an underwriter because of his participation. See Quinn and Company v. S.E.C., 452 F.2d 943 (10th Cir. 1971). 36 It is clear that defendants have failed to sustain the burden which the law imposes on sellers of unregistered securities to prove an exemption. Lively v. Hirschfeld, supra; Garfield v. Strain, 320 F.2d 116 (10th Cir 1963); Woodward v. Wright, 266 F.2d 108 (10th Cir. 1959). 37