Private Offerings & Managed Buyouts: No Prospectus Needed

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Four courts have upheld a statute governing private offerings stating that a prospectus is not required. The 2nd U.S. Circuit Court of Appeals has issued the ruling, Yung v. Lee, according to Judges Reena Raggi, Dennis Jacobs, and Robert Sack decided the case. Raggi wrote the opinion for the panel.

The details of the case occurred over 1998 and 1999. Yung Yao, and his son Billy Yung, acquired shares in Integrated Transportation Network Group (ITNG), according to ITNG is a wholly owned subsidiary of the Dawson Science Corporation. There were also meetings covering the potential for expansion for auto leasing and the value of taxi licenses, held by TNG, into the Chinese market. The Yungs were given a prospectus containing an audit report prepared by BDO Seidman.

The transaction began falling apart in May 1999 when the Yungs discovered previously undisclosed liabilities and false and misleading statements and omissions in the prospectus that concealed the company's financial problems, according to Discovery of ITNG's “dire” financial position lead to the Yung's securities claim based on §12(a)(2) and 15 of the Securities Act of 1933.

First, the Southern District Judge Deborah Batts ruled that §12(a)(2) did not cover transactions of private securities. Before 1995, it was ruled, in the 2nd Circuit and other courts, that §12(a)(2) applied to private and public securities offerings, according to

In 1995, The U.S. Supreme Court held that a private sales contract could not be considered a prospectus after deciding Gustafson v. Alloyd Co., 513 U.S. 561 (1995), according to The Supreme Court ruling read §12(a)(2) liability “cannot attach unless there is an obligation to distribute the prospectus in the first place (or unless there is an exemption).”

The high court said, a prospectus “is a term of art referring to a document that describes a public offering of securities by an issuer or a controlling shareholder,” according to The court's interpretation bound “…lower federal courts to their application of that statute,” including the 1st, 5th, 10th Circuit Courts, as well as the 2nd.

Judge Raggi said in, “We now join these courts in holding that Gustafson's definition of a prospectus as ‘a document that describes a public offering of securities' compels the conclusion that a §12(a)(2) action cannot be maintained by a plaintiff who acquires securities through a private transaction, whether primary or secondary.”

According to, the final court opinion found that the action filed by Billy Yung and Yung Yao, claiming that they were defrauded by ITNG, was dismissed and defendants BDO International, BDO Binder, and BDO Seidman, were granted dismissal for lack of subject matter jurisdiction.

Several major companies have completed private offerings in the last several years. Science Applications International Corporation (SAIC) offered $800 million, in 10 and 30-year senior unsecured notes, to be used for future acquisitions, expansion of their outsourcing business, stock repurchases, and capital expenditures, according to their prepared statement. SAIC completed the sale of these unsecured notes in mid-2002. More currently, Massey Energy reported that it priced $760 million in corporate notes to institutional buyers and foreign investors, according to the Associated Press.

Initial Public Offerings (IPOs) require that companies have a net worth of at least $5 million and prepare public financial statements, as well as submit to a full SEC review. The advantages of private offerings become clear when you consider they can be prepared quickly and relatively, inexpensively according to Cambridge Financial Services.

For different types of businesses, one financial services company, Cambridge Financial Services, offers software packages to streamline the creation of the proper paperwork for the three popular types of private stock offerings. They are Regulation D Series (Private Placement Memorandum or PPM), Limited Partnership Offering (LPO), and Form U-7 (Small Corporate Offering Registration or SCOR). Review Cambridge Financial Services software offerings at www/

In a similar vein, Research and Markets now offers the book Winning Legal Strategies: Implementing a Successful Management Buyout (MBO) authored by James M. Hill and John S. Gambaccini. The book divides the MBO process into basic steps spotlighting this often neglected and underutilized ownership technique. Go to for more information.

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