No. 93-404
Argued November 2, 1994
Decided February 28, 1995
JUSTICE KENNEDY delivered the opinion of the Court.
Under 12(2) of the Securities Act of 1933 buyers have an express cause of action for rescission against sellers who make material misstatements or omissions "by means of a prospectus." The question presented is whether this right of rescission extends to a private, secondary transaction, on the theory that recitations in the purchase agreement are part of a "prospectus."
I
Petitioners Gustafson, McLean, and Butler (collectively Gustafson) were in 1989 the sole shareholders of Alloyd, Inc., a manufacturer of plastic packaging and automatic heat sealing equipment. Alloyd was formed, and its stock was issued, in 1961. In 1989, Gustafson decided to sell Alloyd and engaged KPMG Peat Marwick to find a buyer. In response to information distributed by KPMG, Wind Point Partners II, L. P., agreed to buy substantially all of the issued and outstanding stock through Alloyd Holdings, Inc., a new corporation formed to effect the sale of Alloyd's stock. The shareholders of Alloyd Holdings were Wind Point and a number of individual investors. [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 2]
In preparation for negotiating the contract with Gustafson, Wind Point undertook an extensive analysis of the company, relying in part on a formal business review prepared by KPMG. Alloyd's practice was to take inventory at year's end, so Wind Point and KPMG considered taking an earlier inventory to use in determining the purchase price. In the end they did not do so, relying instead on certain estimates and including provisions for adjustments after the transaction closed.
On December 20, 1989 Gustafson and Alloyd Holdings executed a contract of sale. Alloyd Holdings agreed to pay Gustafson and his coshareholders $18,709,000 for the sale of the stock plus a payment of $2,122,219, which reflected the estimated increase in Alloyd's net worth from the end of the previous year, the last period for which hard financial data were available. Article IV of the purchase agreement, entitled "Representations and Warranties of the Sellers," included assurances that the company's financial statements "present fairly . . . the Company's financial condition" and that between the date of the latest balance sheet and the date the agreement was executed "there ha[d] been no material adverse change in . . . [Alloyd's] financial condition." App. 115, 117. The contract also provided that if the year-end audit and financial statements revealed a variance between estimated and actual increased value, the disappointed party would receive an adjustment.
The year-end audit of Alloyd revealed that Alloyd's actual earnings for 1989 were lower than the estimates relied upon by the parties in negotiating the adjustment amount of $2,122,219. Under the contract, the buyers had a right to recover an adjustment amount of $815,000, from the sellers. Nevertheless, on February 11, 1991, the newly formed company (now called Alloyd, Co., the same as the original company) and Wind Point brought suit in the United States District Court for the Northern District of Illinois, seeking outright rescission [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 3] of the contract under 12(2) of the Securities Act of 1933. Alloyd (the new company) claimed that statements made by Gustafson and his coshareholders regarding the financial data of their company were inaccurate, rendering untrue the representations and warranties contained in the contract. The buyers further alleged that the contract of sale was a "prospectus," so that any misstatements contained in the agreement gave rise to liability under 12(2) of the 1933 Act. Pursuant to the adjustment clause, the defendants remitted to the purchasers $815,000 plus interest, but the adjustment did not cause the purchasers to drop the lawsuit.
Relying on the decision of the Court of Appeals for the Third Circuit in Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682 (1991), the District Court granted Gustafson's motion for summary judgment, holding "that section 12(2) claims can only arise out of the initial stock offerings." App. 20. Although the sellers were the controlling shareholders of the original company, the District Court concluded that the private sale agreement "cannot be compared to an initial offering" because "the purchasers in this case had direct access to financial and other company documents, and had the opportunity to inspect the seller's property." Id., at 21.
On review, the Court of Appeals for the Seventh Circuit vacated the District Court's judgment and remanded for further consideration in light of that court's intervening decision in Pacific Dunlop Holdings Inc. v. Allen & Co. Inc., 993 F.2d 578 (1993). In Pacific Dunlop the court reasoned that the inclusion of the term "communication" in the Act's definition of prospectus meant that the term prospectus was defined "very broadly" to include all written communications that offered the sale of a security. Id., at 582. Rejecting the view of the Court of Appeals for the Third Circuit in Ballay, the Court of Appeals decided that [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 4] 12(2)'s right of action for rescission "applies to any communication which offers any security for sale . . . including the stock purchase agreement in the present case." 993 F.2d, at 595. We granted certiorari to resolve this Circuit conflict, 510 U.S. ___ (1994), and we now reverse.
II
The rescission claim against Gustafson is based upon 12(2) of the 1933 Act, 48 Stat. 84, as amended, 15 U.S.C. 77l(2). In relevant part, the section provides that any person who
"offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraph (2) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, "shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security."
As this case reaches us, we must assume that the stock purchase agreement contained material misstatements of [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 5] fact made by the sellers and that Gustafson would not sustain its burden of proving due care. On these assumptions, Alloyd would have a right to obtain rescission if those misstatements were made "by means of a prospectus or oral communication." The parties (and the courts of appeals) agree that the phrase "oral communication" is restricted to oral communications that relate to a prospectus. See Pacific Dunlop, supra, 993 F.2d, at 588; Ballay, supra, at 688. The determinative question, then, is whether the contract between Alloyd and Gustafson is a "prospectus" as the term is used in the 1933 Act.
Alloyd argues that "prospectus" is defined in a broad manner, broad enough to encompass the contract between the parties. This argument is echoed by the dissents. See post, at ___ (THOMAS, J., dissenting); post, at ___ (GINSBURG, J., dissenting). Gustafson, by contrast, maintains that prospectus in the 1933 Act means a communication soliciting the public to purchase securities from the issuer. Brief for Petitioners 17-18.
Three sections of the 1933 Act are critical in resolving the definitional question on which the case turns: 2(10), which defines a prospectus; 10, which sets forth the information that must be contained in a prospectus; and 12, which imposes liability based on misstatements in a prospectus. In seeking to interpret the term "prospectus," we adopt the premise that the term should be construed, if possible, to give it a consistent meaning throughout the Act. That principle follows from our duty to construe statutes, not isolated provisions. See Philbrook v. Glodgett, 421 U.S. 707, 713 (1975); Kokoszka v. Belford, 417 U.S. 642, 650 (1974).
A
We begin with 10. It provides, in relevant part: [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 6]
"Except to the extent otherwise permitted or required pursuant to this subsection or subsections (c), (d), or (e) of this section -
"(1) a prospectus relating to a security other than a security issued by a foreign government or political subdivision thereof, shall contain the information contained in the registration statement . . . .
"(2) a prospectus relating to a security issued by a foreign government or political subdivision thereof shall contain the information contained in the registration statement . . . ." 15 U.S.C. 77j.
Section 10 does not provide that some prospectuses must contain the information contained in the registration statement. Save for the explicit and well-defined exemptions for securities listed under 3, see 15 U.S.C. 77c (exempting certain classes of securities from the coverage of the Act), its mandate is unqualified: "a prospectus . . . shall contain the information contained in the registration statement."
Although 10 does not define what a prospectus is, it does instruct us what a prospectus cannot be if the Act is to be interpreted as a symmetrical and coherent regulatory scheme, one in which the operative words have a consistent meaning throughout. There is no dispute that the contract in this case was not required to contain the information contained in a registration statement and that no statutory exemption was required to take the document out of 10's coverage. Cf. 15 U.S.C. 77c. It follows that the contract is not a prospectus under 10. That does not mean that a document ceases to be a prospectus whenever it omits a required piece of information. It does mean that a document is not a prospectus within the meaning of that section if, absent an exemption, it need not comply with 10's requirements in the first place. [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 7]
An examination of 10 reveals that, whatever else "prospectus" may mean, the term is confined to a document that, absent an overriding exemption, must include the "information contained in the registration statement." By and large, only public offerings by an issuer of a security, or by controlling shareholders of an issuer, require the preparation and filing of registration statements. See 15 U.S.C. 77d, 77e, 77b(11). It follows, we conclude, that a prospectus under 10 is confined to documents related to public offerings by an issuer or its controlling shareholders.
This much (the meaning of prospectus in 10) seems not to be in dispute. Where the courts are in disagreement is with the implications of this proposition for the entirety of the Act, and for 12 in particular. Compare Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d, at 688-689 (suggesting that the term prospectus is used in a consistent manner in both 10 and 12), with Pacific Dunlop Holdings Inc. v. Allen & Co., 993 F.2d, at 584 (rejecting that view). We conclude that the term "prospectus" must have the same meaning under 10 and 12. In so holding, we do not, as the dissent by JUSTICE GINSBURG suggests, make the mistake of treating 10 as a definitional section. See post at ___ (GINSBURG, J., dissenting). Instead, we find in 10 guidance and instruction for giving the term a consistent meaning throughout the Act.
The Securities Act of 1933, like every Act of Congress, should not be read as a series of unrelated and isolated provisions. Only last term we adhered to the "normal rule of statutory construction" that "identical words used in different parts of the same act are intended to have the same meaning." Department of Revenue of Oregon v. ACF Industries, Inc., 510 U.S. ___, ___ (1994) (slip op., at 9) (internal quotation marks and citations omitted); see also Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. ___, ___ (1993) (slip [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 8] op., at 19); Atlantic Cleaners & Dryers, Inc. v. United States, 286 U.S. 427, 433 (1932). That principle applies here. If the contract before us is not a prospectus for purposes of 10 - as all must and do concede - it is not a prospectus for purposes of 12 either.
The conclusion that prospectus has the same meaning, and refers to the same types of communications (public offers by an issuer or its controlling shareholders), in both 10 and 12 is reinforced by an examination of the structure of the 1933 Act. Sections 4 and 5 of the Act together require a seller to file a registration statement and to issue a prospectus for certain defined types of sales (public offerings by an issuer, through an underwriter). See 15 U.S.C. 77d, 77e. Sections 7 and 10 of the Act set forth the information required in the registration statement and the prospectus. See 77g, 77j. Section 11 provides for liability on account of false registration statements; 12(2) for liability based on misstatements in prospectuses. See 15 U.S.C. 77k, 77l. Following the most natural and symmetrical reading, just as the liability imposed by 11 flows from the requirements imposed by 5 and 7 providing for the filing and content of registration statements, the liability imposed by 12(2), cannot attach unless there is an obligation to distribute the prospectus in the first place (or unless there is an exemption).
Our interpretation is further confirmed by a reexamination of 12 itself. The section contains an important guide to the correct resolution of the case. By its terms, 12(2) exempts from its coverage prospectuses relating to the sales of government-issued securities. See 15 U.S.C. 77l (excepting securities exempted by 77c(a)(2)). If Congress intended 12(2) to create liability for misstatements contained in any written communication relating to the sale of a security - including secondary market transactions - there is no ready explanation for exempting government-issued securities [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 9] from the reach of the right to rescind granted by 12(2). Why would Congress grant immunity to a private seller from liability in a rescission suit for no reason other than that the seller's misstatements happen to relate to securities issued by a governmental entity? No reason is apparent. The anomaly disappears, however, when the term "prospectus" relates only to documents that offer securities sold to the public by an issuer. The exemption for government-issued securities makes perfect sense on that view, for it then becomes a precise and appropriate means of giving immunity to governmental authorities.
The primary innovation of the 1933 Act was the creation of federal duties - for the most part, registration and disclosure obligations - in connection with public offerings. See, e. g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976) (the 1933 Act "was designed to provide investors with full disclosure of material information concerning public offerings"); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752 (1975) ("The 1933 Act is a far narrower statute [than the Securities Exchange Act of 1934 (1934 Act)] chiefly concerned with disclosure and fraud in connection with offerings of securities - primarily, as here, initial distributions of newly issued stock from corporate issuers"); United States v. Naftalin, 441 U.S. 768, 777-778 (1979) ("[T]he 1933 Act was primarily concerned with the regulation of new offerings"); SEC v. Ralston Purina Co., 346 U.S. 119, 122, n. 5 (1953) ("`[T]he bill does not affect transactions beyond the need of public protection in order to prevent recurrences of demonstrated abuses'"), quoting H. R. Rep. No. 85, 73d Cong., 1st Sess., 7 (1933). We are reluctant to conclude that 12(2) creates vast additional liabilities that are quite independent of the new substantive obligations the Act imposes. It is more reasonable to interpret the liability provisions of the 1933 Act as designed for the primary purpose of providing [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 10] remedies for violations of the obligations it had created. Indeed, 11 and 12(1) - the statutory neighbors of 12(2) - afford remedies for violations of those obligations. See 11, 15 U.S.C. 77k (remedy for untrue statements in registration statements); 12(1), 15 U.S.C. 77l(1) (remedy for sales in violation of 5, which prohibits the sale of unregistered securities). Under our interpretation of "prospectus," 12(2) in similar manner is linked to the new duties created by the Act.
On the other hand, accepting Alloyd's argument that any written offer is a prospectus under 12 would require us to hold that the word "prospectus" in 12 refers to a broader set of communications than the same term in 10. The Court of Appeals was candid in embracing that conclusion: "[T]he 1933 Act contemplates many definitions of a prospectus. Section 2(10) gives a single, broad definition; section 10(a) involves an isolated, distinct document - a prospectus within a prospectus; section 10(d) gives the Commission authority to classify many." Pacific Dunlop Holdings Inc. v. Allen & Co., 993 F.2d, at 584. The dissents take a similar tack. In the name of a plain meaning approach to statutory interpretation, the dissents discover in the Act two different species of prospectuses: formal (also called 10) prospectuses, subject to both 10 and 12, and informal prospectuses, subject only to 12 but not to 10. See post at ___ (GINSBURG, J., dissenting); see also post, at ___ (THOMAS, J., dissenting). Nowhere in the statute, however, do the terms "formal prospectus" or "informal prospectus" appear. Instead, the Act uses one term - "prospectus" - throughout. In disagreement with the Court of Appeals and the dissenting opinions, we cannot accept the conclusion that this single operative word means one thing in one section of the Act and something quite different in another. The dissenting opinions' [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 11] resort to terms not found in the Act belies the claim of fidelity to the text of the statute.
Alloyd, as well as JUSTICE THOMAS in his dissent, respond that if Congress had intended 12(2) to govern only initial public offerings, it would have been simple for Congress to have referred to the 4 exemptions in 12(2). See Brief of Respondents 25-26; post, at ___ (THOMAS, J., dissenting). The argument gets the presumption backwards. Had Congress meant the term "prospectus" in 12(2) to have a different meaning than the same term in 10, that is when one would have expected Congress to have been explicit. Congressional silence cuts against, not in favor of, Alloyd's argument. The burden should be on the proponents of the view that the term "prospectus" means one thing in 12 and another in 10 to adduce strong textual support for that conclusion. And Alloyd adduces none.
Alloyd's contrary argument rests to a significant extent on 2(10), or, to be more precise, on one word of that section. Section 2(10) provides that "[t]he term `prospectus' means any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security." 15 U.S.C. 77b(10). Concentrating on the word "communication," Alloyd argues that any written communication that offers a security for sale is a "prospectus." Inserting its definition into 12(2), Alloyd insists that a material misstatement in any communication offering a security for sale gives rise to an action for rescission, without proof of fraud by the the seller or reliance by the purchaser. In Alloyd's view, 2(10) gives the term "prospectus" a capacious definition that, although incompatible with 10, nevertheless governs in 12. [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 12]
The flaw in Alloyd's argument, echoed in the dissenting opinions, post, at ___ (THOMAS, J., dissenting; post, at ___ (GINSBURG, J., dissenting), is its reliance on one word of the definitional section in isolation. To be sure, 2(10) defines a prospectus as, inter alia, a "communication, written or by radio or television, which offers any security for sale or confirms the sale of any security." 15 U.S.C. 77b(10). The word "communication," however, on which Alloyd's entire argument rests, is but one word in a list, a word Alloyd reads altogether out of context.
The relevant phrase in the definitional part of the statute must be read in its entirety, a reading which yields the interpretation that the term prospectus refers to a document soliciting the public to acquire securities. We find that definition controlling. Alloyd's argument that the phrase "communication, written or by radio or television," transforms any written communication offering a security for sale into a prospectus cannot consist with at least two rather sensible rules of statutory construction. First, the Court will avoid a reading which renders some words altogether redundant. See United States v. Menasche, 348 U.S. 528, 538-39 (1955). If "communication" included every written communication, it would render "notice, circular, advertisement, [and] letter" redundant, since each of these are forms of written communication as well. Congress with ease could have drafted 2(10) to read: "The term `prospectus' means any communication, written or by radio or television, that offers a security for sale or confirms the sale of a security." Congress did not write the statute that way, however, and we decline to say it included the words "notice, circular, advertisement, [and] letter" for no purpose.
The constructional problem is resolved by the second principle Alloyd overlooks, which is that a word is known by the company it keeps (the doctrine of noscitur [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 13] a sociis). This rule we rely upon to avoid ascribing to one word a meaning so broad that it is inconsistent with its accompanying words, thus giving "unintended breadth to the Acts of Congress." Jarecki v. G. D. Searle & Co., 367 U.S. 303, 307 (1961). The rule guided our earlier interpretation of the word "security" under the 1934 Act. The 1934 Act defines the term "security" to mean, inter alia, "any note." We concluded nevertheless that in context "the phrase `any note' should not be interpreted to mean literally `any note,' but must be understood against the background of what Congress was attempting to accomplish in enacting the Securities Acts." Reves v. Ernst & Young, 494 U.S. 56, 63 (1990). These considerations convince us that Alloyd's suggested interpretation is not the correct one.
There is a better reading. From the terms "prospectus, notice, circular, advertisement, or letter," it is apparent that the list refers to documents of wide dissemination. In a similar manner, the list includes communications "by radio or television," but not face-to-face or telephonic conversations. Inclusion of the term "communication" in that list suggests that it too refers to a public communication.
When the 1933 Act was drawn and adopted, the term "prospectus" was well understood to refer to a document soliciting the public to acquire securities from the issuer. See Black's Law Dictionary 959 (2d ed. 1910) (defining "prospectus" as a "document published by a company . . . or by persons acting as its agents or assignees, setting forth the nature and objects of an issue of shares . . . and inviting the public to subscribe to the issue"). In this respect, the word prospectus is a term of art, which accounts for Congressional confidence in employing what might otherwise be regarded as a partial circularity in the formal, statutory definition. See 15 U.S.C. 77b(10) ("The term `prospectus' means any prospectus . . . ."). The use of the term prospectus to [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 14] refer to public solicitations explains as well Congress' decision in 12(2) to grant buyers a right to rescind without proof of reliance. See H. R. Rep. No. 85, 73d Cong., 1st Sess., 10 (1933) ("The statements for which [liable persons] are responsible, although they may never actually have been seen by the prospective purchaser, because of their wide dissemination, determine the market price of the security . . . .").
The list of terms in 2(10) prevents a seller of stock from avoiding liability by calling a soliciting document something other than a prospectus, but it does not compel the conclusion that Alloyd urges us to reach and that the dissenting opinions adopt. Instead, the term "written communication" must be read in context to refer to writings that, from a functional standpoint, are similar to the terms "notice, circular, [and] advertisement." The term includes communications held out to the public at large but that might have been thought to be outside the other words in the definitional section.
Our holding that the term "prospectus" relates to public offerings by issuers and their controlling shareholders draws support from our earlier decision interpreting the one provision of the Act that extends coverage beyond the regulation of public offerings, 17(a) of the 1933 Act.* See United States v. Naftalin, [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 15] 441 U.S. 768 (1979). In Naftalin, though noting that "the 1933 Act was primarily concerned with the regulation of new offerings," the Court held that 17(a) was "intended to cover any fraudulent scheme in an offer or sale of securities, whether in the course of an initial distribution or in the course of ordinary market trading." The Court justified this holding - which it termed "a major departure from th[e] limitation [of the 1933 Act to new offerings]" - by reference to both the statutory language and the unambiguous legislative history. Id., at 777-778. The same considerations counsel in favor of our interpretation of 12(2).
The Court noted in Naftalin that 17(a) contained no language suggesting a limitation on the scope of liability under 17(a). See id., at 778 ("the statutory language . . . makes no distinctions between the two kinds of transactions"). Most important for present purposes, 17(a) does not contain the word "prospectus." In contrast, as we have noted, 12(2) contains language, i.e., "by means of a prospectus or oral communication," that limits 12(2) to public offerings. Just as the absence of limiting language in 17(a) resulted in broad coverage, the presence of limiting language in 12(2) requires a narrow construction.
Of equal importance, the legislative history relied upon in Naftalin showed that Congress decided upon a deliberate departure from the general scheme of the Act in this one instance, and "made abundantly clear" its intent that 17(a) have broad coverage. See Naftalin, 441 U.S., at 778 (quoting legislative history stating that "`fraud or deception in the sale of securities may be prosecuted regardless of whether . . . or not it is of the class of securities exempted under sections 11 or 12.'" [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 16] S. Rep. No. 47, 73d Cong., 1st Sess., 4 (1933)). No comparable legislative history even hints that 12(2) was intended to be a free-standing provision effecting expansion of the coverage of the entire statute. The intent of Congress and the design of the statute require that 12(2) liability be limited to public offerings.
It is understandable that Congress would provide buyers with a right to rescind, without proof of fraud or reliance, as to misstatements contained in a document prepared with care, following well established procedures relating to investigations with due diligence and in the context of a public offering by an issuer or its controlling shareholders. It is not plausible to infer that Congress created this extensive liability for every casual communication between buyer and seller in the secondary market. It is often difficult, if not altogether impractical, for those engaged in casual communications not to omit some fact that would, if included, qualify the accuracy of a statement. Under Alloyd's view any casual communication between buyer and seller in the aftermarket could give rise to an action for rescission, with no evidence of fraud on the part of the seller or reliance on the part of the buyer. In many instances buyers in pratical [practical] effect would have an option to rescind, impairing the stability of past transactions where neither fraud nor detrimental reliance on misstatements or omissions occured. We find no basis for interpreting the statute to reach so far.
III
The SEC, as amicus, and JUSTICE GINSBURG in dissent, rely on what they call the legislative background of the Act to support Alloyd's construction. With a few minor exceptions, however, their reliance is upon statements by commentators and judges written after the Act was passed, not while it was under [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 17] consideration. See Brief for Securities and Exchange Commission as Amicus Curiae 19-23; post, at ___ (GINSBURG, J., dissenting). Material not available to the lawmakers is not considered, in the normal course, to be legislative history. After-the-fact statements by proponents of a broad interpretation are not a reliable indicator of what Congress intended when it passed the law, assuming extratextual sources are to any extent reliable for this purpose.
The SEC does quote one contemporaneous memorandum prepared by Dean Landis. See id., at 13 (citing James M. Landis, Reply to Investment Bankers Association Objections of May 5, 1933, p. 5). The statement is quite consistent with our construction. Landis observed that, in contrast to the liabilities imposed by the Act "`that flow from the fact of non-registration or registration,'" dealings may violate 12(2) "`even though they are not related to the fact of registration.'" See ibid. (emphasis added). This, of course, is true. The liability imposed by 12(2) has nothing to do with the fact of registration, that is with the failure to file a registration statement that complies with 7 and 11 of the Act. Instead, the liability imposed by 12(2) turns on misstatements contained in the prospectus. And, one might point out, securities exempted by 3 of the Act do not require registration, although they are covered by 12. Landis' observation has nothing to do with the question presented here: whether a prospectus is a document soliciting the public to purchase securities from the issuer.
The SEC also relies on a number of writings, the most prominent a release by the FTC, stating that 12(2) applied to securities outstanding on the effective date of the 1933 Act. See id., at 19-20. Again, this is an issue not in dispute. Although the Act as passed exempted securities from registration if sold by the issuer within sixty days of the passage of the Act, see 1933 Securities [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 18] Act, 3(a)(1), the limitation did not apply to 12(2). See 15 U.S.C. 77l. Instead, actions brought under 12(2) are subject to the limitation of actions provision in 13. See 15 U.S.C. 77m (one year from the date of discovery). A buyer who discovered a material omission in a prospectus after the passage of the Act could sue for rescission under 12(2) even though the prospectus had been issued before enactment of the statute. This tells us nothing one way or the other, however, about whether the term "prospectus" is limited to a document soliciting the public to purchase securities from the issuer.
In large measure the writings on which both the SEC and JUSTICE GINSBURG rely address a question on which there is no disagreement, that is, "to what securities does 12(2) apply?" We agree with the SEC that 12(2) applies to every class of security (except one issued or backed by a governmental entity), whether exempted from registration or not, and whether outstanding at the time of the passage of the Act or not. The question before us is the coverage of 12(2), and the writings offered by the SEC are of little value on this point.
If legislative history is to be considered, it is preferable to consult the documents prepared by Congress when deliberating. The legislative history of the Act concerning the precise question presented supports our interpretation with much clarity and force. Congress contemplated that 12(2) would apply only to public offerings by an issuer (or a controlling shareholder). The House Report stated: "[t]he bill affects only new offerings of securities . . . . It does not affect the ordinary redistribution of securities unless such redistribution takes on the characteristics of a new offering." H. R. Rep. No. 85, 73d Cong., 1st Sess., 5 (1933). The observation extended to 12(2) as well. Part II, 6 of the House Report is entitled "Civil Liabilities." See id., at 9. It begins: "Sections 11 and 12 create and define the civil [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 19] liabilities imposed by the act . . . . Fundamentally, these sections entitle the buyer of securities sold upon a registration statement . . . to sue for recovery of his purchase price." Ibid. It will be recalled that as to private transactions, such as the Alloyd purchase, there will never have been a registration statement. If 12(2) liability were imposed here, it would cover transactions not within the contemplated reach of the statute.
Even more important is the Report's discussion, and justification, of the liabilities arising from omissions and misstatements in "the prospectus:"
"The Committee emphasizes that these liabilities attach only when there has been an untrue statement of material fact or an omission to state a material fact in the registration statement or the prospectus - the basic information by which the public is solicited. All who sell securities with such a flaw, who cannot prove that they did not know - or in the exercise of due care could not have known - of such misstatement or omission, are liable under sections 11 and 12. For those whose moral responsibility to the public is particularly heavy, there is a correspondingly heavier legal liability - the persons signing the registration statement, the underwriters, the directors of the issuer, the accountants, engineers, appraisers, and other professionals preparing and giving authority to the prospectus - all these are liable to the buyer if they cannot prove [the use of due care]. This throws upon originators of securities a duty of competence as well as innocence . . . ." Ibid.
The House Report thus states with clarity and with specific reference to 12 that 12 liability is imposed only as to a document soliciting the public.
In light of the care that Congress took to justify the imposition of liability without proof of either fraud or [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 20] reliance on "those whose moral responsibility to the public is particularly heavy" - the "originators of securities" - we can not conclude that Congress would have extended that liability to every private or secondary sale without a whisper of explanation. The conspicuous absence in the legislative history is not the absence of an explicit statement that 12(2) applied only to public offerings, see post at ___ (GINSBURG, J., dissenting), but the lack of any explicit reference to the creation of liability for private transactions.
JUSTICE GINSBURG argues that the omission from the 1933 Act of the phrase "offering to the public" that appeared in the definition of "prospectus" in the British Companies Act of 1929 suggests that the drafters of the American bill intended to expand its coverage. See post, at ___ (GINSBURG, J., dissenting). We consider it more likely that the omission reflected instead the judgment that the words "offering to the public" were redundant in light of the understood meaning of "prospectus." Far from suggesting an intent to depart in a dramatic way from the balance struck in the British Companies Act, the legislative history suggests an intent to maintain it. In the context of justifying the "civil liabilities" provisions that hold "all those responsible for statements upon the face of which the public is solicited . . . to standards like those imposed by law upon a fiduciary," the House Report stated: "The demands of this bill call for the assumption of no impossible burden, nor do they involve any leap into the dark. Similar requirements have for years attended the business of issuing securities in other industrialized nations." H. R. Rep. No. 85, at 5. So, too, the Report provided: "The committee is fortified in these sections [that is, 11 and 12] by similar safeguards in the English Companies Act of 1929. What is deemed necessary for sound financing in conservative England ought not to be unnecessary for the more feverish pace which American finance has [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 21] developed." Id., at 9. These passages confirm that the civil liability provisions of the 1933 Act, 11 and 12, impose obligations on those engaged in "the business of issuing securities," in conformance, not in contradiction to, the British example.
Nothing in the legislative history, moreover, suggests Congress intended to create two types of prospectuses, a formal prospectus required to comply with both 10 and 12, and a second, less formal prospectus, to which only 12 would be applicable. The Act proceeds by definitions more stable and precise. The legislative history confirms what the text of the Act dictates: 10's requirements govern all prospectuses defined by 2(10) (although, as we pointed out earlier, certain classes of securities are exempted from 10 by operation of 3). In discussing 10, the House Report stated:
"Section 10 of the bill requires that any `prospectus' used in connection with the sale of any securities, if it is more than a mere announcement of the name and price of the issue offered and an offer of full details upon request [the exception codified at 2(10)(b)], must include a substantial portion of the information required in the `registration statement.' . . .
"`Prospectus' is defined in section 2(1) [now 2(10)] to include `any prospectus, notice, circular, advertisement, letter, or other communication offering any security for sale.'
"The purpose of these sections is to secure for potential buyers the means of understanding the intricacies of the transaction into which they are invited." Id., at 8.
Nothing in the Report suggests that Congress thought that 10 would apply only to formal prospectuses required to be produced by 5. See 15 U.S.C. 77e. [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 22] Cf. post, at ___ (THOMAS, J., dissenting). The Report undermines the dissents' self-contradicting conclusion that the contract here is a prospectus under 2(10) even though not subject to the requirements of 10. [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 26]
* * *
In sum, the word "prospectus" is a term of art referring to a document that describes a public offering of securities by an issuer or controlling shareholder. The contract of sale, and its recitations, were not held out to the public and were not a prospectus as the term is used in the 1933 Act.
The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.
It is so ordered.
[Footnote *] Section 17(a) provides:
"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly -
"(1) to employ any device, scheme, or artifice to defraud, or
"(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___ (1995) , 15]
"(3) to engage in any
transaction, practice, or course of business which operates or would operate as
a fraud or deceit upon the purchaser." 15 U.S.C. 77q(a). [ GUSTAFSON v. ALLOYD CO., ___ U.S. ___
(1995) , 1]