Senator Jack Reed has vowed to continue to try in future legislation to correct the investor protection problem associated with the US Supreme Court ruling in Gustafson v. Alloyd, 513 US 561 (1995), where the Court held that Section 12(2) of the Securities Act does not extend to a private sale contract, since a contract, and its recitations, that are not held out to the public are not a "prospectus" as the term is used in the 1933 Act.
A Senate counteroffer in the House-Senate conference reconciling the two versions of financial reform legislation would have amended the Securities Act to address the effects of the Gustafson ruling that has left investors in private securities offerings without protection from material misstatements or omissions in the security’s prospectus. This was the Levin Amendment in the Senate , SA 3969. Ultimately, however, the Gustafson provision was stripped out of the final legislation.
According to Senator Levin, the Gustafson ruling interpreted the securities laws as depriving purchasers in private offerings of the same protections against material misstatements or omissions that apply to public offerings. The amendment would have restored Congressional intent and closed that loophole. Cong. Record, May 11, 2010, S3530. The amendment would have brought investors in private securities offerings under within the scope of Section 12(2) of the Securities Act by amending the definition of prospectus in the 1933 Act.
On the day the Senate passed Dodd-Frank, Senator Reed vowed to continue to work on a bipartisan basis to add the Gustafson fix to a future legislative vehicle so that investors in private offerings are placed on the same level as investors in public offerings, thereby restoring congressional intent and a standard that was in place for 60 years before the Supreme Court decided Gustafson. Before the Supreme Court's decision in this case, noted the Chair of the Senate Securities Subcommittee, the simple yet clear rule was to be careful not to mislead when selling securities in both public and private offerings. After Gustafson, this simple rule was needlessly complicated and limited just to public offerings, in his view(Cong. Record July 15, 2010, p. S5916).