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A relatively minor discrepancy between an initial public offering’s printed and electronic prospectuses does not mean the securities fail to meet registration requirements, the 2nd U.S. Circuit Court of Appeals has ruled. The appeals court also found in Demaria v. Anderson, 01-7505, that investors can have standing to sue for false and misleading statements under � 11 of the Securities Act of 1933 even though they did not purchase shares at the initial offering. The court upheld Southern District of New York Judge William H. Pauley’s dismissal of a class action complaint brought against Internet startup company, a publisher of personal finance information, and the banks that handled the company’s IPO in May 1999. A bar graph in the company’s printed prospectus reported its online publishing revenue and net losses. However, a table in the company’s electronic (or EDGAR) filing with the Securities and Exchange Commission misidentified the company’s online publishing net losses as publishing revenue. The EDGAR filing also failed, in one section, to show net losses. Eleven days after went public, the company reported the losses and, over the next three months, the price of its stock dropped from over $10 per share to 67 cents. The plaintiffs claimed the discrepancy between the printed and electronic prospectus meant the shares were unregistered. They also sued under � 11 of the 1933 act, charging that failed to include financial information for the fiscal quarter leading up to the IPO. However, Judge Pauley found that the shares were registered and that the registration statement was not false and misleading under � 11. He dismissed the complaint for failure to state a claim upon which relief could be granted, On the appeal, Chief Judge John M. Walker Jr. said the 2nd Circuit had asked the SEC to file an amicus brief “because of the novelty and importance of the issues” raised by the case. At issue was � 5 of the 1933 act, which makes it unlawful to sell a security unless a registration statement is in effect, and � 12, which sets liability for any person who offers or sells a security in violation of � 5. The 2nd Circuit, Walker said, rejected the plaintiffs’ argument that the shares were unregistered “because it rests on an erroneous interpretation of the regulations pertaining to SEC filings.” Title 17 C.F.R. � 232.304, he said, outlines the rules and regulations for EDGAR filings. Rule 304(a) states that where “graphic, image or audio material cannot be produced in an electronic filing,” the electronic filing should contain a “fair and accurate” description of that material. And Rule 304(b)(1) states that the graphic, image or audio material “in the version of the document delivered to investors shall be deemed part of the electronic filing.” In its amicus brief, the SEC explained to the court that the purpose of Rule 304(b) is “to assure that graphic material is subject to civil liability that relates to false or misleading statements in the registration statements.” “In light of this purpose,” Judge Walker said, “plaintiffs’ assertion that Rule 304(b) liability is contingent upon satisfaction of Rule 304(a)’s ‘fair and accurate’ requirement makes no sense.” “In a case such as this one, where the only claimed error in an electronically filed prospectus is an inaccurate summary of the graphic, audio or visual material contained in the Printed Prospectus,” he said, the printed prospectus conforms to the registration statement, and there can be no claim under � 12(a)(1) of the act. STANDING ISSUE On the issue of standing, the underwriter defendants said plaintiffs had purchased their shares in the aftermarket, after the initial offering, and therefore had no claim under � 11, which allows a suit by “any person acquiring” a security pursuant to materially false registration statement. But Walker said the plain meaning of � 11 is clear. “We see no reason why ‘any’ as used in Section 11 should not be read as the equivalent of ‘every’ such that every person who acquires a security issued pursuant to an allegedly defective registration statement has standing to sue under Section 11,” he said. Later, the judge added: “This understanding of the statutory text conforms with the long-standing practice in this Circuit of permitting suit under � 11 by those who can ‘trace’ their shares to the allegedly defective registration statement.” But even though the plaintiffs had standing to sue under � 11, Walker said that “reading the prospectus as a whole, ILife’s failure to include the first quarter March 1999 financial figures would not have misled a reasonable investor as to ILife’s revenue potential.” The prospectus, he said, “plainly stated that ILife had a history of net losses,” and did not “paint an unrealistically optimistic picture of ILife’s future performance.” Judges Fred I. Parker and Sonia Sotomayor joined in the opinion. Stephen Rabin of Rabin & Peckel in West Palm Beach, Fla., represented the plaintiffs. Martin I. Kaminsky of New York’s Pollack & Kaminsky represented and individual officers with the company. Jay B. Kasner of Skadden, Arps, Slate, Meagher & Flom represented Warburg Dillon Read and other underwriters.

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