For a long time, it has been settled law that if you bought shares on a public offering and if the prospectus was materially deficient, and if then the price of the shares you purchased fell, then you the investor had a claim for damages under applicable Federal securities laws.  It also seemed clear that this claim was for the benefit of purchases of shares covered by that erroneous filing.

It also was thought that, if someone purchased shares not issued pursuant to the incorrect prospectus, then the purchaser could not make a claim for losses arising from that prospectus since the purchased shares were not “covered” by the disclosures therein.

The US Supreme Court is soon to hear arguments over whether a purchaser of shares of the same class as those covered in the prospectus but not included in the registered securities, and who bought such shares at a higher price because of that erroneous prospectus, can claim damages by reason of buying shares NOT covered by that public offering.  In this case, the shares had not been previously registered and were thus by definition issued under the prospectus.  To decide in favor of the plaintiff would upset Federal law in the seven Federal circuits which have decided such a case and also per a prior SCOTUS decision.

If the Supreme Court decides that unregistered shares are transferred subject to the accuracy of public disclosures in a prospectus, then the potential plaintiff class is greatly expanded, as is the risk of the issuing company; the company then would be in effect making representations of facts to all of its shareholders.  The impact of such a determination on disclosure by registrants, risk metrics considered by underwriters, and the cost of insurance is not known but is potentially material.