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Series 79 practice questionhardProspectus Requirements

A company's preliminary prospectus states that it will use 60% of IPO proceeds for acquisitions. After the IPO, the company uses those funds entirely for working capital. An investor sues under Section 12(a)(2). Which is the most accurate statement?

  1. AThe company has no liability because the use of proceeds section is not binding
  2. BThe company may face liability if the change in use of proceeds was foreseeable at the time of the offering and was not disclosed✓ Correct answer
  3. CThe company is automatically liable for any deviation from the stated use of proceeds
  4. DOnly the underwriters, not the company, can be held liable for use of proceeds misstatements
Explanation

Why B — The company may face liability if the change in use of proceeds was foreseeable at the time of the offering and was not disclosed

Under Section 12(a)(2), an issuer can be held liable for material misstatements or omissions in the prospectus used to sell securities. If the company knew or should have known at the time of the offering that it would not use proceeds as stated, this could constitute a material misstatement. However, companies are generally afforded flexibility in how they use proceeds, and the prospectus typically includes language preserving management's discretion. The key issue is whether the stated intent was genuine at the time the prospectus was circulated.

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