Doran v. Petroleum Management Corp.
545 F.2d 893 (5th Cir.1977).

Facts:
Doran, a sophisticated investor, received a call from a broker advising him of the opportunity to become a “special participant” in Petroleum Management Corporation (PMC). He agreed, and contributed $125,000. For the next couple years, Doran received periodic production information on completed wells. During this time, however, PMC was deliberately overproducing, in violation of the production allowances.

  • They eventually went under, and Doran and PMC were on the hook for $50,000+.
  • Doran then sued to rescind the contract based on violations of the Securities Acts.

History:
The district court held that the sale was a private offering exempted from the Act. See Section 4(2).

Issue:
Whether the sale was part of a private offering exempted from the registration requirements of that Act.

Holding:
Reversed and remanded to determine that question.

Reasoning:

  • The court identified four factors relevant to determining whether an offering is public or private, thus qualifying for the exemption:

(1) The number of offerees and their relationship to each other and the issuer.
(2) The number of units offered.
(3) The size of the offering.
(4) The manner of the offering.

  • For the first element, courts focus on the information available to the offerees by virtue of that relationship. This can be shown in two ways:

(1) The corporation actually disclosed the information that a registration statement would normally provide, OR
(2) The offeree had effective access to that relevant information.

  • Here, the latter three factors were present, but the first (and most critical) factor was not:
    • “Did the offerees know or have a realistic opportunity to learn facts essential to an investment judgment? We remand so that the trial court can answer that question.”

The court held that the investment sophistication of an offeree definitely plays a role, but there must be sufficient basis of accurate information upon which he can exercise his skills.

  • They equated it to a scientist needing his specimens.