Doran v. Petroleum Management Corp.
Citation
545 F.2d 893 (5th Cir. 1977). United States Court of Appeals for the Fifth Circuit.
Facts
Petroleum Management Corp. offered interests in an oil and gas drilling program. Among the offerees were some sophisticated investors with knowledge of the oil business and some unsophisticated investors who lacked the ability to fend for themselves. All purchasers may have been sophisticated, but at least one offeree was not. PMC relied on the § 4(2) private placement exemption from Securities Act registration. When the investment failed, Doran sought rescission.
Issue
Is the § 4(2) private placement exemption available when not all offerees — as opposed to all purchasers — were sophisticated investors capable of fending for themselves?
Holding
The court held that the § 4(2) exemption was unavailable because the offering included at least one unsophisticated offeree. The exemption focuses on offerees, not purchasers, and a single unsophisticated offeree destroys the exemption for the entire offering.
Rule / Doctrine
SEC v. Ralston Purina established that the private placement exemption is available only when all offerees can fend for themselves — that is, they have access to the same information as would be available through a registered offering. The Fifth Circuit extended this to hold that the inquiry centers on offerees, not purchasers: if any offeree lacks sophistication, the exemption is lost even if that person did not ultimately purchase. A sophisticated purchaser who bought the offering can still seek rescission if a fellow offeree was unsophisticated.
Significance
Doran is a foundational private placement case and a principal teaching vehicle for the § 4(2) / Rule 506 exemption structure, the focus on offerees rather than purchasers, and the all-or-nothing nature of the exemption when it fails.