General Motors, having been bailed out by the government, is preparing for its massive initial public offering, which could be the biggest in U.S. history. Some will no doubt look at the bailout and conclude that GM investments now come with explicit government backing. But there’s a catch, as caught by CEI’s OpenMarket:
Government ownership poses unique dangers for new shareholders, according to GM’s own preliminary prospectus filed with the SEC.
Among the very last items in 16 pages of “risk factors” is a small disclaimer containing a bombshell. This IPO is largely exempt from from federal and state anti-fraud laws and corresponding lawsuits.
“Your ability bring a claim … under the federal securities laws may be limited,” says the prospectus on page 27. The document explains that because the main “selling stockholder is a federal agency,” the “sovereign immunity” doctrine “provides that claims may not be brought against the United States of America or any agency or instrumentality thereof unless specifically permitted by act of Congress.”
…GM’s new private shareholders, in contrast to shareholders who buy into almost any other IPO, will have virtually no recourse against fraudulent claims. To borrow a much-overused cliché with its genesis in a commercial for old GM’s Oldsmobile, this is not your father’s IPO. Nor that of your grandfather, though it may slightly resemble a stock offering your great-grandfather participated in before federal securities fraud statutes were enacted in the 1930s. But then again, even he would have been able to bring fraud suits under state law, something federal sovereign immunity expressly prohibits.
For IPOs with selling shareholders in the private sector, the federal Securities Act “creates liability for any person who offers or sells a security through a prospectus or an oral communication containing a material misstatement or omission,” notes Cornell University’s Legal Information Institute. GM and other IPOs pose risks, and shareholders assume those risks. But this may be the only IPO since the creation of the Securities and Exchange Commission in which the lead sellers are exempt from anti-fraud laws as well as lawsuits in general.
