                             2016 IL App (1st) 143051
                                  No. 1-14-3051
                            Opinion filed June 30, 2016
                                                                           Fourth Division
______________________________________________________________________________

                                     IN THE
                        APPELLATE COURT OF ILLINOIS
                                FIRST DISTRICT
______________________________________________________________________________

JJR, LLC; BLAIR FREDRICH IRA and        )         Appeal from the
BLAIR FRIEDRICH as owner-beneficiary,   )         Circuit Court of
DANIEL C. IDZAL, JAIMIE KLINE, ANNE )             Cook County.
K. MORNINGSTAR 2006 REVOCABLE           )
TRUST, LESLIE MORNINGSTAR               )         No. 2010 L 014697
IRREVOCABLE TRUST USAD 12-11-98,        )
MADISON R. MORNINGSTAR                  )         Honorable Judge
REVOCABLE TRUST DTD 118-90,             )         Thomas R. Mulroy, Jr.,
BARBARA KLINE HERMAN, JOHN              )         Judge, presiding.
MORNINGSTAR 5-21-75 TRUST, MOLLY )
GERBAZ 5-21-75 TRUST, PEMAQUID          )
POINT INVESTMENT COMPANY, LLC,          )
SPECIAL PEOPLE IN NEED, THE             )
SCHWEPPE FOUNDATION, GARY H.            )
KLINE, GARY H. KLINE IRA ROLLOVER )
and GARY H. KLINE as owner-beneficiary, )
JOSEPH R. and MARTHA M. MEMBRINO, )
RUSS M. HERMAN, ANDREW E. KLINE         )
SEP IRA and ANDREW E. KLINE as owner- )
beneficiary, THERESA L. KLINE IRA and   )
THERESA L. KLINE as owner-beneficiary,  )
NEGAR ALIMAMAGHANI, MASSAD &            )
MASSAD INVESTMENTS, LTD.,               )
THOMAS E. CALLAHAN, FRANK W.            )
BRAZITAS, DAVID B. SCOTT, PETER         )
CRAIG WOOD, R.H. STRICKLER,             )
DUNCAN W. CAMPBELL, HOPKINS             )
INVESTMENT LIMITED PARTNERSHIP,         )
     No. 1-14-3051

     THE CHASE FOUNDATION OF                )
     VIRGINIA, DS&S CHASE, LLC, THE         )
     STUART F. CHASE 2001 REVOCABLE         )
     TRUST, THE D. SUMNER CHASE, III 2001   )
     IRREVOCABLE TRUST, STUART F.           )
     CHASE, JAMES L. JESSUP, JR.,           )
                                            )
      Plaintiffs-Appellants,                )
                                            )
      v.                                    )
                                            )
     WILLLIAM J. TURNER, SIGNATURE          )
     CAPITAL LLC, SIGNATURE CAPITAL         )
     SECURITIES LLC, WILLIAM G. FRAINE, )
     STEPHEN A. CONE, JON GUYATT and        )
     HUGH E. SAWYER,                        )
                                            )
      Defendants-Appellees.                 )
     ____________________________________________________________________________

           JUSTICE COBBS delivered the judgment of the court, with opinion.
           Presiding Justice McBride and Justice Howse concurred in the judgment and opinion.
                                                 OPINION

¶1         This case arises from a dispute between plaintiffs, JJR, LLC, et al., and defendants

        William J. Turner, et al., which involved defendants’ alleged inducement of plaintiffs to

        invest in Eggs Overnight, Inc. (Eggs), a start-up company, based on allegedly false

        statements and misrepresentations. Plaintiffs collectively invested $4.61 million in Eggs and

        claimed $7,989,595.98 in damages. Signature Capital Securities, LLC, and Signature LLC

        were defaulted by the court and a judgment was entered against them for $7,989,595.98. A

        bench trial resulted in a finding in favor of Turner, the remaining defendant. Plaintiffs appeal

        contending that: (1) the circuit court failed to address their claim alleging violation of section

        12(H) of the Illinois Securities Law of 1953 (815 ILCS 5/12(H) (West 2010)); (2) reliance is


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     No. 1-14-3051

        not an element of a section 12(H) claim; (3) with respect to their subsection (F) and

        subsection (G) claims, reliance is determined at the time of irrevocable investment; (4) the

        circuit court misassessed the testimony regarding reliance; and (5) neither boilerplate risk

        disclosures nor the roll-out schedule cured the executive summary’s numerous, specific, and

        emphatic misrepresentations. For the reasons that follow, we affirm.

¶2                                            BACKGROUND

¶3          On December 29, 2010, plaintiffs filed a 10 count complaint against defendants alleging,

        inter alia, that defendants violated sections 12(F), (G), and (H) of the Illinois Securities Law

        (815 ILCS 5/12(F), (G), (H) (West 2010)), committed common-law fraud, and committed

        negligent misrepresentation. The case proceeded to a bench trial. At trial, Turner testified that

        he was a principal in defendant Signature Capital, a venture capital firm, and in Signature

        Capital, LLC (collectively, Signature). As part of his duties in Signature, Turner was the

        exclusive placement agent to find investors to purchase $25 million of preferred stock

        offerings for Eggs. The initial offering took place between December 2007 and April 2008

        and was referred to as the “Series A” offering or the “bridge financing period.” The

        investments during this period were actually bridge loans made to Eggs through convertible

        promissory notes. However, at Eggs’ election, these convertible promissory notes would

        automatically be converted into stock. Investors did not have the option to cash out their

        loans. When the notes were converted, those people who had invested during the bridge

        financing period would also have the opportunity to purchase additional stock at a 20%

        discounted rate. The promissory notes expressly stated that the securities that would be

        issuable when the note was converted would not be registered under state or federal law. The

        majority of plaintiffs invested during this initial period.


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¶4         During the bridge financing period, the only official written document that was available

        was the executive summary, which was drafted by the Eggs management team. 1 The

        executive summary is a 46-page document that gives an overview of the Eggs business plan.

        It describes its service of using reusable and “trackable” shipping containers and its business

        strategy of appealing to companies that ship high value or damaged goods. The executive

        summary included, among other things, diagrams of the Eggs shipping containers and a chart

        detailing the multi-phase roll-out schedule. The chart indicates that the “Smart Shell” tags

        with the Global Positioning System (GPS) and Radio Frequency Identification (RFID)

        technology would be available sometime between January and June 2009.

¶5         Plaintiffs allege that several statements in the executive summary were false or

        misleading. As many of the allegedly false statements are similar and repetitive, the

        following are examples excerpted from the executive summary:

               “Eggs service offering is: *** the first to use embedded hybrid GPS/Cellular

           technology to track containers; the first to use embedded RFID technology to monitor

           container wear and shock levels as well as unauthorized container openings.”

               “Eggs Value-Added Capabilities Provide *** [a] [s]ophisticated and proprietary

           Internet-based transaction processing, tracking and monitoring system.”

               “Embedded inside the Egg Safe container is a hybrid of state-of-the art GPS and

           Cellular technologies (Smart Shell) for container tracking and state-of-the art based RFID

           technology for monitoring container heat and shock levels as well as unauthorized




           1
            The Eggs management team consisted of Hugh Sawyer (chair), Jon Guyette (president and CEO)
        and Bill Fraine (executive vice president of sales and marketing).

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     No. 1-14-3051

           openings for every container throughout its journey from shipper location to end

           recipient.”

               “MARKET VALIDATION: The company has already achieved proof-of-concept of

           its damage, resistant reusable container technology and its end-to-end logistics transit.”

¶6         Notably, the first page of the executive summary included cautionary language that

        stated: “THESE MATERIALS INCLDUE OR MAY INCLUDE CERTAIN STATEMENTS,

        ESTIMATES AND FORWARD-LOOKING PROJECTIONS OF THE COMPANY WITH

        RESPECT TO THE ANTICIPATED FUTURE PERFORMANCE OF THE COMPANY.

        SUCH STATEMENTS, ESTIMATES AND FORWARD-LOOKING PROJECTIONS

        REFLECT VARIOUS ASSUMPTIONS OF MANAGEMENT THAT MAY OR MAY NOT

        PROVE TO BE CORRECT AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES.

        PLEASE CONTACT US FOR FURTHER INFORMATION.”

¶7         Additionally, during the bridge financing period, the Eggs team, along with Turner,

        traveled to several cities to solicit investors at in-person meetings. Plaintiffs similarly allege

        that oral statements made at the meetings and statements in the PowerPoint presentation

        given at the meetings, were false or misleading. The same PowerPoint presentation was also

        attached to some personal e-mails Turner sent to potential investors. Examples of the

        PowerPoint slides with allegedly false representations are detailed below.

               “EGGS, A UNIQUE BUSINESS CONCEPT ***

               •     Holistic Solution–EGGS’ Proprietary, Reusable, Containers linked with GPS

                     Technology-Driven Supply Chain Logistics Service

                     ***



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               LEVERAGING PROPRIETARY TECHNOLOGY *** Reusable ‘SMARTSafe’

           Container

               •     Shock resistant ‘Outers’ (Plastic Corrugated)

               •     Mass-customized ‘Inners’

               •     Global tracking (GPS/Cellular)

               •     Monitoring–Shock, temperature & un-authorized opening (RFID)

                                                      ***

               Eggs, A Breakthrough

               •     We have invented a patented, reusable container that virtually eliminates damage

                     from shock and dramatically reduces source waste because it is reuseable

               •     Our Egg Safe ContainerTM is technically sophisticated and self-diagnostic with

                     real time tracking and product monitoring capability”

¶8         Additionally, the PowerPoint presentation contained a written disclosure, which stated:

               “This document is not a prospectus for the purpose of a securities offering. It is

           furnished for information only. No representation or warranty is made by Eggs as to the

           accuracy or completeness of such information and nothing contained in the summary is

           or shall be, relied on as a promise or representation as to the future.”

¶9         Plaintiffs further contend that Turner sent e-mails to potential investors that contained

        allegedly false and misleading information. These e-mails were sent between December 2007

        and September 2008. Plaintiffs allege numerous false representations in the e-mails. Only

        relevant excerpts from various e-mails are reproduced below.




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         “EGGS SMARTSafe containers have, embedded inside, a hybrid combination of state

      of the art GPS and Cellular technology for container tracking and state of the art based

      RFID technology for monitoring of container heat and shock levels, as well as

      unauthorized openings for EVERY container throughout its journey from shipper

      location to end recipient.” (December 4, 2007).

         “EGGS has strong Intellectual Property, with 7 patents granted/applied for, both

      technology and methods patents, as well as several more patents soon to be submitted.”

      (December 4, 2007).

         “EGGS is a first mover, GREEN-TO-THE-EXTREME, breakthrough product-

      shipper service, offering damage resistant, real time tracked, and ‘real time enough’

      monitored (heat, shock, and unauthorized openings) reusable, shock resistant, highly

      patented containers to be used to transport highly damaged and high value goods in the

      parcel industry.” (December 12, 2007).

         “State-of-the-art and novel use of GPS-cellular-RFID technology is heavily deployed

      in the EGGS containers and supply chain network.” (December 12, 2007).

         “[Eggs’] sustainability of the competitive edge is ensured with the high tech reusable

      container, coupled with a novel Mother Hen Internet software service system, and

      industry knowhow that tracks and monitors (shock-leve[l], temp level, water seep, and

      unauthorized opening, supply chain logistics, etc.) throughout the end-to-end multi leg,

      journey of the container.” (December 19, 2007).

         “The EGGS (‘Not-a-Yolk Broken’) containers have embedded tracking technology,

      and temperature, shock level, and unplanned opening monitoring technology, and comes



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             with a sophisticated Mother Hen (nurturing and caring) internet based service system that

             manages a shipper’s end-to-end and global supply chain issues.” (February 3, 2008).

                 “Eggs is a unique, first to market, elegant, global supply chain logistics solutions

             service company *** providing shippers of high value, damage prone products, the first

             major damage resistant breakthrough offering in the shipper marketplace in over a

             decade, leveraging its proprietary shock-resistant, high tech (GPS, cellular, RFID)

             proprietary reusable (plastic corrugated) containers.” (March 6, 2008).

¶ 10         Significantly, in most of the e-mails in question, Turner included the same disclosure

          statement as in the executive summary. This disclosure explicitly communicates that the

          information in the e-mail was based on forward-looking projections and the assumptions of

          Eggs’ management.

¶ 11         Turner testified that on April 2, 2008, Eggs elected to convert the convertible promissory

          notes into stock and presented the investors with a formal private placement memorandum

          (PPM) and a subscription agreement. The PPM stated that none of the securities offered

          pursuant to the PPM were registered under state or federal law. Plaintiffs allege that the PPM

          contained misleading language because it purported, inter alia, to have achieved proof-of-

          concept validation. Specifically, the PPM stated, “MARKET VALIDATION: The Company

          has already achieved proof-of-concept of its damage, resistant reusable container technology

          and its end-to-end logistics transit with several pilot companies.” However, the PPM also

          contained several pages of risk disclosures. Within the risk disclosures, the PPM expressly

          stated that although Eggs’ management believed Eggs was first to market, “there is no

          guarantee that the current entrenched competitors will not soon develop similar offerings and

          obviate the marketing and product advantages that the Company anticipates.”


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¶ 12         Additionally, the risk disclosures in the PPM informed investors that the GPS and RFID

          technology was not available at that time and a risk existed that Eggs would not achieve its

          technology goals. Specifically, the language of the risk disclosure reads, “[s]uccessful

          development of our container and technology depends on a number of factors, including: ***

          our ability to timely complete design and testing of new software and hardware components

          and products.”

¶ 13         At the same time investors were given the PPM, they were presented with the

          subscription agreement. The subscription agreement contained a nonreliance clause, which,

          when signed, attested that the investor did not rely on any information that was contrary to

          the information in the PPM. The subscription agreement provides, in relevant part:

                 “Representations and Warranties. The Purchaser hereby acknowledges, represents,

             warrants, and agrees as follows:

                                                    ***

                 (f) In evaluating the suitability of an investment in the Company, the Purchaser has

             not relied upon any representation or other information (oral or written) other than as

             stated in the Memorandum or as contained in documents or answers to questions so

             furnished to the Purchaser or the Purchaser’s Advisors by the Company.

                                                    ***

                 (j) The Purchaser is not relying on the Company, the Placement Agent or any of their

             respective employees or agents with respect to the legal, tax, economic and related

             consideration of an investment in the Securities, and the Purchaser has relied on the

             advice of, or has consulted with, only his own Purchaser’s advisors, if any;

                                                    ***

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                 (v) No oral or written information furnished, to the Purchaser or the Purchaser’s

             Advisor, if any, in connection with the offering of the Securities which are in any way

             inconsistent with the information contained in the Memorandum[.]”

¶ 14         Turner testified that in October 2008, only months after investors signed the subscription

          agreement, Eggs experienced financial difficulties and went into “hibernation” to save

          money. After requests from investors, including Gary Kline, Eggs was restarted in February

          2009. In a letter dated February 2, 2009, Turner notified investors of the restart and, among

          other things, stated that the GPS, cellular, and RFID technology had not been developed.

          Eggs attempted to “re-stock” the company but it ultimately failed. By the middle of 2010

          Eggs did not have sufficient finances to continue its operation and filed for bankruptcy. None

          of the 34 investors recovered the money they invested.

¶ 15         Turner admitted that despite the language in the executive summary, the PowerPoint

          presentation, the e-mails, and the PPM, Eggs at no time had fully developed the Eggs carton

          with the RFID and GPS technology. He explained that Eggs had process patents for the

          service that Eggs would provide but it did not have technology patents. In other words, Eggs

          had invented the idea, but had not actually invented the necessary technology. In addition,

          because Eggs had not developed a finished prototype, it had never tested the Eggs product in

          the market in a pilot program. Turner maintained, however, that investors were aware that the

          technology was not fully developed. He explained that they were told at the presentations

          that there would be a multiphase roll-out and that the cartons with the RFID and GPS

          technology were not anticipated until 2009. He averred that only sophisticated investors were

          solicited for Eggs and these investors, many of who had invested in other risky start-ups,

          were encouraged to ask questions at the presentations. In addition, the charts in the executive


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          summary and the PowerPoint made clear the embedded technology would not be available

          until 2009.

¶ 16         Jamie Kline testified that he invested in Eggs based on information in the executive

          summary. He explained that he decided to invest in Eggs because he thought it was an

          original idea to have a shipping container that could be tracked and that would notify a

          shipper if the container was improperly opened. Jamie invested on three different occasions

          including during the 2009 restart of the company. He further testified that he moved to

          Georgia in July or August 2009 to work for Eggs. At that time there were approximately 30

          boxes at the manufacturing facility, but none of them had RFID or GPS technology and he

          never saw a finished prototype of the Eggs container.

¶ 17         Jamie further testified that he invested in the restart and moved to Georgia to work for

          Eggs because he believed that if he did not invest again, his original investment would be

          lost. He also believed that if he was more involved in the operation he could help Eggs be

          successful. In addition, his cousin, Gary Kline, was about to become a board member so he

          knew they would have more control over Eggs’ future. Jamie admitted that in February 2009,

          even with the knowledge that the containers did not have GPS or RFID technology, he

          believed that Eggs still had merit to survive as a company. Jamie additionally admitted that

          he thought the box without the embedded technology but with the Eggs process was a

          capable product that would be attractive to potential customers. Notably, Jamie testified that

          he believed Eggs failed for a number of reasons including mismanagement and market

          forces.

¶ 18         Gary Kline testified that he was introduced to Eggs by Turner and he relied on the

          executive summary when he decided to invest in Eggs. He further testified that he reviewed


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          the PowerPoint presentation and relied on that as well. Gary attended several oral

          presentations and he testified the Eggs’ team did not convey any information verbally that

          was inconsistent with the executive summary or the PowerPoint presentation. He invested in

          Eggs because the embedded GPS technology made it a niche product in the parcel delivery

          industry. Believing Eggs to be a good investment, Gary convinced several of his friends and

          family members to invest in Eggs. Gary also invested money from trusts he was managing as

          a trustee.

¶ 19          Derwood Chase testified that he relied on the executive summary and the PowerPoint

          presentation when he decided to invest in Eggs personally, and when he invested on behalf of

          the trusts he managed as a trustee. Chase maintained that he invested in Eggs because of the

          embedded RFID and GPS technologies. However, he admitted that he knew Eggs was a start-

          up and therefore a risky investment. Further, Chase testified that he received an e-mail from

          Turner dated December 22, 2007, which stated that “our first deliverable product with

          revenue expected to start in Quarter 1 ‘08 does not require GPS/Cellular and RFD monitoring

          tags[.] *** Eggs conservatively estimates that the GPS cellular units will be available Quarter

          1 2009.” Chase admitted that in 2008, subsequent to receiving this e-mail that disclosed the

          roll-out schedule, he invested more money into Eggs and solicited others to invest in Eggs.

¶ 20          Chase acknowledged that he looked at an Eggs container at an in-person meeting, and he

          did not observe a device with GPS or RFID technology in the container. He also admitted

          that he knew from reading the executive summary that Eggs was going to have a multiphase

          operational roll-out and that the Eggs’ GPS cellular capabilities would not be commercially

          available until Quarter 1, 2009. He agreed that as of November 2008, months after he was




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          aware that the RFID and GPS technology was not present in the Eggs containers, he believed

          Eggs was a worthwhile investment.

¶ 21         Both parties submitted closing arguments in written posttrial briefs. In plaintiffs’ brief

          they contended, inter alia, that section 12(H) of the Illinois Securities Law was violated and

          does not require that a plaintiff prove reliance. Plaintiffs also reasserted their sections 12(F),

          12(G), common-law fraud, and negligent misrepresentation claims.

¶ 22         The court entered a 21-page written order in favor of Turner and against plaintiffs on all

          counts. In ruling, the trial court noted that “[s]ections 12(F) through (I) of the Illinois

          Securities Law are modeled after §17(a)(1) through (a)(3) of the federal Securities Act of

          1933” (citing Lucas v. Downtown Greenville Investors Ltd. Partnership, 284 Ill. App. 3d 37,

          45 (1996)). The court continued by explaining that “[t]o prove a violation of §12(F) and (G)

          of the Act, Plaintiff must show Defendant; (1) made a misstatement or omission; (2) of

          material fact; (3) in connection with the purchase or sale of securities; (4) upon which

          plaintiffs relied” (citing Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 455

          (2004)). The court then provided a detailed analysis regarding whether plaintiffs could have

          reasonably relied on the alleged misstatements made by defendants. It noted that the

          subscription agreement, which was signed by plaintiffs, contained a nonreliance clause and

          informed investors that certain technology was not yet developed, and that the PPM listed

          risk factors with warnings that Eggs International, Inc., was a risky investment. The court

          concluded that, with this information available, plaintiffs could not have reasonably relied on

          any alleged false representations. Furthermore, the court separately found that plaintiffs

          failed to prove reliance because only 3 of 34 plaintiffs testified at trial and none of those

          plaintiffs established that they actually relied on the alleged misrepresentations to their


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          detriment. The court specifically noted that it did not find Jaime Kline, Gary Kline, or

          Derwood Chase credible. Finding that plaintiffs could not prove reliance, the court also

          denied the common-law fraud and negligent misrepresentation claims, for which reliance is

          an essential element. The court concluded the order by stating that “[t]he Court finds for

          Defendant William J. Turner and against Plaintiffs on all counts.” Plaintiffs did not file a

          posttrial motion.

¶ 23                                                ANALYSIS

¶ 24                                         A. Section 12(H) Claim

¶ 25          Initially, we address plaintiffs’ assertion that the trial court failed to rule on their section

          12(H) Illinois Securities law claim. Plaintiffs, having taken the position that the claim was

          not disposed, invite our de novo review. They argue throughout their brief that unlike

          sections 12(F) and (G), reliance is not required to prevail on their section 12(H) claim.

          Contrary to plaintiffs’ assertion, a review of the trial court’s written order reveals that the

          circuit court expressly ruled in favor of defendant “on all counts.” Thus, we presume that the

          trial court’s ruling was dispositive of all of plaintiffs’ claims.

¶ 26          Although we have a final judgment, the record is devoid of the court’s reasoning in

          disposing of the section 12(H) claim. Absent that reasoning, we are unable to determine on

          what basis the court disposed of plaintiffs’ section 12(H) claim. Regardless of the basis, or

          even whether the court’s reasoning was correct, we review the court’s judgment, not its

          reasoning, and we may affirm the circuit court on any grounds supported by the record. Bruel

          & Kjaer v. Village of Bensenville, 2012 IL App (2d) 110500, ¶ 22.

¶ 27          Plaintiffs maintain that section 12(H) establishes presumptive liability whenever a false

          statement is made in written materials given to prospective investors and consequently they

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          were not required to prove reliance. Defendants failed to respond to this argument, but

          instead point out that the relevant inquiry is whether the alleged false statements are material.

          Whether reliance is required for a section 12(H) claim under the Illinois Securities Law is an

          issue of statutory interpretation, which we review de novo. Goldfine v. Barack, Ferrazzano,

          Kirschbaum & Perlman, 2014 IL 116362, ¶ 20.

¶ 28         Before proceeding with our analysis, we set forth below the relevant provisions of section

          12 of the Illinois Securities law:

                 “§12. Violation. It shall be a violation of the provisions of this Act for any person:

                                                        ***

                 (F) To engage in any transaction, practice or course of business in connection with

             the sale or purchase of securities which works or tends to work a fraud or deceit upon the

             purchaser or seller thereof.

                 (G) To obtain money or property through the sale of securities by means of any

             untrue statement of a material fact or any omission to state a material fact necessary in

             order to make the statements made, in the light of the circumstances under which they are

             made, not misleading.

                 (H) To sign or circulate any statement, prospectus, or other paper or document

             required by any provision of this Act or pertaining to any security knowing or having

             reasonable grounds to know any material representation therein contained to be false or

             untrue.” 815 ILCS 5/12(F), (G), (H) (West 2010).

¶ 29                                           Section 12(H) Construed




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¶ 30          It is significant to note that the Illinois Securities Law was modeled after the federal

          Securities Act of 1933 (federal Act). 15 U.S.C. § 77a et seq. (2000). Thus, Illinois courts

          have consistently looked to the corresponding provisions of the federal Act in interpreting the

          Illinois Securities Law. Lucas v. Downtown Greenville Investors Ltd. Partnership, 284 Ill.

          App. 3d 37, 45 (1996); Foster v. Alex, 213 Ill. App. 3d 1001, 1004-05 (1991). In this case,

          although the trial court broadly stated that sections 12(F) to (I) of the Illinois Securities Law

          were modeled after section 17 of the federal Act, 2 we have found no support for the

          proposition that section 12(H) was modeled after that section. In fact, our research has

          produced little Illinois case law that analyzes section 12(H) at all, and none that holds this

          section is based on section 17. Rather, Samuel H. Young, a principal drafter of the Illinois

          law, explained that Illinois’s section 12(H) is based on section 12 of the federal Act. Samuel

          H. Young, Interpretive Comments and Notes on Sections of the Securities Law of 1953 as

          Amended, Ill. Ann. Stat., ch. 1211/ 2 , App’x, at 629 (Smith-Hurd 1960). We find support for

          Young’s explanation in the plain language of the two provisions.

¶ 31          Section 12 of the federal Act provides:

                  “Any person who-

                       ***

                       (2) offers or sells a security *** by means of a prospectus or oral communication,

              which includes an untrue statement of a material fact or omits to state a material fact

              necessary in order to make the statements, in light of the circumstances under which they

              were made, not misleading (the purchaser not knowing of such untruth or omission), and

              2
               This court has previously observed that sections 12(F) and 12(G) are modeled after sections
          17(a)(1) to (a)(3) of the Federal Securities Act of 1933. Lucas v. Downtown Greenville Investors Ltd.
          Partnership, 284 Ill. App. 3d 37, 45 (1996); 15 U.S.C. § 77q(a)(1), (a)(2) (2000) .

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             who shall not sustain the burden of proof that he did not know, and in the exercise of

             reasonable care could not have known, or such untruth or omission, shall be liable ***.”

             15 U.S.C. § 77l(a)(2) (2000).

¶ 32         We recognize that the language of the two provisions varies. However, similar to section

          12(H) of the Illinois Securities Law, section 12 of the federal Act imposes liability for

          material false statements contained in prospectuses and statements pertaining to securities.

          Both of these provisions target false statements disseminated to solicit investors.

          Furthermore, none of the other provisions in the federal law, including section 17, so closely

          address the particular harm that section 12(H) of the Illinois law is designed to address.

          Accordingly, we accept Young’s explanation and conclude, therefore, that section 12(H) of

          the Illinois Securities Law is based on section 12 of the federal Act.

¶ 33         Having determined the similarities between the state and federal provisions, it is

          significant to note that section 12(H) of the Illinois Securities Law, which was first enacted in

          1953, remained unchanged until 2003. In 2003, section 12(H) was amended to add the words

          “or pertaining to any security.” Pub. Act 93-580 (eff. Aug. 21, 2003). The amendment,

          however, did nothing to alter the similarity between the state and federal provisions. A

          review of the legislative history reveals that the amendments, which were also made to

          various other sections of the act, were made for the purpose of increasing investor protection

          as well as the Secretary of State’s enforcement powers. Final Legislative Synopsis and Digest

          of the 93d Ill. Gen. Assem. (No. 15), at 1067. Specifically, the transcript of the Illinois

          Senate debate at which this bill was passed states, inter alia, that the amendments were

          enacted “to enhance investor protection” and “mandate[ ] accurate audit and financial

          statements, require[ ] firms to keep adequate records, and impose[ ] restrictions on those


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          firms that failed to supervise employees who engaged in misconduct.” 93d Ill. Gen. Assem.,

          Senate Proceedings (Apr. 8, 2003), at 43 (statements of Senator Welch). Although these

          amendments expanded protections to investors and increased the government’s enforcement

          power, nothing in their language or the legislative history suggests that we should depart

          from analyzing section 12(H) under the structure set forth in federal case law. Accordingly,

          we look to the analysis of section 12 of the federal Act in our review of section 12(H) of the

          Illinois law.

¶ 34          Unlike the dearth of Illinois law analyzing section 12(H), case law regarding section 12

          of the federal Act is abundant. Within the federal line of cases analyzing section 12, it is well

          established that a showing of reliance on an alleged false or misleading statement is not

          required. Gustafson v. Alloyd Co., 513 U.S. 561, 576 (1995); In re Fuwei Films Securities

          Litigation, 634 F. Supp. 2d 419, 434 (S.D.N.Y. 2009). To succeed under section 12, a

          plaintiff must only prove that the “(1) [d]efendant sold or offered a security; (2) by means of

          a prospectus or oral communication; (3) that included an untrue statement of material fact or

          omitted a material fact necessary to make such statements not misleading.” Fuwei Films

          Securities Litigation, 634 F. Supp. 2d at 435. Thus, because reliance is not required, section

          12 imposes liability more easily but is more narrowly applied than section 17, as discussed

          below. 3 In re Morgan Stanley Information Fund Securities Litigation, 592 F.3d 347, 359-60

          (2d Cir. 2010).

¶ 35          Consistent with construction of section 12 of the federal Act, we similarly find that proof

          of reliance is not required to prevail on a section 12(H) claim under the Illinois Securities

              3
              Section 10(b) of the Exchange Act, which is almost identical to section 17 in the Securities Law
          of 1933, is the “ ‘catchall’ cousin” of section 12 and is meant to apply more broadly. Tirapelli v.
          Advanced Equities, Inc., 351 Ill. App. 3d 450, 455 (2004).

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          Law of 1953. Rather, all that must be shown is: (1) a statement, prospectus, or other paper or

          document, (2) that is required by the Act or pertains to securities, (3) contained a material

          false statement or omission. 815 ILCS 5/12(H) (West 2010); see Fuwei Films Securities

          Litigation, 634 F. Supp. 2d at 435. Like a section 12 claim under the federal Act, the main

          issues in a section 12(H) Illinois Securities Law claim are whether a false statement exists

          and whether it was material. See In re Morgan Stanley Information Fund Securities

          Litigation, 592 F.3d at 359-60. Thus, as it turns out, plaintiffs are correct that reliance is not a

          necessary element in a section 12(H) claim. We are mindful that the trial court did not make

          factual findings as to whether false statements existed or whether the alleged false statements

          were material. Regardless, as we explain below, plaintiffs’ section 12(H) claim fails for

          another reason. Federal case law interpreting federal section 12 is instructive.

¶ 36                            Section 12 and Public Versus Private Offerings

¶ 37         In Gufstafson, the United States Supreme Court considered whether section 12 of the

          federal Act applied to a private sale contract for securities. Gufstafson, 513 U.S. at 564. The

          court held that section 12, which imposes liability for false statements in a prospectus or oral

          statements regarding a prospectus, only applied to public sale offerings. Id. In so ruling, the

          court explained that under the Act a prospectus must include information contained in the

          registration statement, which is only required for public offerings. Id. at 569. Thus, section

          12 only applies to public offerings. Id.

¶ 38         Significant to our case, the Gufstafson court explained that reliance is not required under

          section 12, in part, because section 12 is limited to public offerings. Id. at 576. In considering

          the federal Act’s legislative history, the Court reasoned that “[i]n light of the care that

          Congress took to justify the imposition of liability without proof of either fraud or reliance on


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          ‘those whose moral responsibility to the public is particularly heavy’–the ‘originators of

          securities’–we cannot conclude that Congress would have extended this liability to every

          private or secondary sale without a whisper of explanation.” Id. at 582; see also H.R. Rep.

          85, 73d Cong. (1st Sess. 1933)). The court noted that it was reluctant to impose new

          substantive obligations and that it is more reasonable to interpret section 12 as providing a

          remedy for violations of the obligations that the Act created. Id. at 572. Subsequent courts

          explained that the Gufstafson court’s holding that section 12 does not apply to private sales

          extends to private offerings for which a PPM is created because they are not registered under

          the Act. Faye L. Roth Revocable Trust v. UBS Painewebber, Inc., 323 F. Supp. 2d 1279,

          1293-94 (S.D. Fla. 2004).

¶ 39                           Section 12(H) and Public Versus Private Offerings

¶ 40          Section 12(H) of the Illinois law states that it applies to false statements or omissions

          contained in statements, prospectuses, or other paper documents required by the Act or

          pertaining to any security. 815 ILCS 5/12(H) (West 2014). Similar to the federal Act, which

          applies to prospectuses required for public offerings, prior to 2003, section 12(H) expressly

          stated that it applied only to documents required by the Act. 4 Under section 4(G) of the

          Illinois Securities law, limited offerings (i.e., private offerings) are exempt from securities

          registration obligations. 815 ILCS 5/4(G) (West 2014). Accordingly, in a limited offering,

          there are no statements, prospectuses, or other paper documents required by the Act other

          than the report of sale that must be filed to qualify for the exemption. Id. However, the


              4
               To the extent that People v. Bartlett, 294 Ill. App. 3d 435 (1998), purports to hold that section
          12(H) applies to statements that are not related to a public offering, we disagree. Bartlett, did not
          address section 12(H)’s relationship to the corresponding federal provision, section 12 of the federal
          Act, or whether section 12(H) of the Illinois law applied to private offerings.

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          Illinois legislature has explicitly stated that section 12(H) does not impose liability for the

          content of the report of sale. 815 ILCS 5/13(H) (West 2014). Thus, like the federal Act,

          because the Illinois Securities Law exempts limited offerings from the obligations that the

          law imposes, we hold that section 12(H) of the Illinois Securities Law of 1953 does not apply

          to limited offerings and only applies to offerings required to be registered, that is public

          offerings.

¶ 41         We again acknowledge that in 2003 the language “or pertaining to any security” was

          added to section 12(H). Pub. Act 93-580 (eff. Aug. 21, 2003). Although the legislative

          history is clear that the 2003 amendments intended to expand protections to investors

          generally, nothing in the legislative history indicates whether the amendment was also

          intended to broaden its application to include public and private offerings alike. Nevertheless,

          we do not believe that the Illinois legislature, in amending section 12(H), intended to

          drastically alter the section 12(H) purpose and applicability to be much broader than the

          federal Act upon which it was based without any explanation. The 2003 amendment is more

          reasonably interpreted as setting forth a violation not only when documents that the Act

          obligates registrants to create contain false statements or omissions, but also when any

          document that pertains to any security is created for a registered offering and contains false

          statements or omissions. To hold that reliance is not required, but not limited section 12(H)

          claims to registered offerings, would greatly expand the liability beyond what the legislature

          intended.

¶ 42         Our conclusion in this regard is bolstered by the very purpose of the Illinois Securities

          Law and the reason limited offerings are exempt from the Act. “ ‘[T]he purpose of the

          [Illinois] Securities Law is to protect innocent persons who might be induced to invest their


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          money in speculative enterprises over which they have little control.’ ” Carpenter v. Exelon

          Enterprises Co., 399 Ill. App. 3d 330, 334 (2010) (quoting A.G. Edwards, Inc. v. Secretary of

          State, 331 Ill. App. 3d 1101, 1110 (2002)). Limited offerings are exempt from the obligations

          of the law to facilitate small businesses’ ability to raise capital. Samuel H. Young,

          Interpretive Comments and Notes on Sections of the Securities Law of 1953 as Amended, Ill.

          Ann. Stat., ch. 1211/ 2 , App’x, at 598 (Smith-Hurd 1960) When there are relatively few

          investors and smaller amounts of money raised, the concern that the investors will not be able

          to adequately investigate the soundness of the investment are mitigated. See Securities &

          Exchanges Comm’n v. Ralston Purina Co., 346 U.S. 119, 125 (1953). This is because

          generally, when an offering is private, investors have greater access to the necessary

          information to make an informed investment decision, more bargaining power to obtain

          information, and more control over the success over the enterprise. Id; Doran v. Petroleum

          Management Corp., 545 F.2d 893, 903 (5th Cir. 1977). These are not the “innocent

          investors” the Act seeks to protect.

¶ 43         By contrast, when an offering is made to the public at large, the concerns of deception

          and fraud in the sale of securities increase because investors are unable to independently

          obtain information and may not be as experienced in purchasing securities. Ralston Purina

          Co., 346 U.S. at 125; Doran, 545 F.2d at 903. Therefore, a greater concern exists where a

          statement or document that is widely disseminated contains false or misleading information.

          Thus, the limited offering exemption “strike[s] a balance between protection of the public

          and freedom of action by the sellers of securities which would be broad enough to help small

          businesses in relatively small financing transactions yet narrow enough to limit abuses.”




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          Samuel H. Young, Interpretive Comments and Notes on Sections of the Securities Law of

          1953 as Amended, Ill. Ann. Stat., ch. 1211/ 2 , App’x, at 598 (Smith-Hurd 1960).

¶ 44                             The Eggs Securities–Public or Private Offering

¶ 45         In this case, the parties make no claim that the Eggs securities were offered as anything

          other than a limited or private offering. As the nature of the offering is relevant to our

          disposition, we deem it appropriate to set forth what constitutes a private offering under

          Illinois law. Private security offerings are exempted from the Illinois Securities Law under

          the limited offering exemption. 815 ILCS 5/4(G) (West 2014); Samuel H. Young,

          Interpretive Comments and Notes on Sections of the Securities Law of 1953 as Amended, Ill.

          Ann. Stat., ch. 1211/ 2 , App’x, at 598 (Smith-Hurd 1960). In Illinois, an offer, sale, or

          issuance of a security is exempt from the securities law where:

                       “(a) all sales of such security to residents of this State (including the most recent

             sale) within the immediately preceding 12-month period have been made to not more

             than 35 persons or have involved an aggregate sales price of not more than $1,000,000;

                       (b) such security is not offered or sold by means of any general advertising or

             general solicitation in this State; and

                       (c) no commission, discount, or other remuneration exceeding 20% of the sale

             price of such security, if sold to a resident of this State, is paid, or is given directly or

             indirectly for or on account of such sales.” 815 ILCS 5/4(G)(1) (West 2014).

¶ 46         Here, the PPM expressly states that none of the securities offered were registered under

          either state or federal law. Further, both the convertible promissory note and the PPM by

          which the Eggs stock was offered to investors explicitly stated that the securities were not

          registered under federal or state laws. Moreover, the evidence at trial established that the

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          necessary requirements for the limited offering exemption were met. First, there were 34

          investors in Eggs, and thus Eggs was sold to fewer than 35 persons. Second, Eggs was not

          offered by general advertising and was only offered to “accredited investors,” as defined by

          regulation D promulgated under the federal Act. To be accredited as an individual, the

          individual must have a net worth that exceeds $1 million. 17 C.F.R. § 230.501 (2014). Third,

          Turner did not receive a commission, discount, or other remuneration exceeding 20% of the

          sale price of such security. It is unquestionable that the Eggs securities were not sold as part

          of a registered offering. Therefore, we find that the Eggs securities were offered as part of a

          limited or private offering and that, therefore, section 12(H) does not apply.

¶ 47          As we noted earlier, we may affirm the circuit court on any grounds supported by the

          record. DiCosola v. Ryan, 2015 IL App (1st) 150007, ¶ 8. For the reasons set forth above, we

          hold that like its federal counter-part, section 12(H) is only applicable to registered offerings

          (i.e., public offerings). Gufstafson, 513 U.S. at 569; Faye L. Roth Revocable Trust v. UBS

          Painewebber, Inc., 323 F. Supp. 2d 1279, 1293-94 (S.D. Fla. 2004). Because we conclude

          that the Eggs securities were limited or private offerings, section 12(H) does not apply and

          thus, plaintiffs’ claim must fail.

¶ 48                   B. Sections 12(F), 12(G), Fraud, and Negligent Misrepresentation Claims

¶ 49          We note that, unlike section 12(H), sections 12(F) and 12(G) of the Illinois Securities

          Law are modeled after section 17(a) of the federal Act. Lucas, 284 Ill. App. 3d at 45. As the

          “catch-all” for any fraud in the sale of securities, section 17(a) applies more broadly and

          imposes liability in both private and public offerings. Gustafson, 513 U.S. at 576-77; United

          States v. Naftalin, 441 U.S. 768 (1979); Tirapelli, 351 Ill. App. 3d at 455. In contrast to




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          section 12(H), reliance is an element of both sections 12(F) and 12(G) claims, as discussed

          below.

¶ 50         Plaintiffs contend that the denial of their section 12(F), section 12(G), fraud, and

          negligent misrepresentation claims was against the manifest weight of the evidence because

          the executive summary, in-person meetings, PowerPoint presentation, e-mails sent by Turner,

          and the PPM contained false and misleading information. Specifically, plaintiffs assert that

          defendant misrepresented that (1) Eggs were first to market, (2) the GPS and RFID

          technology was available, and (3) Eggs had proof of concept market validation. Plaintiffs

          further argue that these “false” statements were not cured by boilerplate risk disclosures or

          the nonreliance clause. Defendant asserts that, in the correct context, these statements were

          not false or misleading.

¶ 51         Section 12(F), section 12(G), fraud, and negligent misrepresentation claims each require

          that the plaintiffs prove reliance on the alleged false and misleading statements. See Tirapelli

          v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 456 (2004) (explaining that reasonable

          reliance is an element of both section 12(F) and section 12(G) claims); Platinum Partners

          Value Arbitrage Fund, Ltd. Partnership v. Chicago Board Options Exchange, 2012 IL App

          (1st) 112903, ¶ 29 (noting that reliance is an element of a common-law fraud claim); Fox

          Associates, Inc. v. Robert Half International, Inc., 334 Ill. App. 3d 90, 94 (2002) (listing

          reliance as an element of a negligent misrepresentation claim). The trial court denied these

          claims because it found that plaintiffs were unable to establish that they reasonably relied on

          the alleged misrepresentations. Whether plaintiffs reasonably relied on an allegedly false

          statement is a question of fact. Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 456

          (2004). A trial court’s factual findings are given great weight on appeal. In re Estate of


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          Ferguson, 313 Ill. App. 3d 931, 938 (2000). Thus, we will not overturn a trial court’s factual

          finding in a bench trial unless it is against the manifest weight of the evidence. Id. A finding

          is against the manifest weight of the evidence only when the opposite conclusion is clearly

          apparent or when the findings are unreasonable, arbitrary, or not based on evidence.

          Battaglia v. 736 N. Clark Corp., 2015 IL App (1st) 142437, ¶ 23.

¶ 52         In this case, after hearing all of the evidence, the trial court found that the alleged false

          statements and misrepresentations were mitigated by the cautionary language and disclaimers

          attached to the executive summary, the e-mails, the PowerPoint, the PPM, and the

          nonreliance clause in the subscription agreement. In addition, relying on Tirapelli v.

          Advanced Equities, Inc., 351 Ill. App. 3d 450 (2004) and Rissman v. Rissman, 213 F.3d 381,

          383-84 (7th Cir. 2000), the trial court concluded that the nonreliance clause in the

          subscription agreement, which each plaintiff signed, precluded them from relying on any

          alleged prior oral or written representations when they decided whether or not to invest. The

          court also found that the roll-out schedule in the executive summary and the PowerPoint

          indicated that that the GPS and RFID technology would not be available until 2009, and thus

          plaintiffs had sufficient notice that the embedded technology was not available when they

          invested.

¶ 53         We acknowledge that the court emphasized the risk factors delineated in the PPM and the

          nonreliance clause in the subscription agreement in finding that plaintiffs did not reasonably

          rely. Plaintiffs assert that these documents were only available after they made irrevocable

          investments during the bridge financing period and thus have no bearing on whether they

          reasonably relied on the misrepresentations at the time they invested. Even if we did not

          consider the risk factors in the PPM and the nonreliance clause in the subscription agreement,


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       No. 1-14-3051

          the court’s finding that plaintiffs could not reasonably rely on the executive summary, the

          PowerPoint, and the e-mails due to the cautionary language attached to them, is not negated

          and is sufficient to support the court’s judgment.

¶ 54         Moreover, even if the existence of the cautionary language alone did not support the trial

          court’s judgment, the court specifically noted that it did not find Jamie Kline, Gary Kline, or

          Derwood Chase credible. The trial court is in a superior position to observe the conduct of

          witnesses, determine their credibility, and to weigh their testimony. Thomas v. Weatherguard

          Construction Co., 2015 IL App (1st) 142785, ¶ 46. We will not second-guess the trial court’s

          credibility determinations that are supported by evidence. Prigano v. Prigano, 405 Ill. App.

          3d 801, 810 (2010). Here, the plaintiffs who testified were sophisticated investors. They were

          all aware that Eggs was a risky investment because it was a start-up company. Gary Kline

          testified that he continued to solicit investors for Eggs after he was aware of the alleged false

          statements. In addition, Jamie Kline and Derwood Chase testified that they believed that

          Eggs was a worthwhile investment even after they had received the PPM with the detailed

          risk factors that informed them of the status of the embedded technology and Eggs’ lack of

          an established customer base. The remaining plaintiffs did not testify to independently

          establish reliance. Therefore, the court’s determination that plaintiffs did not rely on the

          allegedly false statements in deciding to invest in Eggs is supported by the evidence.

¶ 55         Therefore, a review of the record reveals that the court gave detailed reasons supported

          by evidence for its determination that plaintiffs could not establish reliance. Accordingly, we

          do not find that the court’s decision that plaintiffs could not maintain their section 12(F),

          section 12(G), fraud, and negligent misrepresentation claims, was against the manifest weight

          of the evidence.


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       No. 1-14-3051

¶ 56                                          CONCLUSION

¶ 57         For the reasons stated above, we affirm the judgment of the trial court.

¶ 58         Affirmed.




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