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FIFTH DIVISION

JUSTICE HARTMAN delivered the opinion of the court:

Plaintiffs Philippe Olczyk, Robert K. Pickup and Joshua Teitelbaum, individually and on behalf of all others similarly situated (collectively plaintiffs), appeal from the circuit court's dismissal of their second amended consolidated class action complaint (subject complaint) with prejudice. Plaintiffs, stockholders of defendant Cerion Technologies, Inc. (Cerion), a "high-tech" manufacturer of components for computer disk drives, had filed suit against Cerion and defendants Nashua Corporation (Nashua), William Blair & Co. (Blair), David A. Peterson, Paul A. Harter, Richard A. Clark, Gerald G. Garbacz and Daniel M. Junius (collectively defendants), alleging that Cerion's representation of its business prospects in its prospectus was misleading because it failed to disclose the fact at the time of its offering that Cerion already "was being eliminated as a supplier by its two major customers." In dismissing the subject complaint with prejudice, the court held that defendants' prospectus "bespoke caution" and that plaintiffs had failed to plead facts sufficient to overcome the warnings and risk disclosures set forth in the prospectus. The sufficiency of the subject complaint under state and federal law is the crux of this appeal.

Plaintiffs raise as issues whether: (1) the circuit court erred in dismissing the subject complaint with prejudice for failing to satisfy Illinois' fact pleading rules; (2) the court misconstrued the "bespeaks caution" doctrine as applied to Cerion's prospectus; (3) alternatively, they lacked standing to bring their claims for relief under the state and federal securities laws; and (4) the court abused its discretion when it dismissed plaintiffs' subject complaint with prejudice, denying them leave to amend. The facts recited below are derived from the pleadings and attached exhibits.

Cerion, a manufacturer of aluminum disc substrates, set forth its business condition in a prospectus it prepared for the initial public offering of its common stock. Following the dissemination of that prospectus, on May 24, 1996, Cerion issued and sold 3,840,000 shares of common stock at $13 per share, yielding aggregate proceeds of more than $45,000,000. The stock was issued pursuant to a registration statement filed with the Securities and Exchange Commission (SEC) on the same date.

Plaintiff Pickup purchased 1,000 shares of Cerion common stock at $19.50 per share on May 24, 1996, the date of its issuance, on the open market and 1,000 shares at $9.875 on June 12, 1996. Plaintiff Teitelbaum purchased 100 shares of Cerion common stock at $10.50 per share on June 21, 1996. Plaintiff Olczyk purchased 10,000 shares of Cerion common stock at $11.625 on June 14, 1996, 10,000 shares at $9.4875 per share on June 21, 1996 and 500 shares at $10.875 per share on July 3, 1996. Teitelbaum was the first to file suit, challenging Cerion's disclosures in its initial public offering, followed by Olczyk who made similar allegations. The two cases were consolidated. On March 21, 1997, Teitelbaum and Olczyk, joined by Pickup, filed a consolidated amended class action complaint (amended complaint) against Cerion, Nashua, the parent corporation of Cerion at the time of the offering and principal financial beneficiary of the offering, Blair, the lead underwriter of the offering, and five officers and directors of Cerion. The amended complaint alleged that Cerion's registration statement and prospectus and the statements contained in these documents were materially false and misleading to investors in violation of the Securities Act of 1933 and other laws, because they failed to disclose that "StorMedia [, Cerion's largest customer,] was experiencing trends and changes in its own business which placed its relationship with Cerion in jeopardy and *** result[ed] in a complete termination of their supply and contractual arrangements[,] *** jeopardizing Cerion's future financial results ***."

Defendants' motions to dismiss the amended complaint were granted on October 9, 1997, for want of specificity, particularly the factual basis supporting the allegation that Cerion knew it was losing the business of its largest customer when its registration statement and prospectus were issued. Plaintiffs were granted leave to amend.

On December 5, 1997, plaintiffs filed the subject five-count second amended complaint, now alleging that certain statements and non-disclosures in the prospectus, attached as an exhibit, constituted material misrepresentations and omissions and stated claims under sections 11, 12 and 15 of the Securities Act of 1933 (counts 1, 2 and 3, respectively) and under the Illinois securities law (count 4) and consumer fraud law (count 5). Plaintiffs alleged that at the time of the offering, Cerion was a manufacturer of aluminum disk substrates, the metallic platforms for thin film disks used in computer hard disk drives; in 1995, substrate sales comprised about 95% of Cerion's total sales; prior to the offering, Cerion was informed it was being eliminated as a supplier by its two major customers, StorMedia and HMT; and defendants completed the offering without disclosing these material facts in the registration statement and prospectus. Plaintiffs asserted that such omissions were material to Cerion's business and to its prospective investors because StorMedia and HMT accounted for 86% of Cerion's sales in 1995 and 84% of sales in the first three months of 1996, yet the prospectus represented that Cerion's business was rapidly expanding, so fast that Cerion "might not be able to expand fast enough to accommodate the demand for Cerion's products."

The subject complaint further asserted that at the time of the offering, StorMedia was largely dependent upon purchases by another business entity, Maxtor Corporation (Maxtor) which, in 1995, comprised 45% of StorMedia's net sales. On November 17, 1995, StorMedia had entered into a written supply agreement with Maxtor to manufacture "media," rigid thin film magnetic discs which store information, for use in Maxtor's hard disc drives. Aluminum substrates, like those manufactured by Cerion, are the platforms for these thin film discs. On November 17, 1995, and thereafter, StorMedia's product had to be qualified by a specific date and in conjunction with other specific components so that Maxtor could provide hard disc drives that met the requirements of Maxtor's customers; and Maxtor's obligation to purchase StorMedia's media was contingent upon StorMedia's product meeting Maxtor's specifications and functional requirements. After entering into the supply agreement with Maxtor, from November 17, 1995 until at least May 24, 1996, StorMedia's media repeatedly failed to perform adequately, failed to meet Maxtor's functional requirements and failed to meet Maxtor's specifications, ultimately causing Maxtor itself to lose substantial business opportunities. Cerion received notice that it was about to lose StorMedia as a customer, due to StorMedia's inability to produce, from Cerion substrates discs, media that met industry standards and Maxtor's requirements. Prior to the offering, Cerion also was informed by its second largest customer, HMT, that it planned to reduce its orders from Cerion, because HMT would build its own substrate facility.

Plaintiffs alleged further the prospectus did not disclose the fact that for several months prior to the offering, StorMedia failed to fulfill its supply arrangement with Maxtor Corporation, which subsequently led to the cancellation of StorMedia's contract with Cerion, although the prospectus represented that Cerion worked in close technical collaboration with its customers, including StorMedia, throughout the lengthy sales, manufacturing and supply cycles for Cerion's products and that Cerion was refining its customer service approach to monitor product performance as Cerion's products were incorporated into the manufacturing of products by its customers. Plaintiffs charged that the facts known to StorMedia regarding its problematic products supplied to Maxtor were known to Cerion, by virtue of the sibling relationship between StorMedia and Cerion, Nashua having been the former parent of StorMedia, thereby ensuring the flow of information from StorMedia to Cerion. The prospectus also failed to warn or inform investors that HMT already had informed Cerion that it would reduce drastically its orders for media to be purchased from Cerion by virtue of its own impending manufacture of substrate discs. Yet, the prospectus stated, in pertinent part, "[t]he loss of one or more of [Cerion's] customers *** could have a material adverse effect on [Cerion's] business, results of operations and financial condition."

Plaintiffs alleged in the alternative that such statements in its prospectus about Cerion's close technical collaboration with its customers, including StorMedia and HMT, and its monitoring the performance of products throughout their subsequent life cycle were materially false and misleading if Cerion was unaware of the status of its business and did not in fact monitor the performance of its products.

Plaintiffs asserted that the prospectus contained materially false and misleading risk disclosures that warned only generally of general market conditions, but failed to disclose what Cerion then knew specifically and materially concerning the declining market for Cerion's products and the questionable status of its supply arrangements with StorMedia and HMT. Although the prospectus warned that various events "could" or "may" occur, and that there can be no assurance that Cerion's business would continue in its present state, it was materially misleading to caution that unfavorable events "might" happen when they already had occurred.

Blair, which received $4,018,560 in proceeds for its role as the lead underwriter for the offering, was charged with having violated its duty to investors to perform properly an independent due diligence investigation of Cerion prior to the offering; Blair was required to conduct an investigation into the business, operations, prospects, financial condition, and accounting and management control systems of Cerion; Blair also failed to investigate the status of Cerion's business with either HMT or StorMedia prior to the offering; and, in the course of its investigation, Blair obtained, or should have obtained, knowledge of the facts alleged, if it had acted with reasonable care.

The subject complaint described Nashua's role in the offering as the former parent of Cerion and StorMedia. Nashua was then in default under a $20 million loan agreement, which had increased its indebtedness from $33 million in 1994 to $53 million in 1995. In 1995, Nashua reported a $2.31 loss per share, and planned a public offering of Cerion stock, which would eliminate its debt. Of the 3,838,000 shares sold in the offering, Nashua sold 2,223,000 of them and Cerion the remainder. Nashua secured $26,900,250 in proceeds, plus an additional $4,018,560 through Blair's exercise of its option to purchase additional stock. Cerion realized proceeds of $19,525,350, of which Nashua received the major share.

Six weeks after the initial public offering, after the market had closed on July 9, 1996, a Cerion press release disclosed that StorMedia had cancelled its outstanding purchase orders with Cerion due to a "recent slowdown at StorMedia." In reaction to the news, the price of Cerion stock decreased from $9 per share to $4.875 per share, a 46% decline.

On February 18, 1998, defendants moved to dismiss the subject complaint pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1996) (section 2-615)) on the same grounds advanced in moving to dismiss the amended complaint. Blair filed its motion separately from other defendants. Defendants also contended that plaintiffs lacked standing to pursue their securities claims because of their aftermarket purchase of Cerion's common stock and, their Illinois Consumer Fraud Act claim should be dismissed for failure to plead loss causation and because the underwriter defendants are "regulated professionals" exempt from the Act. On May 6, 1998, following a hearing, the circuit court granted defendants' motions to dismiss with prejudice, holding that: the subject complaint failed to satisfy Illinois' fact pleading rules, the prospectus "bespoke caution as a matter of law" and the failure to disclose Cerion's loss of 86% of its business did not constitute a material misstatement. For reasons which follow, we reverse and remand.

I

Dismissals of complaints under section 2-615 are reviewable de novo. Peter J. Hartmann Co. v. Capital Bank and Trust Co., 296 Ill. App. 3d 593, 600, 694 N.E.2d 1108 (1998); Harris v. Chicago Housing Authority, 235 Ill. App. 3d 276, 277, 601 N.E.2d 1011 (1992). Grants of motions to dismiss require review of whether significant allegations of the complaint, if established, could entitle plaintiffs to relief. Bryson v. News America Publications, Inc., 174 Ill. 2d 77, 86, 672 N.E.2d 1207 (1996); Peter J. Hartmann Co., 296 Ill. App. 3d at 600. No cause of action should be dismissed on the pleadings unless it clearly appears that no set of facts can be proved under the complaint entitling plaintiffs to relief. Bryson, 174 Ill. 2d at 86-87; Peter J. Hartmann Co., 296 Ill. App. 3d at 600.

Plaintiffs contend that the circuit court erred when it dismissed the subject complaint with prejudice, finding their fact pleading insufficient to overcome that protection afforded by the "bespeaks caution" doctrine and the federal "safe harbor" provided by SEC Rule 175, which the court held also protected defendants' prospectus.

Plaintiffs identify error in the circuit court's determination that allegations of Cerion's knowledge which they ultimately pled were inadequate. They assert that Cerion's knowledge is not an element of a claim under section 11 of the Securities Act of 1933, as a matter of substantive law, since the issuer of securities is absolutely liable for any material misstatements in, or omissions from, the registration statement, which it is required to sign under section 11(a)(1). The Supreme Court has held that under section 11, a plaintiff who "purchased a security issued pursuant to a registration statement *** need only show a material misstatement or omission to establish [a] prima facie case. Liability against the issuer of a security is virtually absolute, even for innocent misstatements." Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 74 L. Ed. 2d 548, 555, 103 S. Ct. 683, 687 (1983) (footnote omitted).

Additionally, plaintiffs argue, section 12 of the Securities Act has similar minimal requirements to establish a cause of action that do not require pleading defendants' knowledge. Quoting In re NationsMart Corp. Securities Litigation, 130 F.3d 309, 318 (8th Cir. 1997), cert. denied, 524 U.S. 927, 141 L. Ed. 2d 696, 118 S. Ct. 2321 (1998) (NationsMart), plaintiffs maintain that "[f]raud and scienter are not elements of a