Before securities can be sold to the public, they must be registered with the Securities and Exchange Commission (SEC). Failing to register a stock before selling it to the public will result in an unregistered offer or sale of a security, which can result in hefty criminal consequences.
Securities Act of 1933
The purpose of the Securities Act of 1933 (Securities Act) is for investors to receive vital and critical information concerning securities. This information includes financial statements and anything else that could be deemed essential for the value of the security. In addition, the Securities Act desired to prohibit deceit, misrepresentation, and fraud in selling securities through its registration requirement.
When registering with the SEC, companies are required to provide the following information:
- Description of their companies’ assets
- Description of the securities that will be offered for sale
- Relevant information concerning the management of the company
- Financial statements that are certified by an independent accountant
Most companies, foreign or domestic, are required to file with the SEC before they can begin selling securities publicly. However, there are a few exceptions, including:
- Private securities offerings concerning a limited number of people or entities
- Offerings of limited size
- Intrastate offerings
- Securities of municipal, state, and federal governments
Anyone can access registration information using the EDGAR database provided by the SEC.
Securities Registration Exemptions
Municipal Securities
The Securities Act does not require any debt security issued by a government authority to be registered with the SEC. Generally, these securities are issued to finance public-purpose projects such as low-income housing developments.
Intrastate Offerings
The Securities Act does not require registration of an intrastate offering. An intrastate offering is made available only to residents in the state where the corporation is located. The offering must be registered in the state and comply with the following SEC rules:
• The issuer is a corporation in the state where the offering is located
• At least 80% of the corporation’s revenues must come from the state of the offering
• At least 80% of the corporation’s assets are in the state of the offering
• At least 80% of the proceeds of the offering must be used in the state of the offering
• Buyers of the security can only be residents of the state or business entities owned by residents of the state of the offering
If any of the above does not apply and the company sells securities, it can be considered an unregistered security sale which may result in penalties.
Private Placement
The Securities Act does not require registration of transactions not involved in public offerings. Therefore, if someone is selling securities to an experienced investor but has not made the sale offer public, it may qualify for what is known as a private placement exemption.
To qualify for a private placement exemption under the Securities Act, the purchaser of the securities must:
- Have enough knowledge and experience in financial and business matters to be considered a sophisticated investor who can evaluate the risks and merits of the investment or be able to bear the economic risk of the investment;
- Have access to information that would usually be provided in a public offering for registered securities; and
- Agree not to resell or distribute the security to the public.
Regulation A
The SEC does not require small offerings to be registered. Instead, an offering is considered small if it meets the following conditions:
- Not worth more than $5,000,000 within 12 months
- A simplified disclosure document is filed with the SEC at least ten days before the small offering
- Offering disclosures are sent to each buyer at least 48 hours before confirmation of the sale
Broker Misconduct
Businesses that sell securities are considered brokers. Brokers are required to stay in compliance with SEC rules. Regarding unregistered securities and securities fraud, brokers are not allowed to sell unregistered securities, and they must report and warn investors about security fraud that they are aware of.
If a broker sells an unregistered security or participates in securities fraud, they can be subject to hefty fines. For example, in 2011, Citigroup was required to pay a $285 million settlement in connection to SEC charges of misleading investors about a collateralized debt obligation tied to the housing market.
Other Securities Fraud
Securities fraud can occur in several ways. One can commit securities fraud and never actually profit from the activity. The following are examples of securities fraud:
- Misrepresentation: If someone makes a false statement about a company or security that is used to manipulate people into buying or selling a security, it can be considered fraud.
- Insider trading: If someone is associated with a company and uses their inside knowledge to gain an advantage over the public by using information not yet known to the public, it can be considered insider trading.
- Pump and dump: A manipulative scheme used to pump up a stock’s price so that the conspirators can sell at a higher price and make a profit.
- Churning: When securities brokers convince clients to make excessive trades to generate more fees and commissions for the broker. When a broker engages in churning, they violate their fiduciary duty, which can result in severe penalties.
Penalties For Securities Fraud
The penalties for securities fraud depend on the amount of money manipulated in the fraudulent scheme. However, someone found guilty of securities fraud could face up to 20 years in federal prison and a fine of up to $5 million. In addition to fines and jail time, the guilty party could be required to pay restitution to the people who suffered a monetary loss in the fraudulent scheme.
Contact An Experienced Texas Securities Fraud Attorney
If you or someone you know is being charged with securities fraud or the sale of unregistered securiites, Cofer Luster securiites fraud criminal defense attorneys are ready to help. We are experienced white-collar criminal defense attorneys who will conduct an indepdent investigation and will work to develop the best strategies and tactics for your defense strategy. Schedule a confidential consultation today by calling us at 682-777-3336 or contacting us online. We will review your case and discuss how to best built our team.
