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Securities and Investment Law: Compliance and Litigation


Expertise in Compliance with Securities Laws When Raising Capital


California strictly regulates fundraising for your company or startup, whether through equity or debt, in order to protect investors. Codified as Corporations Code Section 25401, this state la provision mirrors Rule 10b-5, the federal anti-fraud provision. Section 25401 reads:


“It is unlawful for any person, in connection with the offer, sale, or purchase of a security, directly or indirectly, to do any of the following:

(a) Employ a devise, scheme, or artifice to defraud.

(b) Make an untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading.

(c) Engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.” 


The language here is similar to that of general fraud provision under Civil Code §3294, which imposes liability to a defendant engaging in “intentional misrepresentation, deceit, or concealment of a material fact,” except Section 25401 does not require that the investor prove that he or she actually relied upon specific statements; it merely concerns the veracity of statements made in communication with respect to a securities transaction. Under clause (b), investors bringing action against a company must only prove either that the company made a misstatement of material facts or that it omitted from its communication material facts.


This presents a difficult challenge for companies that want to raise money and or communicate the successes of their products to the outside world. Some of what they disclose may be facts, and some may merely reflect the management’s opinions. Sometimes, the distinction between the two is clear. Other times, the line separating facts and opinions can be blurry. An experienced securities attorney is essential for any company or individual considering a securities transaction. We work closely with our domestic and non-US clients to interpret, implement and assure compliance with a range of securities law compliance matters, including:


  • Developing and negotiating founder stock agreements/plans
  • Advise and development of multiple classes of equity, including preferred shares
  • Investor qualification planning
  • Compliance with Reg D, and other exemptions to SEC registration 
  • Preparation and negotiation of private placement memorandum (PPMs)
  • Drafting and negotiating term sheets and other final investment documents
  • Preparation and review of Securities Exchange Act reports
  • Disclosure matters, including compliance with Regulation FD and Regulation G
  • Compliance with the Foreign Corrupt Practices Act
  • Preparation and review of proxy statements, advice on shareholder proposals and assistance with conduct of shareholder meetings
  • Compliance with insider trading rules, Section 16 reporting and liability matters and implementation of issuer repurchase and Rule 10b5-1 issuer and individual trading programs
  • Corporate governance, including board independence and committee matters, fiduciary duties, takeover defenses, dealing with activist shareholders, proxy access and director and officer liability issues
  • Executive and key employee compensation, including creation of and advice with respect to equity-based compensation plans and executive employment and severance agreements.


Our approach to compliance includes advice and counsel provided before litigation arises to reduce the risk of litigation. We draw on the experience of our securities litigation and regulatory enforcement attorneys to counsel clients on making and accepting securities investments. We also advise and litigate when necessary on Director & Officer and other issues, including claims of fraud, failure to disclose, material omissions, etc. 


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Securities fraud often involves the following:

  • Projection of unrealistic returns
  • Ponzi schemes
  • Failure to disclose material facts
  • Failure to disclose risks
  • Churning an account
  • Misstatements of material facts
  • Concentration in one stock or industry
  • Unsuitable investments
  • Using proceeds for undisclosed purposes


When it comes to choosing an attorney to handle your case, results matter. The Law Offices of Nate Kelly specialize in handling investor claims under the Federal and State Securities Laws, recovering millions of dollars for clients over the last decade. We have the results to give credibility to our law firm. While investors who believe they may have been defrauded are right to be concerned about spending "good money after bad", securities fraud litigation may be the best ROI you can find. We don't just know the law, we put it into practice to secure real results. 




An important feature of the California law is that is provides a remedy of rescission (you give back the stock and get your money back) under certain circumstances for those who have purchased securities that are not properly registered under Corporations Code Section 25110.  Corporations Code Section 25503 imposes liability for the money back plus interest upon a person violating Section 25110.   The statute provides for a measure of damages to be paid to the investor if he or she has already sold the security.  


This is a claim solely based upon whether or not certain technical registration, qualification or exemption requirements have been met by the issuer of the security.  Such a case must be filed in Court within two years of the date of sale.  However, if the technical requirements of registration or exemption were not met, investors can recover the money paid for the securities without having to prove fraud.   This type of case must be filed within two years of the violation or within one year after discovery thereof, "whichever shall first expire" pursuant to Corporations Code Section 25507, subd. (a).  


California law also prohibits fraud in the offer and sale of securities, under Corporations Code Section 25401.  Section 25401 makes it illegal to offer, sell or purchase securities through untrue statements or omissions of a material fact.  Section 25501 gives a victim of such fraud the right to sue to recover damages or rescission.  Further, of special significance to investors who were defrauded is the fact that the requirements to prove a case under Sections 25401 and 25501 are not as difficult to prove as a claim for fraud under the Federal Securities laws or under the rules for ordinary fraud.   


Under California law, Corporations Code Sections 25401 and 25501 do not require that the investor prove that he or she actually relied upon a untrue statement or material omission.  This is a huge benefit to defrauded investors.  This element, which is known as "loss causation" is a requirement of the Federal Securities laws under the Securities Exchange Act of 1934 aka Rule 10b-5, and it is a very difficult element to prove in many cases and it permits promoters to get away with outright lies, so long as the lies do not directly cause economic harm to the investor.  Under the federal rule, an investor must normally show that he or she read or heard of the facts that were false, believe them to be true, and that these were important in the decision to invest.  This requirement gives the defense an opportunity to conduct a witch hunt into the education, background, knowledge and sophistication of the investor, which often is offensive and an invasion of the privacy of the investor.


A classic example of this rule is where investors in a shipping venture involving a single freighter are falsely told that the ship has far greater freight capacity than is actually the case.  By this misrepresentation, the promoters are able claim that greater profits can be expected from the investment than is really the case.  However, it is disclosed in the prospectus that the ship is uninsured.  When the ship sinks in a storm, causing a total loss to investors, they sue, claiming that they would never have invested if the actual size of the vessel had been disclosed, and if they had never invested, they would not have suffered losses.   


Under the federal rule of loss causation, the Court might find that the misrepresentation regarding the capacity of the ship was material, and that investors might not have invested if the actual size of the ship had been disclosed.  Therefore, "transaction causation" was established.   However, since the size of the ship had nothing to do with its sinking, and nothing to do with the reason for the loss, the claim fails for lack of loss causation.  This is an example of a case in which someone who could sue and win under the California Corporate Securities Law of 1968 would probably lose under the analogous federal law.


Because the California Corporate Securities Law of 1968 does not require proof of reliance on the facts that were fraudulently misrepresented and does not require proof of loss causation, it is far easier for a defrauded investor to win under the California law than under the Federal law.


In order for a securities fraud claim to be governed by the California Corporate Securities Law of 1968, the offer to sell must emanate from California or the offer to buy must be accepted in California. See, California Corporations Code Section 25008(a) and (b).  It is not necessary for the investor to be in California, or to be a resident of California, in order to sue under the California Corporate Securities Law of 1968.


Claims for relief under for securities fraud under Corporations Code Sections 25401 and 25501 are governed by the statute of limitations in Corporations Code Section 25506, which requires that the case must be filed within five years after the act or transaction constituting the violation, or within two years after the discovery by the plaintiff of the facts constituting the violation, whichever shall first expire. 


Contact us today to schedule a free consultation!  



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