State enforcement authority can reach a seller even when a security qualifies for a registration exemption. Your first task is separating permission to offer an investment from honesty about that investment.
Suppose an issuer, the organization issuing a security, gives you a sales presentation that conceals its financial problems. Omitting a material fact can trigger antifraud enforcement. Your customer's protection cannot depend on whether that issuer registered its offering. The Administrator is the state official or agency responsible for administering securities law, including investigating suspected violations.
The Uniform Securities Act of 1956, as amended, supplies the rules tested here. Its §101 antifraud provisions reach any person, including individuals and organizations, directly or indirectly involved in misconduct. Registration status makes no difference. An unregistered promoter cannot escape §101 by arguing that the Administrator regulates only registered professionals.
The prohibited conduct must relate to an offer, sale, or purchase of a security. §101 covers three routes to fraud:
- Fraudulent schemes: You cannot use a deceptive plan, such as inventing an investment project to collect purchasers' money.
- Material misstatements and omissions: You cannot state an important falsehood or leave out information needed to keep what you say from misleading investors.
Common mistakes
- Treating one exempt resale as outside §101. The exemption addresses registration, not the truthfulness of the pitch.
- Treating a notice filing as proof, under §405, that financial statements were checked for accuracy. Filing status supplies no such assurance.
- Choosing a final §306 stop order based only on the public interest. The question must also supply a statutory ground.
Bottom line
- §101 covers direct and indirect fraud involving offers, sales, and purchases, regardless of registration status.
- Exempt securities, exempt transactions, and federal covered securities remain subject to state antifraud enforcement.
- §404 prohibits materially misleading statements in filings and proceedings; §405 prohibits portraying filing or exemption status as government approval.
- §306 stop orders require public interest and statutory grounds; final orders require notice, an opportunity for hearing, and written findings.
Exam shortcut
Read the alleged misconduct before the security's label. Circle the deceptive statement or omitted fact before considering an exemption. When a stem says “stop order,” identify its target: registration effectiveness under §306 or covered-security offers and sales under §307(d). Withdrawing a particular exemption is a separate §402(c) order. Then check that power's prerequisites. For federal covered securities, test the filing's legality before treating nonpayment or missing paperwork as a violation.
The full lesson (about 2,636 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- E10
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