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What Constitutes a Material Misrepresentation in a Securities Offering?

California Corporations Code Section 25401 provides: “It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.” Id.

[Emphasis added.]. What is meant by the phrase “an untrue statement” is easily understood. Black’s Law Dictionary defines the term “untrue” to mean “Prima facie inaccurate, but not necessarily willfully false. A statement is ‘untrue’ which does not express things exactly as they are.” Black’s Law Dictionary (5th Ed., West 1979) p. 1380, citing Zolintakis v. Equitable Life Assur. Soc. Of United States, C.C.A. Utah, 108 F.2d 902, 905. Similarly, Black’s defines the term “misrepresentation” as “[a]ny manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts. An untrue statement of fact.” Id. at 902.So what is a “material fact”? The California anti-fraud statutes with respect to securities are largely modeled after the federal securities laws. For instance, California Corporations Code Section 25401 contains language which is virtually identical to the language contained in 17 C.F.R. 240-10b-5. In fact, on September 23, 2013 Senate Bill 528 was signed into law overhauling California Corporations Code Section 25401 to model it after Rule 10b-5, and one only need look to federal law to determine what constitutes a “material” fact. The United States Courts for the 9th Circuit (which includes California) has issued its Manual of Model Civil Jury Instructions. Instruction 18.2 of that manual is the jury instruction that would be read to the jury in a civil suit alleging misrepresentations in the sale of securities.

Instruction No. 18.2 provides: “A factual representation concerning a security is material if there is a substantial likelihood a reasonable investor would consider the fact important in deciding whether to buy or sell that security. ¶ An omission concerning a security is material if a reasonable investor would have regarded what was not disclosed to [him] [her] [it] as having significantly altered the total mix of information [he] [she] [it] took into account in deciding whether to buy or sell the security.” Manual of Model Civil Jury Instructions 18. Securities Exchange Act, Instruction No. 18.2 Securities-Misrepresentations or Omissions-Materiality.

Essentially, a misrepresentation of material fact in the sale of securities may consist of almost any representation, written or oral, which would affect an investor’s decision to make or refrain from making a particular investment. The “material fact” may concern the value of the investment, the qualifications of the management team controlling the investment, the expected return, or the amount the investor is ultimately required invest to receive the expected return.

If you are considering issuing securities to raise capital for your business, or you are considering investing in a particular security, you need to consult a professional with the training and experience to help you make an intelligent decision. Michael Leonard, Esq. of San Diego Corporate Law is the attorney you can trust to assist you understand the complex rules and laws which govern the sale and issuance of securities. To schedule a consultation with Mr. Leonard to discuss your securities needs, or any other business-related matter, you can contact him by visiting San Diego Corporate Law or by telephone at (858) 483-9200.

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