Monday, February 24, 2014

Simplifying Antifraud Liability under Federal Securities Law

I have been working on a project involving liability for securities fraud under the Securities Act and the Securities Exchange Act. I’m addressing the possible liability of one particular defendant in one limited context--selling securities pursuant to the crowdfunding exemption in section 4(a)(6) of the Securities Act.

A defendant in that context faces possible civil liability under at least five different antifraud provisions—sections 4(a)(6), 12(a)(2), and 17(a) of the Exchange Act; Rule 10b-5; and section 9 of the Exchange Act. You could actually count that as seven if you counted scheme liability under Rule 10b-5 and section 17(a) separately. And that’s not counting the aiding and abetting provision in section 20(e) of the Exchange Act or possible state law liability.

Those antifraud provisions differ in many ways: the standard of care; the burden of proof; reliance requirements; who may sue; who’s liable as a defendant. Does it really make sense to have a potpourri of antifraud rules applicable to a single defendant in a single transaction?

I can understand why we might want to apply different rules when the SEC is a plaintiff than when a private party is the plaintiff. And I can understand why we might want to apply different liability rules to different types of defendants or different types of transactions. Policy considerations vary from defendant to defendant and from transaction to transaction. We might want to apply stronger liability rules to brokers, for instance, or in registered public offerings.

What I don’t understand is why a multitude of antifraud rules should apply to a single type of defendant in a single type of transaction. Wouldn’t it make more sense to decide what the requirements for liability should be for fraud in that type of transaction and, based on those policy choices, choose one liability rule to apply exclusively to that type of transaction? If a plaintiff didn't meet the requirements of the applicable rule, the plaintiff couldn't turn to any other liability provision for that transaction.

This would require Congressional action, and that's never going to happen, of course. Absent a political tsunami of some sort, Congress could never pass a coherent set of securities liability rules. But I can dream, can't I?

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