Saturday, January 15, 2011

Real-World Low-Level Felonies

A willful violation of securities law is just what it sounds like--you violated the law and can't reasonably claim there was no way for you to know it was, like, a bad idea. For example, let's say you owned a bar and grill and wanted to raise money to build an addition to the restaurant. If the local bank shuts you down, you might start asking customers if they want to invest $5,000 each in exchange for 2% of the profits. You might not call the investments "stock," but the regulators would consider them to be investment contracts, which are securities. If you didn't register them, they can refer you to a criminal prosecutor (Attorney General, District Attorney, State's Attorney, etc.) who might want to charge you with some low-level felonies for selling unregistered securities through unregistered agents. Would they go that far? They might. Maybe some of your investors complain to the regulators that you didn't disclose the following material information:
  • your restaurant was on the verge of bankruptcy
  • the addition could only be built if granted a zoning variance
  • you intended to use some of the $ for a new Cadillac Escalade
  • your restaurant has never made a profit
Oopsie. Now, we're talking about multiple counts of felony charges like "securities fraud" or "omissions and misstatements," etc. on top of the unregistered securities and selling thru unregistered agents. The Uniform Securities Act's little "3 years/$5,000" criminal penalties are just for the little pretend Uniform Securities Act. The lowest-level felony in Alabama, for example, a "Class C felony," carries a sentence of anywhere between 1 and 10 years and a $15,000 fine! In IL, a Class 4 felony carries a sentence between 1 and 3 years, and/or a $25,000 fine. Wow. So, if a smarmy businessman takes people's money under false pretenses, the Administrator is not the problem. The problem would really be the possible criminal liability and also the civil liability to investors who end up suing him.

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