1. Overview of the California Securities Act
2. Criminal Actions Involving Securities Fraud
3. Selling Unqualified Securities in California
4. Requirements to Sell Securities

The California Securities Act went into effect on January 2, 1968. The law requires that all sales of securities in California be registered with the California Department of Business Oversight or be exempt from registration per Section 25102 of the California Corporations Code.

Overview of the California Securities Act

The securities law regulates any offers or sales from secondary sellers and issuers of securities in California. The purpose is to protect consumers in California from deceptive and fraudulent transactions that involve securities. The security law affects entrepreneurs in California who incorporate a business and will issue stock in the state. They are required to either register or be exempt.

Anyone who attempts to bypass the stipulations of the securities act runs the risk of facing criminal penalties. Securities fraud cases can be tried as a misdemeanor or as a felony in some cases. A person convicted of securities fraud can face substantial fines as well as imprisonment.

Criminal Actions Involving Securities Fraud

Securities fraud is a complicated area in California's criminal law when determining if a company or person will face criminal liability due to violating the state's securities laws.

  • The prosecution of a securities fraud case can take place in either federal or state court.
  • California's securities fraud laws require the prosecutor to show that the defendant intentionally violated the state's securities laws. This means that the defendant may have acted recklessly, intentionally, or deliberately.
  • The prosecutor will need to present information regarding the defendant's knowledge of securities regulations and laws to show willful conduct.
  • Prosecutors must also prove that the defendant participated in a fraudulent plan or scheme that affected the purchase, sale, or offer of securities. They may also show that the defendant either directly or indirectly permitted misleading or false statements to be released.
  • If the defendant deliberately withheld information that affected sales, offers, or purchases related to securities, this would be considered securities fraud.
  • Selling or offering securities for sale in a way that does not comply with the information stated in the qualification paperwork is grounds for securities fraud.
  • Misleading behavior in the sale or purchase of securities is fraud. The California Corporations Code considers engaging in certain activities for the sole purpose of giving a false or misleading impression to be fraud.
  • Securities may not be willfully traded in any way that manipulates the market.
  • Securities cannot be traded in a way where there is no actual change in ownership. Entering an order to buy or sell securities when you know of an impending offsetting order for the purpose of creating a misleading impression is securities fraud. These are examples of making a misleading or false impression.
  • A form of criminal law occurs when someone knowingly lies to another person to get them to buy or sell securities.
  • One of the best-known forms of securities is insider trading. This occurs when someone has information that is not public knowledge and uses that information to buy or sell securities.

Selling Unqualified Securities in California

Before selling or offering securities in California, you may need to "qualify" the securities. This is done through the California Department of Corporations. The process to qualify securities is extensive with lots of paperwork and information/disclosures about the company that will be issuing the securities.

In some situations, it is considered a fraudulent crime only if the person "willfully" sold securities without first complying with the qualification requirement. If, on the other hand, a person was acting in good faith and believed they were not violating the law, that person will not be held criminally liable.

Requirements to Sell Securities

The general rule is anyone in the role of selling securities must be a licensed broker. California law expands on this by not including a director, officer, individual in a lesser position, or someone performing similar functions. People in these positions may not receive compensation for transactions specifically related to sales or purchases of securities. They may only do so as long as it is as part of their salary, but it cannot be a commission.

Federal law is basically the same, noting that everyone must hold a broker's license. For offerings being sold in one state, the broker must be licensed in that state. If the offerings are being sold in multiple states, the broker must be licensed with the Securities and Exchange Commission as well.

If you need help with the California Securities Act, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.