A common form of investment fraud is the selling of unregistered securities. In many cases, investors can recover their losses in securities arbitration. In short, unregistered securities are securities that have not been registered with the Securities and Exchange Commission (SEC). Before a stock, bond or note can be sold to the public, it must be registered with the SEC. In fact, it must be registered before it can even be offered to the public. Any security is considered to be unregistered if it does not have an effective registration statement.
While the offering of unregistered securities is a violation of Section 5 of the Securities Act of 1933, there are some exceptions. So when is it legal and when is it illegal? According to Section 5(c) of the Securities Act of 1933, “It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 8.”
Seems fairly cut and dry, so when is it legal? Exemptions to the restriction of the sale of unregistered securities include:
- A corporation’s privately-owned stock can be issued to board members and executives. However, the SEC must be notified by the stockholders before it is sold to another individual.
- Investments from qualified investors — investors with minimum $200,000 annual income or a net worth of $1 million — may be solicited by a corporation.
The selling of unregistered securities is a serious act of broker misconduct. If you were sold unregistered securities and suffered investment losses as a result, find out more about your legal rights and options by contacting an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.