Investors and business owners often engage in transactions involving the ownership or right to receive profits of a business. Generally, these transactions involve the sale of stocks or bonds, which are securities and can implicate both state and federal securities laws. At both the state and federal level, securities laws and regulations prevent harm in the market and provide remedies when the sale of securities involve fraud or otherwise damage the marketplace. Primarily, federal law regulates the transaction of securities through statutes governing the interstate issuance and sale of securities, including: the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Securities Investor Protection Act of 1970.
In addition to the federal laws, many states, including Texas, have enacted laws to supplement and reinforce federal regulations, and regulate the intrastate sale of securities. In Texas, the Texas Securities Act (“TSA”) is the general guiding authority for these matters. While other parts of the Texas Constitution concern the transfer of investment securities (see Tex. Bus. & Com. Code Ann. §§8.101) and a cause of action for fraud in these transactions (see Tex. Bus. & Com. Code Ann. §27.01). With these statutes, the most common civil actions involve the issuance of sale, investment advisors or representatives, or as a tie-in with other remedies.
Issuance or Sale
A person who offers or sells a security in violation of the TSA shall be liable to the purchaser buying the security from the seller. In their suit, the purchaser may sue (i) at law; (ii) in equity, to rescind or cancel the purchase; or (iii) for damages, if the purchaser no longer owns the security.
Persons who offer or sell securities by use of an a false, misleading, untrue statement or omission of a material fact shall be liable to the purchaser of the security. However, sellers or offerors of securities may not be liable for false, misleading, untrue statement or omission of material fact when it can be shown that (i) the purchaser knew of the untruth or omission; or (ii) the offeror did not know of the untruth or omission, and could not have known while exercising reasonable care. This same analysis for liability applies when a prospectus is required in connection with a registration and contains an untrue statement or omission of a material fact, which may make the issuer of the security liable.
In addition to sellers, offerors, and issuers, individuals who control these persons, directly or indirectly, may also be jointly and severally liable under the TSA. However, these controlling individuals may also avoid liability by proving, while exercising reasonable care, they did not know of the circumstances leading to the liable acts.
Investor Advisors or Representatives
The TSA provides various causes for liability for investment advisers, their representatives, and individuals who render services as investment advisors under the act. Persons who act in any of these roles may be sued by the purchaser of securities when their actions are in violation of the act or one of the act’s orders. Individuals providing services as investment advisors may be liable to the purchaser for damages, when the investment adviser or their representative commits fraud or engages in fraudulent practices while rendering services. Purchasers who are successful in their suit against investment advisers, their representatives, or a party who exercises control over these individuals may recover damages, court costs, and reasonable attorney fees.
The TSA allows purchasers who file a civil claim against a seller, offeror, an investment advisor or their representative, or a controlling party to for recovery at law or in equity. Additionally, other legal theories that would allow purchasers access to relief under either state or federal law are not preempted or otherwise excluded by the TSA. For example, while double recovery for the same act is precluded, purchasers may file a claim against a party for an action against the TSA as well as the Texas Deceptive Trade Practices-Consumer Protection Act (“DTPA”). Moreover, a purchaser may file a claim against a person who makes or benefits from a false representation under the Texas Business and Commerce Code, and the person may be liable for exemplary damages when the false representation was known when made. In addition to these damages, a purchaser may also recover reasonable attorney fees as well as various court costs.
Investors looking to get a return on their capital and business owners looking to secure funding for their venture should keep these civil actions in mind. Knowing the causes of action and the options to recover will help maintain the integrity of the marketplace.
The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.