1.2.1.5. Liabilities for False Communications
The Securities Act of 1933 lays out the consequences of misleading customers or potential customers with respect to offering and selling a security. Untrue statements of a material fact or the omission of a material fact in a written prospectus or oral communication whose result is to mislead a customer are subject to civil prosecution in a court of law.
Anyone who offers or sells a security misleadingly, bears the burden of proof that she did not know and could not have known of the untruth or the omission. If the accused person cannot provide a convincing argument that she did not know or could not have known, she will be liable to anyone who purchased the security.
The Securities Act also stipulates that any person who sells a security from a new issue before a registration statement is in effect or who offers to sell a security before the registration becomes effective is also liable in a court of law.
In either of these cases, the purchaser may have the right to rescind her investment, often referred to as a rescission right. In the securities world, “to rescind” means to revoke or cancel a transaction, resulting in the return of investor’s money. The amount of rescission cannot exceed the security’s purchase price plus interest, less any income received from the purchase (such as dividends), or for damages if he no longer owns the security. If there has been a violation of the Securities Act, a purchaser has the right to rescind for one year. Occasionally, an issuer may extend a rescission offer to investors. This usually includes an offer to return the original investment plus interest. Any investor who accepts the offer gives up his right to sue the issuer.
If the person who sold the security can prove that any portion of the recoverable amount does not represent a depreciation of the security’s value resulting from the untruth or omission, then that portion shall not be recoverable