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Category: Business Law
Satisfied Customers: 4633
Experience:  23 Years business & securities law, NY and FL bars. SEC all states.
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This question concerns securities laws re. investing in privately

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This question concerns securities laws re. investing in privately held companies. I would appreciate a specific answer.

Question: What are the penalties and other consequences if an investor represents herself to meet the standards of a "qualified" or "accredited" investor as per SEC regulations but in fact is not such?
In order to sell many types of securities under the exemptions to registration provided under the securities laws, the companies who are selling the investments have to sell only to people who are accredited investors as that term is defined in the securities laws. There is no duty imposed upon the company selling the securities to question whether somebody is accredited unless the application raises a red flag which would induce the normally prudent company to ask questions. Once the offering is complete, the SEC or a state agency can determine that the investor was not accredited, and this can threaten the legitimacy of the exemption from registration for the entire offering to all of the investors. The company might have to go back and refund all of the money, or give the investors the right to get out of their investments, this is known as a "right of recission" or a "recission agreement". The investor who lied can become liable to the company for millions, as well as potentially to the other participants in the offering. The legal fees for an offer of recission can be hundreds of thousands of dollars. I have never seen anybody go to jail for lying about this but the civil liability has the potential to be enormous.
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