Corporations Code Section 25401 is California’s basic securities antifraud statute:
It is unlawful for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.
Notably, however, Section 25401 provides no remedy. Section 25501 provides the remedy for civil plaintiffs:
Any person who violates Section 25401 shall be liable to the person who purchases a security from him or sells a security to him, who may sue either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security), unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know (or if he had exercised reasonable care would not have known) of the untruth or omission. . . .
Neither Section 25401 nor Section 25501 requires that a plaintiff allege or prove as part of its prima facie case scienter on the part of the defendant. Thus, I was surprised to see yet another bill being introduced that would expressly negate scienter. AB 1517 (Muratsuchi and Chiu) would, among other changes, amend Section 25501 to add “The plaintiff shall not be required to plead or prove that the defendant acted with scienter.” Although one might argue that a pointless change is a harmless change, this amendment could actually harm investors by implying that scienter is currently required under Sections 25401 and 25501.
AB 1517 also would authorize a new subset of qualifications by permit for crowdfunding permit. I hope to have more to say about that in a future post.