Civil and criminal penalties

Violations of state securities law expose offenders to civil and criminal liability. This lesson covers the civil-liability framework under USA §410, criminal sanctions under §409, including the statutory cap, the Administrator's referral to state attorneys general and U.S. Attorneys for prosecution, and the distinction between administrative and judicial enforcement.

USA §410 — the civil right of action

USA §410 creates a private civil right of action for buyers of securities sold in violation of the state's blue sky law. The right of action is the most powerful enforcement tool in private hands — it lets a wronged buyer sue the seller directly without waiting for administrative or criminal action.

Conduct that triggers civil liability under §410:

• Selling an unregistered, non-exempt security in violation of USA §301
• Selling a security through an unregistered broker-dealer or agent in violation of USA §201
• Selling a security by means of an untrue statement of material fact or omission of a material fact (USA §101 anti-fraud parallels — the civil action does not require scienter, unlike criminal fraud)
• Selling a security in violation of an administrator's order or rule

Who can sue and who can be sued:

• Plaintiff: the buyer — the wronged purchaser of the security
• Defendants: the seller, AND any person who directly or indirectly controls the seller, partners/officers/directors of the seller, employees materially aiding the sale, and broker-dealers/agents who participated in the sale (joint and several liability under USA §410(c))

What the buyer must prove: The buyer must prove only the violation and the purchase. Scienter is NOT required — even an innocent or negligent violation of the registration or sales conduct rules creates civil liability. This is a major difference from federal Rule 10b-5 fraud actions, which require scienter.

Rescission — the buyer's primary remedy

Rescission is the legal undoing of a transaction. The buyer who still owns the security returns it to the seller, and the seller returns the purchase price plus interest, less any income the buyer received from holding the security. The transaction is treated as if it never happened.

The rescission formula:

Recovery = Purchase Price + Interest from Purchase Date − Income Received from the Security

Worked example: A buyer pays $10,000 for an unregistered, non-exempt security on January 1, 2024. The security pays $300 in dividends to the buyer during the year. On January 1, 2025, the buyer sues for rescission. Assume the legal interest rate is 6%.

• Purchase price returned: $10,000
• Interest (6% × 1 year): + $600
• Income received: − $300
• Total recovery: $10,300 — plus the buyer returns the security to the seller

Buyer must tender the security. Rescission requires the buyer to give back what they bought. If the buyer no longer owns the security — e.g., already sold it — rescission is no longer the available remedy. The buyer instead seeks damages (covered next).

Attorney's fees and costs: USA §410(a) generally allows the prevailing buyer to recover reasonable attorney's fees and court costs in addition to the rescission amount. This makes private civil actions economically viable even for smaller transactions.

Damages — when rescission is not available

When the buyer no longer owns the security — usually because the buyer already sold it before discovering the violation — rescission is unavailable as a matter of mechanics. The buyer cannot tender back a security they no longer hold. The USA preserves the right to a substantively equivalent recovery in the form of damages.

The damages formula:

Recovery = Purchase Price + Interest − Income Received − Sale Proceeds

This formula tracks the rescission amount, then subtracts the value the buyer already recovered by selling the security. The net result is the same dollar amount the buyer would have received through rescission.

Worked example: Same facts as the rescission example, but the buyer sold the security on December 1, 2024 for $7,500 (the security had declined in value). The buyer sues for damages on January 1, 2025.

• Purchase price: $10,000
• Interest: + $600
• Income received: − $300
• Sale proceeds: − $7,500
• Damages recovery: $2,800

The buyer is made whole — recovered the original investment as if the sale had never happened, with the actual sale proceeds credited against the calculation.

Why this matters: A securities law violation cannot be cured by waiting for the buyer to sell at a loss. The statute makes the buyer whole whether they still own the security or not.

The rescission offer procedure — USA §410(g)

USA §410(g) gives the seller a structured way to cure a securities law violation before facing a buyer's lawsuit. The mechanism is the formal rescission offer — a written offer to undo the transaction on the same financial terms a court would order under §410(a).

How a rescission offer works:

• The seller (or anyone else who might face civil liability) sends the buyer a written rescission offer
• The offer must specify the rescission amount — purchase price + interest − income, calculated as of the offer date
• The offer must disclose the basis on which it is being made (the suspected violation) and the buyer's rights
• The buyer has 30 days from receipt of the offer to accept

Effect of the offer:

• If the buyer accepts within 30 days, the transaction is unwound on the offered terms; the seller's civil liability under USA §410 is extinguished as to that buyer
• If the buyer rejects the offer or fails to accept within 30 days, the buyer waives the right to bring a §410 civil action for the violation covered by the offer
• If the buyer accepts but the seller fails to perform, the buyer's full §410 right of action is revived — the offer must be backed by actual ability to pay

Strategic significance: A rescission offer is a powerful settlement tool for sellers who discover an inadvertent violation. By offering the same recovery a court would order, the seller closes the door to future civil liability with no judicial intervention. The 30-day deadline puts the burden on the buyer to act quickly or lose the right to sue.

Control person and successor liability — USA §410(c)

USA §410(c) extends civil liability beyond the direct seller to a defined circle of persons who controlled or assisted the sale. The provision is designed to ensure that the buyer can recover even when the direct seller is insolvent or otherwise unreachable.

Joint and several liability extends to:

• Every person who directly or indirectly controls a seller liable under §410(a) — this includes parent companies, majority shareholders, control affiliates, and certain holding-company structures
• Every partner, officer, or director of the seller (or of a controlling person), and any person occupying a similar status or performing similar functions
• Every employee of the seller who materially aided the unlawful sale — including agents who solicited or executed the transaction
• Every broker-dealer or agent that materially aided in the sale

Defense available to control persons: A controlling person, partner, officer, director, or employee is NOT liable if they prove that they did not know — and in the exercise of reasonable care could not have known — of the existence of the facts giving rise to the liability. This is the so-called "reasonable care" defense, and the burden of proof is on the defendant claiming the defense.

Why this matters: A buyer who has been wronged can pursue not only the immediate seller but the entire chain of control and material participation. This dramatically expands the pool of solvent defendants and creates strong incentives for control persons to supervise their selling personnel.

Survival of the cause of action — death does not end §410 liability

Under the act, every cause of action survives the death of any person who might have been a plaintiff or a defendant. It works in both directions: a buyer's estate may pursue the claim the buyer held at death, and a buyer may pursue the claim against the estate of a deceased seller. Liability under §410 attaches to the transaction, not to the lifespan of the parties.

The corollary the exam likes: any surety bond the administrator requires of a registrant must permit suit for the entire statute-of-limitations period — even if the bonded person dies (or leaves the business) before that period expires. A bond that cut off claims at death or deregistration would defeat the survival rule, so the act does not allow it.

Statutes of Limitations

Civil remedy for buyers: A buyer can seek rescission (return of the purchase price + interest from purchase date − any income received). This effectively reverses the transaction and makes the buyer whole.