Federal securities law is the body of federal statutes and SEC rules that governs how securities are issued, traded, and sold in the United States. It rests on a simple idea: anyone offering an investment to the public has to tell the truth about it, in a standardized way, before taking anyone’s money, and has to keep telling the truth for as long as the security trades. The Securities and Exchange Commission enforces the framework, and willful violations can bring up to 20 years in prison and $5 million in fines for individuals.1U.S. Securities and Exchange Commission. Division of Enforcement
What Counts as a Security
The statute defines “security” with a long, intentionally broad list that includes stocks, bonds, notes, investment contracts, and fractional interests in oil or mineral rights, and ends with a catch-all for “any interest or instrument commonly known as a security.”2Office of the Law Revision Counsel. 15 USC 77b – Definitions; Promotion of Efficiency, Competition, and Capital Formation The label a promoter puts on a product does not control. What controls is economic reality.
For anything that doesn’t fit neatly on the list, the Supreme Court’s decision in SEC v. W.J. Howey Co. supplies the test. A transaction is an investment contract, and therefore a security, if it involves (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) derived primarily from the efforts of others.3Justia US Supreme Court. SEC v. W.J. Howey Co., 328 US 293 (1946) Hit all four prongs and federal securities law applies, whatever the product is called.
The SEC applies the same Howey framework to digital assets like cryptocurrency tokens. The question is whether an “active participant,” such as a developer or project promoter, is doing the work that drives the asset’s value. Factors pointing toward a security include a network that is not yet fully functional at sale, a promoter who retains a significant stake, marketing centered on potential price appreciation, and buyers purchasing in quantities that suggest investment rather than use. A digital asset is less likely to be a security when the network is fully operational, holders can immediately use the token for its intended purpose, and marketing focuses on functionality rather than market value.4U.S. Securities and Exchange Commission. Framework for Investment Contract Analysis of Digital Assets
Registering a Public Offering
The Securities Act of 1933 makes it illegal to sell securities through interstate commerce unless a registration statement is in effect with the SEC.5Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails Registration does not mean the SEC vouches for the investment. It means the company has filed the disclosures the law requires so investors can decide for themselves.
A typical registration uses Form S-1 and includes a detailed description of the business, management, executive compensation, risk factors, and audited financial statements. The core document inside that filing is the prospectus, which must be delivered to potential buyers. Risks that could erode the value of the shares, such as pending litigation, competitive pressure, or regulatory uncertainty, have to be disclosed.
If a registration statement contains a false statement of material fact, or leaves out something necessary to keep what it does say from misleading, buyers can sue. Liability runs to everyone who signed the filing, every director at the time of filing, any accountant or appraiser who certified a part of it, and every underwriter.6Office of the Law Revision Counsel. 15 USC 77k – Civil Liabilities on Account of False Registration Statement Directors and professionals can defend themselves by proving they investigated reasonably and believed the statements were true. The issuer has no such defense.
Exemptions From Registration
Not every offering has to go through full registration. Several exemptions let companies raise capital with less paperwork. None of them excuses anyone from the anti-fraud rules; they only reduce the cost and complexity of reaching investors.
Regulation D Private Placements
Regulation D is the most heavily used exemption. Under Rule 506(b), a company can raise unlimited money without registering, but it cannot advertise the offering publicly and can sell to no more than 35 non-accredited investors, each of whom must be financially sophisticated enough to evaluate the risks on their own or through a representative.7U.S. Securities and Exchange Commission. Private Placements – Rule 506(b) There is no cap on accredited investors.
Rule 506(c) permits general advertising, but every buyer must be an accredited investor and the company must take reasonable steps to verify that status rather than relying on a self-check box. Acceptable verification includes reviewing tax returns for income, checking bank and brokerage statements for net worth, or getting written confirmation from a broker-dealer, attorney, or CPA.8U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D
An accredited investor is an individual with net worth above $1 million excluding the primary residence, or annual income above $200,000 individually ($300,000 with a spouse or partner) in each of the prior two years with a reasonable expectation of the same in the current year. Certain licensed professionals and knowledgeable employees of private funds also qualify.9U.S. Securities and Exchange Commission. Accredited Investors
Regulation A
Regulation A sits between full registration and a private placement. Tier 1 allows up to $20 million in a 12-month period; Tier 2 allows up to $75 million.10U.S. Securities and Exchange Commission. Regulation A Tier 2 brings audited financials and ongoing reporting, but it preempts state registration, so the issuer doesn’t have to file separately in every state where it sells.
Regulation Crowdfunding
Regulation Crowdfunding lets smaller companies raise up to $5 million in a 12-month period through SEC-registered online funding portals.11eCFR. 17 CFR Part 227 – Regulation Crowdfunding, General Rules and Regulations Non-accredited investors have individual investment caps keyed to income and net worth; accredited investors have no cap. Before launching, the company files Form C disclosing its business plan, financial condition, use of proceeds, and the terms of the securities.12eCFR. 17 CFR 227.203 – Filing Requirements and Form Progress updates are due within five business days of hitting 50% and 100% of the target amount.
Intrastate Offerings
If the company and every buyer are located in the same state, the offering may qualify for the intrastate exemption. The issuer must be incorporated in that state, keep its principal place of business there, and meet at least one “doing business” test, such as earning 80% of its revenue or holding 80% of its assets within the state.13eCFR. 17 CFR 230.147 – Intrastate Offers and Sales Buyers cannot resell to out-of-state residents for six months. State “blue sky” laws still apply.
Ongoing Reporting Once a Company Is Public
After a company has publicly traded securities, the Securities Exchange Act of 1934 shifts the obligation from one-time disclosure to continuous disclosure.14Office of the Law Revision Counsel. 15 USC 78m – Periodical and Other Reports The annual Form 10-K is the comprehensive filing, with a full business description, risk factors, audited financials, and management’s discussion of results. Form 10-Q delivers unaudited quarterly data. Form 8-K reports significant unexpected events, such as a major acquisition, a bankruptcy filing, or the departure of a CEO, and is generally due within four business days of the triggering event.
When a public company asks shareholders to vote on anything, including director elections, mergers, or executive pay, it must first send a proxy statement on Schedule 14A. The proxy must identify who is soliciting votes and at what cost, disclose director and executive compensation, present the qualifications of board nominees, describe the auditor relationship, and lay out any proposed transaction in detail.15eCFR. 17 CFR 240.14a-101 – Schedule 14A, Information Required in Proxy Statement
Sarbanes-Oxley Certifications
The Sarbanes-Oxley Act of 2002 made senior executives personally accountable for the content of SEC filings. The CEO and CFO must each certify every annual and quarterly report. They attest that they reviewed the report, that it contains no false statement of material fact, and that the financial statements fairly present the company’s financial condition. They also confirm that they are responsible for internal controls, that they evaluated those controls within 90 days of the report, and that they disclosed any significant weakness or fraud to the auditors and the audit committee.16Office of the Law Revision Counsel. 15 USC 7241 – Corporate Responsibility for Financial Reports
A knowing false certification can bring up to $1 million in fines and 10 years in prison. A willful one raises those ceilings to $5 million and 20 years.17Office of the Law Revision Counsel. 18 USC 1350 – Failure of Corporate Officers to Certify Financial Reports
Compensation Clawbacks
Under SEC rules finalized in 2022 and effective on the stock exchanges since late 2023, every listed company must maintain a written policy to claw back executive pay that was awarded on financial results that later turned out to be wrong. When a company restates its financials, it must recover any incentive-based compensation paid to current or former executive officers in the three years before the restatement to the extent that payment exceeded what the corrected numbers would have supported.18U.S. Securities and Exchange Commission. Listing Standards for Recovery of Erroneously Awarded Compensation Recovery is calculated pre-tax and applies regardless of whether the executive had anything to do with the error. Companies cannot indemnify executives against clawback losses or reimburse their insurance premiums for coverage against them.
Rules for Advisers, Brokers, and Funds
Pooled investment vehicles that build diversified portfolios from investor money, such as mutual funds and ETFs, register under the Investment Company Act of 1940, which requires disclosure of holdings, strategy, and fees and restricts transactions that could pit fund managers against their shareholders.
Anyone paid to give investment advice must register under the Investment Advisers Act of 1940, typically on Form ADV, which lays out business practices, fees, and disciplinary history.19Office of the Law Revision Counsel. 15 USC 80b-3 – Registration of Investment Advisers Advisers managing $100 million or more generally register with the SEC; those below that threshold register with their home state.20Office of the Law Revision Counsel. 15 USC 80b-3a – State and Federal Responsibilities The Advisers Act prohibits any fraudulent, deceptive, or manipulative conduct toward clients.21GovInfo. 15 USC 80b-6 – Prohibited Transactions by Investment Advisers Courts have read those provisions as imposing a fiduciary duty. The adviser has to put the client’s financial interests first and either eliminate conflicts of interest or disclose them fully.
Broker-dealers who recommend securities to retail customers operate under a different, lower bar. Regulation Best Interest requires them to act in the customer’s best interest at the time of the recommendation and to avoid putting their own financial interests ahead of the customer’s.22eCFR. 17 CFR 240.15l-1 – Regulation Best Interest In practice that means delivering written disclosure of material fees, the scope of the relationship, and any conflicts before the recommendation; exercising reasonable diligence to understand the risks and costs and to match the recommendation to the customer’s profile; maintaining written policies to identify and address conflicts, including sales contests and bonuses tied to specific products; and enforcing written procedures to comply with the rule overall. The practical gap between a broker under Reg BI and an adviser with fiduciary duties matters most when there is a financial incentive to recommend one product over another.
Anti-Fraud Rules and Penalties
The centerpiece of federal securities fraud law is Section 10(b) of the Exchange Act, which bars using “any manipulative or deceptive device” in connection with the purchase or sale of securities.23Office of the Law Revision Counsel. 15 USC 78j – Manipulative and Deceptive Devices The SEC implemented it through Rule 10b-5, which makes it illegal to use any scheme to defraud, make a false statement of material fact, or omit a fact needed to keep other statements from being misleading in connection with a securities transaction.24eCFR. 17 CFR 240.10b-5 – Employment of Manipulative and Deceptive Devices
A fact is material if a reasonable investor would consider it important when deciding whether to buy or sell. A 10b-5 case also requires scienter, meaning the defendant acted with intent to deceive. Negligence alone is not enough. Insider trading is one of the most familiar uses of the rule. Corporate officers, directors, and employees who trade on material nonpublic information violate 10b-5, and so do outsiders who misappropriate confidential information for personal trading profit.
Willful violations of the Exchange Act can bring up to $5 million in fines and 20 years in prison for individuals, and up to $25 million for entities.25Office of the Law Revision Counsel. 15 USC 78ff – Penalties Sarbanes-Oxley raised those ceilings in 2002, up from $1 million and 10 years for individuals. Courts can also order disgorgement, requiring defendants to turn over profits from illegal conduct.
Harmed investors can sue in their own right, but the Private Securities Litigation Reform Act makes those cases hard to plead. Plaintiffs must identify each misleading statement specifically, explain why it was misleading, and allege facts creating a strong inference of intent to deceive. Courts weigh competing innocent explanations. Discovery is stayed automatically while a motion to dismiss is pending, which keeps plaintiffs from using litigation costs to pressure settlements in weak cases.
Reporting a Violation
If you know about a securities law violation, the SEC’s whistleblower program pays for original information that leads to an enforcement action with more than $1 million in sanctions. The award runs from 10% to 30% of the money collected.26U.S. Securities and Exchange Commission. Whistleblower Program “Original” means based on your own independent knowledge or analysis, not something the SEC already had. The program, created under the Dodd-Frank Act, has paid out billions since launch and includes anti-retaliation protections for employees who report.