Every securities fraud case I worked on at the SEC, across sixteen years, ran through the same seventeen words: it is unlawful "to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading."
That is the core of Rule 10b-5, adopted under Section 10(b) of the Securities Exchange Act of 1934. It is short, it is broad, and it applies to nearly everything.
What the Rule Reaches
Rule 10b-5 applies "in connection with the purchase or sale of any security." Read that slowly. It is not limited to registered offerings, public companies, or organized exchanges. A private placement to five investors, a founder selling shares to a friend, a Regulation D offering, a tweet that moves a stock — all of it is "in connection with" a purchase or sale.
This is the point issuers most often get wrong: an exemption from registration is not an exemption from 10b-5. Your Reg D offering does not have to be registered, but every word in your PPM, your deck and your emails must still be true and complete enough not to mislead. The antifraud rules travel with the security, not the registration statement.
What "Material" Means
A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Not whether the CEO thought it was important. Not whether it changed the stock price. The test is the reasonable investor, and it is applied with hindsight — often by a jury looking at what happened next.
In practice, materiality is where most disclosure fights happen. The struggling product line, the customer who is about to leave, the financing that is not actually committed, the founder's prior SEC history: each one is a judgment call, and the safe side of the line is disclosure. I have never seen an enforcement action brought because a company disclosed too much.
Statements, Omissions and Half-Truths
The rule reaches three failures:
- ›Untrue statements — the projection presented as fact, the "signed" contract that was a term sheet.
- ›Omissions — the risk everyone in the boardroom knew and the offering document did not mention.
- ›Half-truths — statements literally true and functionally false. "We have a relationship with a national distributor" is a half-truth when the relationship is a single unanswered email.
The half-truth category is where optimism crosses into liability. I wrote about that line in When Offering Optimism Becomes a Misleading Statement, and Chapter 7 of my book is devoted to it: Puffery, Optimism and the Misstatement.
Who Can Be Liable
The rule reaches anyone who makes the statement, and it can reach the people behind them. Companies are liable for their filings. Officers and directors can be liable for statements they made, signed or controlled. In private actions, the Supreme Court has narrowed who counts as a "maker" of a statement, but the SEC's enforcement authority is broader, and scheme liability reaches people who deceive without ever putting their name on the words.
Scienter — an intent to deceive, or recklessness — is required for liability. But recklessness is not a high bar when the warning signs were in your own inbox.
The Practical Rule
When you are deciding whether something needs to be in the disclosure, ask the question the enforcement attorney will ask later: if this investment failed, and an investor read the offering document afterward, would they say "nobody told me that"? If the answer is yes, the fact belongs in the document.
For how the SEC assembles these cases from the inside, see How the SEC Builds a Securities Fraud Case. For the offering documents where these statements live, see What Is a PPM and When Do You Need One?.
Related Reading
- ›Securities Law Services
- ›Red Flags That Trigger SEC Investigations
- ›How Disclosure Fraud Develops in Growth-Stage Companies
Questions about how this applies to your company? Email me directly at flehrer@securitiesattorney1.com or call (561) 706-7646.
This post is general information, not legal advice.
Authoritative Sources
- SEC Enforcement Manual, Division of Enforcement — U.S. Securities and Exchange Commission
- SEC Division of Enforcement — Litigation Releases — U.S. Securities and Exchange Commission
- Securities Act of 1933 (15 U.S.C. §§ 77a et seq.) — U.S. Government Publishing Office
- Securities Exchange Act of 1934 (15 U.S.C. §§ 78a et seq.) — U.S. Government Publishing Office
Primary sources are cited so readers can verify the law directly. Rules and staff guidance change; see our editorial and corrections policy to report an error or an outdated citation.
Frederick M. Lehrer served as an enforcement attorney in the SEC's Division of Enforcement at the Southeast Regional Office from 1991 through 2000, and concurrently as a Special Assistant United States Attorney in the Southern District of Florida from 1997 through 1999, prosecuting securities-related financial crimes. He has practiced securities and corporate law in private practice for more than twenty-five years, advising issuers worldwide on SEC registration, disclosure obligations, Regulation D private placements, Regulation A offerings, and going public transactions. The firm is based in Florida and serves clients internationally.
Questions about how this applies to your company are answered personally — most within the same business day. Flat-fee arrangements available for most work.