What are the consequences of violating federal securities laws likely to be?
A word of caution: although sales of securities by start-ups and other earlier stage companies are unlikely candidates for intense, systematic scrutiny by the SEC, one of the important features of Section 5 is that it vests the right to sue in the people to whom the securities are sold. One of the remedies typically sought in relation to a sale of securities in violation of Section 5 is rescission (i.e., essentially, where the issuer is required to buy back the securities). In the context of highly speculative investment, where valuations are likely to vary widely from round to round, the creation of rescission rights resulting from a Section 5 violation could be hugely problematic. Because investors in growth companies operate in an environment of considerable downside risk (and downside frequently materializes) it is not uncommon for investors to have much to gain by demanding rescission. It is essential that whenever a company offers securities for sale, it is certain that the trans
