Does The CSL Observe "No Harm, No Foul"?
The California Corporate Securities Law of 1968 declares it unlawful for any person to offer or sell in this state any security in an issuer, nonissuer, or reorganization transaction unless the sale has been qualified or is exempt or otherwise not subject to qualification. Cal. Corp. Code §§ 25110, 25120 & 25130. If offers are "unlawful" are they actionable or must there be a sale? In other words, does the CSL observe a "no harm, no foul" rule?
The remedy for violations of of these statutes is found in Section 22503. That statute, which is modeled on Section 12 of the Securities Act of 1933, provides a remedy to any person "acquiring the security" from the violator. Consequently, the statute provides no remedy to a person who does not acquire the security, i.e., an offeree. As Justice Blackmun said in Pinter v. Dahl, 486 U.S. 622, 644 (1988):
"The purchase requirement clearly confines § 12 liability to those situations in which a sale has taken place. Thus, a prospective buyer has no recourse against a person who touts unregistered securities to him if he does not purchase the securities."
This does not mean that a persons making unlawful offers can do so with impunity. The Commissioner of Financial Protection & Innovation is authorized to bring civil actions against persons engaging, or about to engage, in violations of the CSL. Cal. Corp. Code § 25530. The Commissioner may also order the offeror to desist and refrain from the further offer or sale of the security until qualification. Cal. Corp. Code § 25532. An offeror may also be subject to civil and criminal penalties. Cal. Corp. § 25535 & 25540.