Criminal Penalties

You've seen that the Administrator cannot impose criminal penalties directly. So who can, and what are the consequences? Section 409 lays out the criminal enforcement framework.

Penalties for Willful Violations (Section 409)

Any person who willfully violates any provision of the Act (except Section 404) or any rule or order under the Act may face:

• A fine of not more than $5,000, OR
• Imprisonment of not more than 3 years, OR
• Both

Important:

• A person cannot be imprisoned for violating a rule or order if they prove they had no knowledge of the rule or order
• Willful violation of Section 404 (misleading filings) requires knowledge that the statement was false or misleading in a material respect
• Penalties are assessed per violation - a person found guilty of three violations could face up to $15,000 in fines and 9 years of imprisonment

Think of it this way: "Willful" has a lower bar than you might expect. It does not mean the person intended to break the law. It just means they knew what they were doing at the time. Selling securities without checking whether they need to be registered counts as willful if the person consciously made the sale.

Exam Tip: Gotchas

• "Willful" does not mean "intent to break the law." It means the person was aware of what they were doing. A person who knowingly sells unregistered securities has acted willfully, even if they had no idea registration was required.

Criminal Referrals

The pathway from violation to criminal prosecution:

• The Administrator may refer evidence of violations to the attorney general or district attorney
• The attorney general or district attorney may institute criminal proceedings with or without a referral from the Administrator
• The Administrator does NOT have the power to bring criminal prosecutions directly

Key takeaway: The Administrator investigates and refers; the attorney general or district attorney (DA) prosecutes; the court imposes penalties.

1. Investigation: Administrator
2. Evidence referral: Administrator to attorney general or DA
3. Criminal prosecution: Attorney general or DA
4. Sentencing (fines, imprisonment): Court

Exam Tip: Gotchas

• The Administrator REFERS but does NOT prosecute. The attorney general or DA brings criminal cases. The Administrator's role ends at referral.
• The attorney general can prosecute WITHOUT a referral. The attorney general does not need the Administrator's permission to bring charges.

Statute of Limitations

• Criminal proceedings under the Act must generally be brought within 5 years of the alleged violation
• This is an optional provision that varies by state, but the 5-year standard is what the exam tests

Exam Tip: Gotchas

• Penalties stack per violation. Three willful violations could mean up to $15,000 in fines and 9 years of imprisonment.
• The 5-year statute of limitations is the testable standard, even though individual states may adopt different timeframes.

Memory Aid: 5-5-3

Element	Value
Statute of limitations	5 years
Maximum fine	$5,000
Maximum imprisonment	3 years