Civil Liabilities

The Uniform Securities Act (USA) gives buyers a private right of action when securities laws are violated. This is the most frequently tested topic in this unit, because the exam probes the exact mechanics of each rule rather than just the headline.

Who Is Civilly Liable for an Unlawful Sale?

Any person who offers or sells a security is civilly liable to the buyer when the offer or sale violates:

• The broker-dealer/agent registration requirement (selling while unregistered as a person)
• The securities registration requirement (selling unregistered securities)
• The prohibition on unlawful representations about registration
• Any rule or order requiring pre-approval of sales literature
• Any condition imposed on a securities registration

Liability also attaches when a seller uses:

• An untrue statement of a material fact, or
• An omission of a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading

For fraud-based liability (untrue statement or omission), the buyer must not have known of the untruth or omission at the time of purchase.

Who Bears the Burden of Proof?

For fraud-based liability (an untrue statement or omission), the USA flips the normal legal standard:

• The seller bears the burden of proof: they must show they did not know, and in the exercise of reasonable care could not have known, of the untruth or omission
• This is a defense of lack of knowledge plus due diligence; the seller must prove both elements
• The buyer does not need to prove the seller's knowledge; the seller must disprove it

Think of it this way: In most lawsuits, the person suing has to prove the other side did something wrong. Under the USA's private right of action, the seller is presumed at fault and must prove they were careful. The buyer only has to show the seller sold a security by means of a material untruth or omission that the buyer did not know about.

Registration violations work differently. The reasonable-care defense is written to apply to "the untruth or omission," which only exists in a fraud case. A seller who sold while unregistered, or sold an unregistered security, is strictly liable: there is no untruth for them to disprove, and being careful or acting in good faith is no defense at all.

Exam Tip: Gotchas

The burden of proof is on the seller to prove innocence, not on the buyer to prove fraud. This reversal of the normal burden is a favorite exam topic. If the seller cannot show they exercised reasonable care, they are liable.

But watch the trap: the reasonable-care defense only exists on the fraud prong. If the question involves a registration violation, a seller who says "I reasonably believed the security was exempt" is still liable. Good faith buys them nothing.

What Can the Buyer Recover?

The buyer may sue at law or in equity and recover:

• The consideration paid for the security (purchase price)
• Plus interest from the date of payment
• Plus court costs and reasonable attorneys' fees
• Less any income received on the security (dividends, interest payments)

The buyer must tender (offer to return) the security and any income received on it.

Think of it this way: Rescission is an "undo" button. The buyer gives back the security and gets their money back, plus interest, minus whatever income the security already paid them. If the buyer already sold, they cannot undo the sale, so they get damages instead (the difference between what they paid and what they got).

If the buyer no longer owns the security, the remedy is damages: the amount recoverable upon tender, minus the value of the security when disposed of, and minus interest from the date of disposition.

• Still owns the security (Rescission): Purchase price + interest - income received
• Already sold the security (Damages): (Purchase price + interest - income) minus (sale proceeds + interest from sale date)

Exam Tip: Gotchas

The exam tests whether the buyer can rescind or must seek damages. If the buyer sold the security at a loss, they recover the difference. The tender must occur before entry of judgment.

When Is an Adviser Civilly Liable?

Any person who provides investment advice for compensation and either:

1. Violates the antifraud provision applicable to advisers, the investment adviser registration requirements, the prohibition on unlawful representations about registration, or any rule or order under the sales-literature-review provision, or
2. Employs any device, scheme, or artifice to defraud a client, or engages in any act that operates as a fraud or deceit on a client

Is liable to the client, who may sue at law or in equity to recover:

• The consideration paid for the advice
• Plus any loss due to the advice
• Plus interest from the date of payment
• Plus costs and reasonable attorneys' fees
• Less any income received from the advice

Who Else Can Be Held Liable as a Control Person?

Every person who directly or indirectly controls someone liable under the seller- or adviser-liability rules above is jointly and severally liable. This includes:

• Every partner, officer, or director of the liable person
• Every person occupying a similar status or performing similar functions
• Every employee who materially aids in the conduct giving rise to liability
• Every broker-dealer or agent who materially aids in the conduct

Defense available: Control persons must prove they did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to the liability.

There is a right of contribution among jointly and severally liable persons (as in cases of contract).

Exam Tip: Gotchas

"Materially aids" is the key phrase. A back-office employee who processes paperwork for a fraudulent sale could be liable. But the employee has the same "no knowledge + reasonable care" defense available to them.

How Long Does the Buyer Have to Sue?

No person may sue under the USA's civil liability rules more than:

• From date of sale or advice: 3 years maximum
• From discovery of violation: 2 years maximum
• Controlling limit: whichever expires first

Exam Tip: Gotchas

The statute of limitations has two prongs and the earlier deadline wins. Compare the two dates rather than just picking the shorter period. A buyer who discovers a violation 2.5 years after the sale has only 6 months left (the 3-year absolute limit). A buyer who discovers a violation after 3 years cannot sue at all, regardless of the 2-year discovery rule.

Common mistake: the 2-year discovery clock is not reduced by time that already passed before discovery. It starts fresh at the moment of discovery. A buyer who discovers a violation 18 months after the sale does not get "2 years minus 18 months" (6 months); discovery sets its own deadline at 18 + 24 = 42 months after the sale. Compare that full 42-month figure against the 36-month sale deadline: the earlier one (36 months, the sale deadline) controls, so this buyer has 18 months left, not 6.

Can a Seller Cut Off the Buyer's Right to Sue?

A seller can cut off the buyer's right to sue by making a written rescission offer before the lawsuit is filed. The rules depend on whether the buyer still owns the security:

Exam Tip: Gotchas

Silence always loses. Whether or not the buyer still owns the security, doing nothing for 30 days gives up the right to sue. The exam frequently tests this.

What actually changes with ownership is how the buyer keeps the right to sue. A buyer who still owns the security keeps it only by accepting. A buyer who has already sold keeps it by rejecting the offer in writing within 30 days. The reason is practical: a buyer who has sold may disagree with the seller's damages math, so the Act lets them reject and litigate, but requires them to say so in writing "so that the seller may know where he stands."

Can a Violator Enforce an Illegal Contract?

• A person who makes or performs a contract in violation of any provision of the Act cannot base any suit on that contract
• A person who acquires rights under such a contract with knowledge of the violation also cannot enforce it
• The contract is voidable by the innocent party

Can a Buyer Waive Their Rights Under the USA?

• Any condition, stipulation, or provision that would bind a person to waive compliance with any provision of the Act is void
• A buyer cannot be forced to waive their rights under the USA, even if they sign such an agreement
• Pre-dispute arbitration clauses do not waive compliance with the Act; they change the forum, not the rights

Exam Tip: Gotchas

A client who signs a waiver agreeing not to sue under the USA can still sue. The waiver is void. However, an arbitration clause is valid because it changes where the dispute is resolved, not whether the client has rights.

Are These the Only Remedies Available to a Buyer?

• The rights and remedies described above are in addition to any other rights or remedies at law or in equity
• However, the Act does not create any cause of action beyond those it specifies. That universe is the civil-liabilities section (the buyer's private right of action, the adviser's client's right, and the related liability of control persons) plus the suit-on-the-bond right in the bonding provision. A required bond must allow suit by anyone with a cause of action under the civil-liabilities section, and, if the Administrator so requires by rule or order, by anyone with a cause of action not arising under this Act at all
• Buyers may pursue both USA civil remedies and common-law fraud claims simultaneously

Does a Cause of Action Survive the Buyer's Death?

• Every cause of action under the USA's civil liability rules survives the death of any person who might have been a plaintiff or defendant
• The estate of a deceased buyer (or seller) can continue the action

What Should You Check on Exam Day?

• Can you tell whether a fact pattern is fraud-based (burden on the seller) or a registration violation (strict liability, no reasonable-care defense)?
• Do you know the rescission formula: purchase price plus interest, minus income received, plus costs and fees, on tender of the security?
• Can you switch to the damages formula the moment the fact pattern says the buyer already sold?
• Do you compare the 3-year sale deadline against the 2-year discovery deadline and pick the earlier one, rather than assuming the shorter number always wins?
• Can you apply the 30-day rescission-offer response rule to both owners and non-owners, remembering that silence forfeits the right to sue either way?
• Do you know that a signed waiver of USA rights is void, while a pre-dispute arbitration clause is enforceable?