Fiduciary Duties & Other Obligations to Investors in a Securities Offering

If you are selling securities via a private placement or public offering of securities to private investors, you have certain obligations and duties to your investors. Failure to heed them could result in lawsuits, civil fines and, in the worst case, criminal prosecution and jail. So if you want to be a successful syndicator or sponsor of an investment group (i.e., the “issuer”) selling securities under a private placement offering, you need to know and understand these important obligations.

Obligations Under Securities Laws

First, you have an obligation under securities laws to not make any misrepresentations or omit any material facts, or to otherwise mislead investors. You have a further obligation to provide all material facts investors need make “informed consent” prior to making their investment decision. This means you, as the sponsor of the securities offering, are responsible for ensuring that every document you provide investors is complete and that every written and spoken statement made by you or any member of your management team is 100% accurate.

The single thing many issuers get wrong when describing an investment opportunity is failing to accurately describe their past experience and specific roles in other investment groups, claiming they “own” other assets. Unless an issuer owns something by himself/herself without investors, it is never accurate to say the issuer “owns” other properties, because ownership belongs to the entity that holds title. If investors are involved, then they are the likely “owners” of the company and the asset. Depending on the specific circumstances, however, it might be accurate for an issuer to say he or she “participates in ownership and/or control” of companies that own the properties.

It is important for issuers to be precise in describing their past roles in other investments, as anything else could be construed by a regulator as a misrepresentation or fraudulent statement. The misrepresentation generally involves inaccurate statements contained in the issuer’s offering documents or marketing materials. Such statements may become the basis of a complaint by the Securities and Exchange Commission (SEC), or a state securities regulator.

Fraud in a securities transaction is illegal (under the Securities Act of 1933) and may be grounds for rescission by investors (meaning you have to give all of their money back, usually within 30 days) or could even be grounds for criminal prosecution—even if the statements are made innocently or by mistake.

Fiduciary Duties

An issuer has “fiduciary duties” including the “duty of care” and the “duty of loyalty,” which form the basis of an issuer’s moral and ethical obligation to investors.

The duty of loyalty requires that fiduciaries act solely in the interest of their clients, rather than in their own interest. When investments go bad, complaints against the issuer for failure to perform that person’s fiduciary duties become the grounds of many investor lawsuits.

The duty of care requires that fiduciaries perform their functions with a high level of competence and thoroughness, in accordance with industry standards. This includes the duty to conduct adequate due diligence and to provide complete and accurate information about the assets being purchased. That includes such things as the physical condition; what you know about the past financial operating history; and any other material facts related to the purchase, financing or your experience with similar investments (good or bad). Additionally, if you make projections, you must provide the assumptions on which your projections are based.

Your duty of loyalty requires you to place investor interests above your own. An explanation of Fiduciary Duty is provided below (excerpted from www.inc.com/encyclopedia/fiduciary-duty.html):

Fiduciary duty is a legal requirement of loyalty and care that applies to any person or organization that has a fiduciary relationship with another person or organization. A fiduciary is a person, committee or organization that has agreed to accept legal ownership or control and management of an asset or group of assets belonging to someone else.

A fiduciary duty is one of complete trust and utmost good faith. While fiduciaries take legal title to assets, the assets do not belong to them. Rather, legal title allows fiduciaries to administer and manage the assets for a temporary period and for a specific purpose. In taking control of another’s assets, fiduciaries also agree to manage those assets in accordance with the wishes of the individual who established the fiduciary relationship.

Conclusion

If you are going to be the issuer of a securities offering or sponsor a group investment, you need to know and understand these obligations. Failure to do so can be the undoing of all you have achieved and could ultimately result in disaster for both you and your investors.

NOTE: This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Any such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions. At Syndication Attorneys, PLLC, we will be happy to discuss your investing goals with you. You can schedule a free, 30-minute consultation by clicking this link.

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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