Background
Under U.S. securities laws, issuers are strictly prohibited from offering or implying “guaranteed returns” to investors in connection with the sale of securities. This applies to both public and private offerings, including those conducted under Regulation D (Rules 506(b) and 506(c)).
Key Legal Considerations
- The Securities Act of 1933 prohibits materially misleading statements or omissions in connection with securities sales (Section 17(a) and Rule 10b-5 under the Securities Exchange Act of 1934).
- Promising or implying a guaranteed return creates a false or misleading representation about investment risk, which is inherently present in any securities offering.
- Even if the investment is structured to produce consistent income (e.g., through notes, preferred returns, or fixed distributions), returns can never be represented as “guaranteed” because they depend on business performance, market factors, and other variables outside the issuer’s control.
Regulatory Risk and Liability
- Representing that an investor will receive a guaranteed return exposes the issuer and its principals to liability for securities fraud, even if the offering is otherwise exempt under Regulation D.
- The SEC and state securities regulators can pursue civil enforcement actions, including fines, injunctions, and rescission rights for investors.
- Investors may also bring private lawsuits under federal or state securities laws based on fraud or misrepresentation.
Permissible Language
- Issuers may describe targeted returns, preferred returns, or anticipated distributions if clearly qualified with language such as “not guaranteed,” “subject to risk,” or “based on available cash flow.”
- All offering documents should include robust risk disclosures and avoid any language that could be construed as promissory, implying certainty of returns.
Conclusion
Securities laws prohibit the use of “guaranteed returns” in any investment offering because it misrepresents the nature of the investment and violates anti-fraud provisions. Issuers must use careful, qualified language when discussing investor returns and ensure that all marketing and offering materials comply with applicable securities regulations.
