Subject: Warning - Selling Unregistered Securities

Last-Revised: 29 Mar 1995
Contributed-By: Michael R. Mitchell (mitchel4 at

Under the U.S. Securities Laws, specifically The Securities Act of 1933, the mere offer to sell a security -- unless there is an effective registration statement on file with the SEC for the offer -- via the Internet can be a felony subjecting the offeror to a 5 year federal prison term. See the Securities Act of 1933, Section 5(c) Of course, sales and deliveries after sale of unregistered securities is unlawful (Section 5(a)) as is failure to deliver a prospectus (Section 5(b)).

Listen to an example from my own experience as a securities lawyer in Los Angeles. Many years ago a young man came into my office and asked my advice about whether he could advertise in the Hollywood Reporter for investors in a movie he wanted to make.

I explained to him that such a course would be fraught with peril for him because it would violate the federal securities laws. He said, "Everybody does it; there are a bunch of ads soliciting people to invest in movies there every day." He said, "Well, I'm going to do it."

About a week later, he phoned me up and said he had got a letter from the SEC requiring him to refund any money he had collected and requiring him to visit the LA office of the SEC. It appears that the SEC reads the Hollywood Reporter. It also reviews the Internet newsgroups.

Certain transactions are exempted from the prohibition (See Section 4) and certain securities are exempted from the prohibition (See Section 3). How a security is defined is set forth in Section 2(1) -- and includes, among other things, any note, stock, bond, investment contract, put call, straddle, option, etc.

You can determine whether a registration statement is or was in effect as to a security by accessing the free SEC Edgar search machine at this URL:

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