South-Western Legal Studies in Business

Seller of Unregistered Securities Must Know They Were Subject to Registration
Description California high court held that a person charged with selling unregistered securities has an affirmative defense that he believed the securities were exempt from registration and the jury should have been so instructed.
Topic Criminal Law
Key Words Securities; Registration; Sale; Knowledge
C A S E   S U M M A R Y
Facts Salas was charged under California law with selling unregistered securities. He claimed he believed that the securities were exempt from registration. The trial judge instructed the jury that good faith belief was irrelevant to criminal culpability and Salas was convicted. The appeals court held that guilty knowledge—meaning knowledge of the security’s nonexempt status or criminal negligence in failing to determine its status—is an element of the crime of selling an unregistered security. It concluded the trial judge instructed the jury improperly but the error was harmless to Salas. He appealed.

Reversed. Knowledge that a security was not exempt is necessary for a criminal conviction. Lack of knowledge that a security is not exempt is an affirmative defense. A defendant is not guilty of the crime of selling an unregistered security if there is a reasonable doubt whether the defendant knew the security was not exempt from regulation or was criminally negligent in failing to know that it was not exempt.

Citation People v. Salas, 38 Cal.Rptr.3d 624 (Sup. Ct., Calif., 2006)

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