Issuers typically use investor suitability questionnaires to elicit information from potential investors in order to substantiate exemptions under federal and/or state securities laws. For example, issuers will often ask detailed questions about a potential investor’s net worth for purposes of establishing that the investor is an accredited investor (for purposes of Regulation D under the Securities Exchange Act of 1934) or a qualified purchaser (for purposes of Section 3(c)(7) of the Investment Company Act of 1940). I suspect that few issuers ask a prospective investor whether s/he is a convicted felon. A case decided last week by the California Court of Appeal suggests a reason why it may be prudent for issuers to do so.
In Semler v. General Electric Capital Corp., the plaintiff had intended to purchase units in a limited liability company. However, the plaintiff was not allowed to invest after the proposed mezzanine lender to the project announced that it would not accept the plaintiff as a member in the LLC. The plaintiff then sued the lender, asserting a single cause of action for violation of the Unruh Civil Rights Act.
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