A Question That You May Want To Add To Your Investor Suitability Questionnaire

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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