Section 25501.5 – What Do It Mean?

In 2004, the California Legislature added Section 25501.5 to the Corporate Securities Law of 1968. Ever since then, I’ve been asked “What do it mean?”

Corporations Code Section 25501.5 generally authorizes an action for rescission (or damages, if the security is no longer owned) by any person “who purchases a security from or sells a security to a broker-dealer that is required to be licensed and has not”. A right of rescission makes sense when the unlicensed broker-dealer is acting as a principal (i.e., as a dealer). The statute makes less sense when the broker-dealer is acting as an agent (i.e., as a broker). When a broker-dealer is acting as an agent, the purchaser acquires the security from the security’s owner- not from the broker. It is certainly debatable whether a security owner should face a claim for rescission or damages when it is the broker-dealer that is violating the licensing requirement.

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