SEC v. Levin Held: The phrase “failure to comply” in Rule 508 specifically refers to a failure to comply with Rules 504 through 506.
Case Brief of: SEC v. Levin (11th Cir. 2017) 849 F.3d 995. (Click to see full case)
Relevant Facts in SEC v. Levin
In SEC v. Levin, Levin raised money for a scheme through private notes. The SEC sued Levin and claimed that the notes were not registered. Levin claimed that the notes were exempt under Rule 504, and if they were not exempt under Rule 504, then the mistakes were forgiven by Rule 508. Rule 508 allowed small mistakes in issuing an exempt security to be forgiven.
About the Law
Rule 508 includes several referenced to how it applies when the issuer has a “failure to comply.” The SEC argues that the term “failure to comply” should refer to failures with all sections of Regulation 5 and should not be restricted to just sections 504-506. At the trial court, the court hears the SEC argument and grants a summary judgement against Levin on the basis of the SEC argument. Levin appeals hoping to overturn that summary judgment.
The court of SEC v. Levin does a careful analysis of the text and determines that “failure to comply” does not refer to the entirety of Section 5. The court reasons that the term “failure to comply” appears in multiple locations, and when the same phrase appears in several locations in the same section, they must have the same meaning. In Rule 508(b), the rule specifically limits the application to a “term, condition or requirement of 230.504, 230.505, or 230.506 will not result in the loss of the exemption from the requirements of section 5 of the Act for any offer or sale to a particular individual or entity, if the person relying on the exemption” satisfies three factors. Because 508(b) is limited to 504, 505 and 506, then the phrase “failure to comply” in the rest of 508 must also refer to 504, 505, and 506.
Results of the Case.
On this conclusion, the trial court’s ruling in SEC v. Levin must be reversed, and Levin will be permitted to take his case to trial.
Note, winning this argument about the meaning of Rule 508 does not mean that Levin won his case. This only gave Levin the right to have a trial over a material question of fact.