Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.
SEC Proposes Crypto Offering Regulations
The Securities and Exchange Commission has issued its proposal to exempt certain crypto asset offerings from registration requirements. But the proposed new rules, that would be set forth in a new regulation titled “Regulation Crypto Assets,” would create new complexities for issuers to navigate.
The 402-page regulation issued on August 18 would include two exemptions from registration under Section 5 of the Securities Act of 1933. The first exemption would permit offerings of up to $5 million during a four-year period while the second would create a two-tiered exemption for issuers conducting offerings of up to $20 million or $75 million during each 12-month period. Under both exemptions, issuers would be required to make certain narrative-based disclosures available to investors. Issuers using the second exemption would be required to provide financial statements and be subject to ongoing reporting requirements. The requirements for the fundraising exemption are modeled on the exemption for registered public offerings known as Regulation A. Issuers relying on these exemptions still would be subject to the antifraud and antimanipulation provisions of the federal securities laws.
The proposed rules also would include a conditional “safe harbor” from the term “investment contract” in the definition of a “security” under the securities laws. The safe harbor would be for issuers that have "completed or otherwise permanently ceased all essential managerial efforts" they committed to on a particular offering and have no plans to take on new ones. Once an issuer has delivered on all its promises to investors, it would make a public filing certifying that it has satisfied the conditions of the safe harbor, including an analysis backing up its position. If the conditions are satisfied, a crypto asset would be deemed not to be an investment contract for purposes of the definition of a “security.” The proposal also would preempt state registration and qualification requirements for digital asset offerings that seek the exemptions.
Why It Matters: The long-awaited proposal, which has a 60-day public comment period, follows Interpretative Guidance issued by the SEC in March 2026 that defined when crypto assets would be considered securities under federal law. The critical issue was whether a purchaser would have a reasonable expectation of a profit based on the continued managerial or entrepreneurial efforts of the issuer. However, the proposed Regulation Crypto Assets would still impose reporting requirements for larger offerings and mandate criteria for the “safe harbor” from “investment contracts.” Thus, the new rule would not be as simple and straightforward as crypto promoters had hoped.
U. S. District Court Holds That Promissory Notes Were Securities; Broad Disclaimers Were Not Sufficient
A California federal judge has ruled in an SEC action that promissory notes issued by a streaming-content company constituted securities under federal law and warnings that an investment carried substantial risk were not sufficient to prevent liability when investor funds were diverted for personal use and other undisclosed purposes. In SEC v. Dencer, issued on August 5, the SEC alleged that Standard Holdings, Inc. and its officers violated the federal securities laws when they raised more than $17 million from approximately 40 investors through offerings of promissory notes and common stock to fund a streaming business targeting China.
In a motion to dismiss the SEC’s complaint, defendants argued, among other things, that $4.25 million in promissory notes purchased by one investor were not securities under federal law. But U.S. District Court Judge Cynthia Valenzuela in Los Angeles, while acknowledging that the notes did not fall into any well-recognized category, held that the notes constituted securities under the four-part test articulated in Reves v. Ernst & Young, 494 U.S. 56 (1990). The motivation for issuing the notes was to raise capital; the transaction was presented as an investment opportunity; and there was no alternative regulatory regime to protect investors. Nor was the purported collateral sufficient to protect against nonpayment. While the remaining factor – the notes had only a limited distribution – favored defendants, taken together the notes did not resemble a recognized category of exempted financial instruments.
Defendants also argued that they were shielded from liability by warnings to investors that they could face a total economic loss. But such general disclosure did not provide notice that investment proceeds would fund substantial personal expenses or that a represented segregation of funds did not exist. Disclosure that funds would not be used “primarily” for personal use was insufficient because the disclosures were transaction-specific and did not apply to the overall use of funds from all investors. Nor was disclosure that funds would be used for “general corporate purposes” sufficient when the personal expenses greatly exceeded the disclosed officer compensation and expenditures for jewelry and clothes were not business-related. The court also held that the SEC plausibly alleged “scheme” liability under SEC Rule 10b-5(a) and (c) as well as material misrepresentations that violated Rule 10b-5(b).
Why It Matters: Courts rarely have the opportunity to consider whether a particular form of a promissory note is a security under federal law. Here, the court carefully considered the Reves factors and concluded that while some factors were either neutral or favored defendants, the overall analysis supported a finding that the notes were securities. If there is no settlement, there would be significant appellate issues. The court also emphasized, as have other courts, that generalized warnings of potential loss do not cover significant factual omissions, including the diversion of funds.
Circuit Court Rejects Claims That Corporate Disclosures Were Actionable “Half-Truths”
A question that often arises in securities litigation is whether a corporate disclosure was a materially misleading “half-truth” that creates liability under the federal securities laws. Pondering that issue, the First Circuit Court of Appeals held that a biotechnology company’s disclosures were not actionable half-truths rendered misleading by omissions about the results of clinical trials.
In In re Apellis Pharmaceuticals, Inc. Securities Litigation, issued on August 19, the First Circuit affirmed dismissal at the pleading stage of securities fraud claims against a company that marketed a drug to slow age-related macular degeneration that can ultimately cause blindness. Although the drug was approved by the Food and Drug Administration following clinical trials, reports later emerged of incidents involving retinal vasculitis, an inflammation of the vessels of the retina that can cause severe vision loss. The drug required a warning label and the company’s stock price dropped substantially.
Plaintiffs did not allege that the company’s statements that no cases of retinal vasculitis were observed during the clinical trials were actually false but that they were only “half-truths” because they failed to disclose that the trials were not designed to detect that problem, which would not be known by reasonable investors. But the court held that the company’s disclosures contained neither contradictions nor undisclosed facts. The company had reported that the trials, which followed proper protocols, revealed certain side effects that could be symptomatic of retinal vasculitis but that there were no observed cases. This was accurate information that did not conceal material facts. Because the disclosed information was accurate, and no “critical qualifying information” was withheld, the complaint was properly dismissed.
Why It Matters: The First Circuit distinguished Apellis from other cases where misleading half-truths gave rise to liability – for example, where a company stated that it would not conduct clinical trials but failed to disclose that it had hired a third party to conduct trials, or where a company executive stated that he could not speculate whether the FDA would require a second clinical trial without disclosing that the FDA had recommended a second trial. The First Circuit has provided corporate executives (and their counsel) with the necessary assurance that accurate disclosure about product development based on known information will not be second-guessed with benefit of hindsight if problems later develop.
California Court of Appeal Holds that Inspection Rights Under California Law Apply to Delaware Corporation
The California Court of Appeal has held that California law applies to the stockholder inspection rights of a Delaware corporation doing business in California notwithstanding a forum selection clause requiring such actions to be heard in Delaware.. The decision conflicts with the decision of the Delaware Chancery Court and is in tension with a prior ruling by the Court of Appeal.
Both California and Delaware allow stockholders to inspect the corporate books and records. See California Corporations Code Sections 1600 and 1601; Section 220 of the Delaware General Corporation Law. But there are important differences. California law requires the stockholder to own 5% of the voting shares (unless the stockholder has a 1% interest and has filed a proxy with the SEC), while Delaware allows any stockholder to make a demand. California provides an absolute right to inspection, while Delaware requires the stockholder to make a written demand under oath stating a proper purpose for the demand, act in good faith, and show that the records requested relate directly to the purpose. Section 220 was narrowed in 2025 to permit inspection of only enumerated categories of documents unless the stockholder can show clear and convincing evidence that additional documents are necessary and essential.
In Salamon v. Orchid Global, Inc., Salamon, an Orchid stockholder, sought to inspect corporate books and records under sections 1600 and 1601. Orchid was a Delaware corporation with its principal place of business in California. The company’s bylaws provided that Delaware was the exclusive forum for any action asserting a claim against the company governed by the internal affairs doctrine. The San Francisco Superior Court stayed the stockholder’s action, holding that the forum selection clause required any inspection demand to be filed in Delaware. Meanwhile, the Delaware Chancery Court dismissed a declaratory action by Orchid on the grounds that it could not show personal jurisdiction over Salamon.
The Court of Appeal, First Appellate District, held that the inspection demand was covered by the internal affairs doctrine. However, in an unanimous decision reversing the Superior Court, the Court of Appeal held that a stockholder’s inspection rights under sections 1600 and 1601 are unwaivable and expressly apply to any foreign corporation with its principal place of business in California. Thus, Orchid had the burden of showing that litigating in Delaware would not diminish the stockholder’s rights if the forum selection clause prevailed. Here, Delaware would not support the same or greater rights than California, and therefore the forum selection clause could not control.
Why It Matters: The Court of Appeal’s decision seemingly contradicts the decision of the Delaware Chancery Court in Juul Labs, Inc. v. Grove, 238 A. 2d 904 (2020), holding that under the internal affairs doctrine a stockholder of a Delaware corporation headquartered in California could not seek inspection rights under sections 1600 and 1601. The California Court of Appeal (also the First Appellate Division) affirmed the Superior Court’s stay of the stockholder’s inspection demand, holding that the stockholder’s inspection rights already had been adjudicated in Delaware, whose decision was entitled to full faith and credit. Grove v. Juul Labs, Inc., 77 Cal. App. 5th 1081 (2022).
The possible distinction here is that there was no adjudicated decision in Delaware that required the respect of the California courts, although it is not clear why a prior Delaware decision would be meaningful if California public policy mandates the application of the California inspection statute. Another factor may have been the 2025 amendments to the Delaware General Corporation Law, which made Section 220 less favorable to shareholder inspection rights. This decision may require a ruling by the California Supreme Court to clarify the application of forum selection clauses to shareholder inspection demands.
District Court Permits Amended Complaint Against KPMG in Silicon Valley Bank Litigation
In March 2023, Silicon Valley Bank Financial Group (“SVBFG”), the parent company of Silicon Valley Bank, failed and was placed into receivership. Numerous lawsuits followed, and a consolidated complaint was filed against SVBFG, its officers, directors, underwriter and KPMG, the company’s outside auditor. The consolidated complaint in In re SVB Financial Group Securities Litigation alleged a single count against KMPG under Section 11 of the Securities Act of 1933, which does not require proof of scienter. KPMG’s motion to dismiss was denied, and after extensive discovery, plaintiffs moved to amend their complaint in June 2025 to allege violations by KPMG of the antifraud provisions of the Securities Exchange Act of 1934.
Judge Noel Wise of the United States District Court for the Northern District of California, in an opinion issued on August 5, denied KPMG’s motion to dismiss the amendment complaint. KPMG argued, among other things, that the amendment was barred by the statute of limitations and that plaintiffs had waived their claim under Section 10(b) of the Exchange Act. KPMG cited the fact that one of the original complaints filed immediately after the bank’s failure had brought a Section 10(b) claim, which was dropped in the consolidated complaint. Therefore, KPMG asserted, the two-year statute of limitations after discovery of facts constituting the violation required the amended complaint to be time-barred. But the court held that plaintiffs had concluded in drafting the consolidated complaint that they lacked sufficient facts to allege scienter with the required particularity; that KPMG was now seeking to seal 64% of the 85 pages of the amended complaint detailing scienter was enough to demonstrate that plaintiffs lacked the requisite evidence of scienter prior to discovery. For the same reason, the amendment was not the result of undue delay and did not significantly prejudice KPMG. Further, the court found that the amended complaint sufficiently alleged scienter and loss causation.
Why It Matters: It is not unusual for a consolidated complaint to modify the claims contained in the separate complaints that were already filed. The court’s decision held that the plaintiffs who drafted the consolidated complaint should not be punished for properly deciding against including the Section 10(b) claim contained in one of the consolidated complaints because they did not believe there was sufficient supporting facts, which were then allegedly provided by the documents produced in discovery. An opposite result would have only encouraged plaintiffs’ lawyers to over plead their lawsuits because of the risk that they would be time-barred from amending the complaints after discovery.