Key point 9-04. Federal and state laws regulate the offer and sale of securities for the protection of the investing public. In general, an organization that issues securities must register the securities, and the persons who will be selling the securities, with state and federal agencies. In addition, federal and state laws contain a broad prohibition on fraudulent activities in the sale of securities. Churches are exempt from some of these requirements in some states. However, they remain subject to the prohibition of securities fraud in all 50 states, and under federal law.
A California appellate state court found a pastor guilty of securities fraud for swindling his congregation, among others, out of nearly $1 million dollars in an investment scam.
Family and church members invested nearly $1 million
A pastor taught finance classes to church members and came to know and advise many of them. He formed an investment company and began selling securities. Many of the investors were members of his church or family members.
Generally, he told potential investors their funds would be insured and not at risk. They would receive returns pursuant to a specific rate and schedule, some as high as 18 percent every 90 days. He informed them their principal would always be secure. Collectively, they invested nearly $1 million dollars in the pastor’s investment company. Much of the proceeds were used for personal expenses, transferred to other financial institutions, or withdrawn.
Eventually, the pastor informed many of his investors that their money was gone. For the most part, their investments were never returned.
The pastor was arrested and charged with 33 felonies, most of which were based on securities fraud. He was convicted by a jury of 27 felonies and sentenced to nearly 25 years in prison. He also was ordered to pay restitution to his victims.
A state appeals court affirmed the pastor’s sentence.
What this means for churches
“Securities” and “fraud” are defined broadly by state and federal securities laws. In many cases, church leaders are not even aware that they are engaging in fraudulent practices.
The fact is, however, that securities violations represent one of the most significant sources of church liability in terms of the size of verdicts. This is a risk that church leaders must take seriously.
Laws regulating the sale of securities have been enacted by the federal government and by all 50 states. Church securities always will be subject to some degree of regulation. The question in each case is how much.
The federal government and most states exempt securities offered by any organization “organized and operated not for private profit but exclusively for a religious . . . purpose” from registration.
It is important to note, however, that some states do not exempt the securities of religious organizations from registration. Other states impose conditions on the exemption and many require that an application for exemption (or “notice” of exemption) be submitted and approved before a claim of exemption will be recognized. A few states require churches and religious denominations that “issue” their own securities to be registered as issuers or issuer-dealers.
All securities laws subject churches and other religious organizations to the antifraud requirements. Churches, therefore, must not assume that any securities that they may offer are automatically exempt from registration or regulation.
Churches that violate state securities laws face a variety of potential consequences under state and federal securities laws. These include investigations, hearings, subpoenas, injunctions, criminal actions, cancellation of sales, suits for monetary damages by aggrieved investors, monetary fines, and revocation of an exemption, or registration, of securities. The bottom line is that churches should not consider offering securities to investors as a way to increase revenue without first consulting with an experienced securities law attorney. 2020 Cal. App. Unpub. LEXIS 4273; 2020 WL 3790477.