Jason Gottlieb and Vani Upadhyaya Publish “Securities Act Section 4(a)(1) and the Development of the ‘Necessary Participant’ Doctrine” in Business Law Today

Partner Jason Gottlieb and Associate Vani Upadhyaya authored an article in Business Law Today, a publication of the American Bar Association Business Law Section, entitled “Securities Act Section 4(a)(1) and the Development of the ‘Necessary Participant’ Doctrine.” The article explores the evolution of the “necessary participant” doctrine and discusses the dangers of expanding the plain language of Section 4(a)(1).

The authors explain that Section 4(a)(1) of the Securities Act explicitly states that the Section 5 prohibition of the offer or sale of unregistered securities, absent an exemption, only applies to transactions by an issuer, underwriter or dealer. However, the SEC has been relatively undaunted by that limitation, and through a long series of enforcement actions – dating back to 1941 with SEC v. Chinese Consolidated Benevolent Ass’n – appellate courts have expanded the plain language of Section 4(a)(1) by developing the “necessary participant” doctrine. The doctrine widened the scope of the “issuer, underwriter or dealer” language to hold defendants liable when they have been a “necessary participant” in the offer and sale of alleged unregistered securities. District courts have since struggled to interpret the definition of a “necessary participant.”

The authors argue that in the era of digital assets trading over complex and interconnected computer networks, an expansive interpretation of “necessary participant” could apply to innumerable persons and entities, including websites that host front ends, participants in a blockchain network, such as validators, stakers or decentralized exchanges, noncustodial wallet providers and blockchains themselves. “It would make no sense to hold the persons or entities creating or operating these technologies responsible for issuances of unregistered securities – not from a policy point of view, and certainly not under the plain language of the Securities Act,” they write.

The authors conclude, “Unless the Supreme Court, other courts of appeal not bound by prior circuit law, or Congress weighs in and ends this eighty-year-long (and counting) detour away from the plain statutory language of the Securities Act, the definition of necessary participant, and the myriad considerations that influence what a “necessary participant” is, will remain unclear for individuals and entities operating in the securities industry and beyond.”

Read the full article here.