An exemption from registration is not an exemption from fraud law: Securities Act Section 17(a) and Exchange Act Rule 10b-5 reach untrue statements and misleading omissions of material fact in any offer or sale of securities, including a private placement pitched with a deck [1][2]. A fact is material if there is a substantial likelihood a reasonable investor would view it as significantly altering the total mix of information, and the statutory safe harbor for forward-looking statements does not cover companies that are not SEC reporting issuers [3][4]. Recent cases against founders turned on ordinary pitch claims, such as user counts, revenue, customer contracts and what a product's AI actually does [5][6][7][8].
In this lesson you will
- Explain why Section 17(a) and Rule 10b-5 apply to private placements and pitch materials.
- Apply the materiality standard to deck claims, metrics and omissions.
- Distinguish honest projections and opinions from statements that create fraud risk.
- Identify the recurring misstatements in recent SEC and DOJ cases against founders.
- Build a verification process that ties every pitch claim to a source document.
Exempt from registration is not exempt from fraud
Section 17(a) of the Securities Act makes it unlawful for any person, in the offer or sale of any securities, to employ a scheme to defraud, to obtain money by means of an untrue statement of a material fact or an omission of a material fact necessary to make the statements made not misleading, or to engage in any practice that operates as a fraud on the purchaser [1]. The statute expressly provides that the exemptions in Section 3 of the Act do not apply to Section 17 [1]. Rule 10b-5 under the Exchange Act separately prohibits any person, directly or indirectly, from making an untrue statement of a material fact or omitting a material fact needed to make statements not misleading, in connection with the purchase or sale of any security [2]. Neither provision is limited to public companies or registered offerings [1][2]. Which exemption a raise relies on, and who may be solicited, is a separate question; the Raising Private Capital course covers this in detail.
In practice this means a pitch deck, a data-room spreadsheet, a follow-up email and a founder's answer in a meeting are all communications made in the offer of a security. Investors, and regulators, will judge them by what they said and by what they left out.
Materiality: what a reasonable investor would want to know
In Basic Inc. v. Levinson (1988), the Supreme Court expressly adopted for Section 10(b) and Rule 10b-5 the materiality standard of TSC Industries v. Northway (1976): there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available [3]. For contingent or speculative events, such as a deal that may or may not close, the Court said materiality depends on a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event [3]. Both antifraud provisions also reach half-truths, because they cover omissions of facts necessary to make the statements made not misleading in light of the circumstances [1][2].
Two practical consequences follow. First, the numbers that do the most persuasive work in a deck, such as revenue, growth, customer counts and retention, are the numbers most likely to be material. Second, a statement can be literally true and still misleading: a slide showing 'contracted revenue' that omits that most contracts are free pilots tells a story the facts do not support.
Projections, opinions and puffery
Public companies have a statutory safe harbor for forward-looking statements, but it is available to an issuer that, at the time of the statement, is subject to the Exchange Act's reporting requirements, and it excludes statements made in connection with an initial public offering [4]. A private company pitching investors therefore should not assume that a projection is protected just because it is labeled forward-looking [4]. The safer practice is to present projections as what they are: management's estimates, built on stated assumptions, with a reasonable basis the company could show an investor on request.
Vague optimism ('we believe this market is enormous') carries less risk than specific, checkable assertions presented as facts ('three Fortune 500 customers have signed'). The dangerous zone is a specific claim dressed as an aspiration or an aspiration dressed as a fact. If a statement would be checked in diligence, write it so it survives that check.
Case studies: what founders actually said
Theranos. Trial evidence showed Elizabeth Holmes told investors Theranos's analyzer could run any blood test run by conventional labs from a fingerstick, while she knew it could perform only a few basic tests and the company relied on conventional machines [5]. She provided investors reports bearing pharmaceutical-company logos that falsely suggested those companies endorsed Theranos, misrepresented a revenue-generating relationship with the Department of Defense, and told investors that Theranos, which had zero revenue in 2012 and 2013, was projected to generate over $100 million in revenue in 2014 [5]. On November 18, 2022, she was sentenced to 135 months in federal prison for defrauding investors [5].
Frank. Charlie Javice represented to two banks that Frank had 4.25 million users and explicitly defined a user as someone who had signed up and for whom Frank held at least a first name, last name, email address and phone number; Frank in fact had approximately 300,000 users [6]. When JPMorgan Chase sought to verify the number, she hired an outside data scientist to create a synthetic data set after Frank's director of engineering declined the request [6]. Javice and co-defendant Olivier Amar were convicted of conspiracy, wire fraud, bank fraud and securities fraud in March 2025, and on September 29, 2025 Javice was sentenced to 85 months in prison, with forfeiture of about $22.4 million and restitution of about $287.5 million [6]. The case involved the sale of a company rather than a fundraise, but the lesson about defined metrics applies equally to a pitch.
Nate. In April 2025 the SEC sued Albert Saniger, founder of the privately held shopping-app startup Nate, alleging he raised over $42 million by telling seed and Series A investors that the app used AI to complete purchases without human involvement, when the company relied in large part on contract employees to manually input orders [7]. These are allegations in a complaint, not findings [7].
Kalder. In October 2026 the SEC announced a partially settled action against Gökçe Güven, founder of the fintech startup Kalder, alleging she raised about $6.7 million while presenting investors inflated revenue and overstated counts of customers in revenue-generating contracts, many of whom were on free demo accounts or short-term discounted pilots [8]. The complaint alleges the company kept an accurate set of books through an outside bookkeeper and a second, inflated set shown to investors; Güven pleaded guilty to securities fraud in a parallel criminal case and consented, subject to court approval, to a judgment including a six-year officer and director bar [8].
- Capability claims: what the product actually does today versus on the roadmap (Theranos, Nate) [5][7].
- Metric definitions: a defined term like 'user' or 'customer' that the underlying data does not meet (Frank, Kalder) [6][8].
- Third-party validation: logos, endorsements and partnerships that imply more than exists (Theranos) [5].
- Revenue and projections: figures disconnected from the company's own records (Theranos, Kalder) [5][8].
- Verification under pressure: fabricating support when diligence arrives turns a misstatement into a scheme (Frank) [6].
What's different in 2026
The SEC's fiscal 2025 enforcement results, released April 7, 2026, say the agency deliberately refocused its program on fraud, naming offering frauds among its focus areas and stating that future priorities will center on fighting fraud and returning money to harmed investors [9]. The release reports that about two-thirds of standalone actions charged one or more individuals, and it cites the Nate case as an example of charging a founder for allegedly misleading investors about a company's use of AI [9]. Cases such as Kalder, announced October 7, 2026, show the same approach applied to a startup raise of about $6.7 million [8]. For founders, the takeaway is that private-company size offers little cover, and claims about AI capability are now a recognized category of enforcement interest.
Worked example: scrubbing a Series A deck (hypothetical)
- Slide claim: '120 enterprise customers.' Check: 74 pay under signed contracts, 46 are free pilots. Revised: '74 paying enterprise customers; 46 in unpaid pilots.'
- Slide claim: '$3.1M ARR.' Check: the figure annualizes the best month and includes a one-time setup fee. Revised: '$2.6M ARR (December recurring revenue x 12); definition in appendix.'
- Slide claim: 'AI-automated underwriting.' Check: the model handles 60% of files; analysts review the rest. Revised: 'Model decisions on 60% of files; human review on 40%, targeting 80% automation by Q4.'
- Slide claim: logo wall including a bank that ended its pilot. Check: no current relationship. Revised: logo removed.
- Slide claim: 'Lead investor committed.' Check: no signed term sheet. Revised: removed until there is one, consistent with treating unconfirmed interest as not yet a commitment.
None of the revisions makes the company look weak; each makes it look credible. Sophisticated investors discount unexplained numbers, so a clear definition often helps the pitch.
Building a truth check into the raise
Treat the deck like a disclosure document. Keep a claims register that links every number, logo and capability statement to a source record, an owner and a date. Write metric definitions once and use them everywhere, including in the model and the data room. Re-check the register before each new version goes out, because a statement that was true in January can become misleading by March. When something material changes during the raise, such as a lost customer or a missed month, tell investors who are still deciding. Counsel should review the deck before it circulates; this lesson is general information, not legal advice.
Key terms
- Section 17(a)
- The Securities Act antifraud provision covering any offer or sale of securities, including exempt offerings.
- Rule 10b-5
- The SEC rule under Exchange Act Section 10(b) prohibiting material misstatements, misleading omissions and fraudulent schemes in connection with securities purchases or sales.
- Materiality
- Whether there is a substantial likelihood a reasonable investor would view a fact as significantly altering the total mix of information.
- Half-truth
- A literally accurate statement made misleading by an omitted fact.
- Forward-looking statement
- A projection, plan or estimate about future performance; the statutory safe harbor covers only reporting issuers.
- Puffery
- Vague, generalized optimism that a reasonable investor would not treat as a verifiable factual claim.
- AI washing
- Overstating or misdescribing a product's use of artificial intelligence to customers or investors.
- Claims register
- An internal log linking each pitch claim to its source record, owner and date of last verification.
Check your understanding
Sources
- [1]Legal Information Institute, Cornell Law School, “15 U.S. Code § 77q - Fraudulent interstate transactions (Securities Act Section 17),” Accessed November 2026.
- [2]Legal Information Institute, Cornell Law School, “17 CFR § 240.10b-5 - Employment of manipulative and deceptive devices,” Accessed November 2026.
- [3]Supreme Court of the United States, via Legal Information Institute, Cornell Law School, “Basic Inc. v. Levinson, 485 U.S. 224 (1988),” 1988.
- [4]Legal Information Institute, Cornell Law School, “15 U.S. Code § 77z-2 - Application of safe harbor for forward-looking statements,” Accessed November 2026.
- [5]U.S. Attorney's Office, Northern District of California, U.S. Department of Justice, “Elizabeth Holmes Sentenced To More Than 11 Years For Defrauding Theranos Investors Of Hundreds Of Millions,” November 18, 2022.
- [6]U.S. Attorney's Office, Southern District of New York, U.S. Department of Justice, “Startup CEO Charlie Javice Sentenced To 85 Months In Prison For $175 Million Fraud,” September 29, 2025.
- [7]U.S. Securities and Exchange Commission, “Litigation Release No. 26282: SEC v. Albert Saniger,” April 11, 2025.
- [8]U.S. Securities and Exchange Commission, “Litigation Release No. 26667: SEC v. Gökçe Güven and Kalder Inc.,” October 7, 2026.
- [9]U.S. Securities and Exchange Commission, “SEC Announces Enforcement Results for Fiscal Year 2025 (Press Release 2026-34),” April 7, 2026.
Educational content only — not legal, tax, or investment advice, or an offer to sell or a solicitation of an offer to buy any security. Rules and data are described as of November 2026 and may change. Securities offered through Umergence LLC, Member FINRA/SIPC.