You Invested in a Private Company on False Numbers: What California Law Lets You Recover

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

You may be able to. If you bought stock, a note, or an LLC interest in a private company on false revenue numbers, California gives you two routes: a common law fraud claim and a statutory claim under Corporations Code sections 25401 and 25501. The statute lets a buyer rescind and recover the price paid plus interest, or recover damages if the investment has since been sold. Kolmogorov Law, P.C. litigates private investment fraud disputes in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss an investment made on numbers that turned out to be untrue.

The situation, in legal terms

It usually starts with a deck. A founder you know shows monthly revenue, signed customers, or a pending contract. You wire the money and receive shares, a convertible note, or a membership interest. Months later the bank statements, a former employee, or a tax return tells a different story.

California's securities law speaks to that situation directly. The statute makes it unlawful to offer or sell a security in this state through any written or oral communication that includes an untrue statement of a material fact. It also reaches the omission of a material fact needed to make the statements made not misleading. (Corp. Code, § 25401.) Private companies are covered.

"Security" is defined broadly. The definition lists stock, notes, evidences of indebtedness, and investment contracts. It also lists interests in a limited liability company, unless the person claiming the exception can prove that all members are actively engaged in management. (Corp. Code, § 25019.)

Why the statutory claim is often stronger than common law fraud

A common law fraud claim requires proof that the founder knew the statement was false or made it recklessly, intended you to rely on it, and that you justifiably did. Our fraud claims guide walks through those elements. Intent is the hard part, because founders rarely write down that the numbers are invented.

The statute shifts that burden. A person who violates section 25401 is liable to the person who bought the security from them. The statute excuses a defendant who proves one of two things: that the buyer knew the truth, or that the defendant exercised reasonable care and did not know of the untruth or omission. (Corp. Code, § 25501.) The seller has to prove care. The buyer does not have to prove a guilty mind.

One limit comes with that advantage. The claim runs against the person you bought from, so an investor who purchased from the company stands differently from one who bought a co-founder's existing shares.

The current statute also requires the court to award reasonable attorney fees and costs to a prevailing purchaser who establishes a right to that relief. (Corp. Code, § 25501.)

What you can recover: rescission or damages

If you still hold the investment, the remedy is rescission. You tender the security back and recover the consideration you paid, plus interest at the legal rate, less any income you received on it. The tender can be made any time before judgment.

If you no longer own it, the remedy is damages. The statute measures them as the price paid plus interest, minus the value of the security when you disposed of it and any income received. (Corp. Code, § 25501.)

A fraud claim can add remedies the statute does not, including punitive damages where the proof supports them. We usually plead both.

Who else can be liable

Here the statute earns its keep, because the company itself is often out of money by the time the truth surfaces.

Liability extends, jointly and severally, to every person who controls the liable seller, to each principal executive officer and director of a liable corporation, and to employees, broker-dealers, and agents who materially aid in the transaction. Each has a defense if they had no knowledge of, or reasonable grounds to believe in, the facts creating the liability. (Corp. Code, § 25504.) Separately, anyone who materially assists the violation with intent to deceive or defraud is jointly and severally liable. (Corp. Code, § 25504.1.)

So the question is rarely just "can I sue the company." It is who signed the deck, who repeated the numbers, and who sat on the board.

The deadlines

The statutory claim must be brought within five years after the transaction or two years after you discovered the facts, whichever expires first. (Corp. Code, § 25506, subd. (b).) Common law fraud has its own period: three years, running from discovery of the facts. (Code Civ. Proc., § 338, subd. (d).) For both, discovery can mean the point at which you had reason to suspect the problem, as our page on the fraud statute of limitations explains.

Do not wait for the company to "turn the corner." Two years from discovery is short.

What to do now

Collect the pitch materials in every version you received. Save the texts and emails in which numbers were stated. Pull the subscription agreement, note, or operating agreement, along with wire confirmations.

Then ask for records. A shareholder has statutory inspection rights, and the response, or the refusal, is evidence either way.

Be careful with anything the company sends you to sign. Amendments, conversions, and "updated" investor documents sometimes contain releases. And where facts were hidden instead of misstated, see our page on fraud by concealment.

If you are the founder accused of misleading investors

Projections are not the same as statements of fact. A forecast labeled as a forecast, with its assumptions shown, is far easier to defend than a "current revenue" figure that was never true.

The statute gives a founder two defenses to prove: the investor knew the facts, or the founder used reasonable care and did not know the statement was wrong. Diligence materials you delivered, data room logs, and the investor's own questions all bear on the first. Your bookkeeping and who prepared the numbers bear on the second.

Stop sending explanations to investors once a demand arrives. Preserve the financial records. Check whether a directors and officers policy exists. We litigate these disputes for investors and for founders; we do not handle securities offerings or prepare offering documents.

What to bring to the first meeting

Every version of the pitch deck, financial statements, and projections you were given.
The subscription agreement, note, SAFE, or operating agreement, and proof of payment.
Emails, texts, and messages discussing revenue, customers, or use of funds.
Anything showing when and how you learned the numbers were wrong.
Names of other investors, officers, directors, and anyone who helped raise the money.

Frequently asked questions

I invested in a friend's startup based on revenue numbers that turned out to be made up. Can I get my money back in California?

Possibly. California Corporations Code section 25501 lets a buyer of a security sold through an untrue statement of material fact sue the seller for rescission: the amount paid plus legal interest, less income received, on return of the security. Whether money is actually recovered also depends on who can pay, so identifying liable officers and directors matters early.

What is Corporations Code section 25401?

It is California's general securities fraud prohibition. Section 25401 makes it unlawful to offer, sell, or buy a security in California through a written or oral communication containing an untrue statement of material fact or a misleading omission. It applies to private company stock and most LLC interests, and section 25501 supplies the private right to sue.

How long do I have to sue for investor fraud in California?

For the statutory claim, five years from the transaction or two years from discovering the facts, whichever comes first, under Corporations Code section 25506. A common law fraud claim must be filed within three years of discovery under Code of Civil Procedure section 338, subdivision (d). Discovery can include the point at which you should have suspected the problem, so the two-year window usually controls planning.

The company I invested in has no money left. Can I go after the founders or directors personally?

Sometimes. California Corporations Code section 25504 makes control persons, principal executive officers, and directors jointly and severally liable with a seller that violated the statute, unless they lacked knowledge of, or reasonable grounds to believe in, the underlying facts. Employees and agents who materially aided the sale can also be reached.

Do I have to prove the founder intended to deceive me?

Not for the statutory claim. Under section 25501, once an untrue statement of material fact is shown, the burden moves to the California seller to prove the buyer knew the truth or that the seller exercised reasonable care and did not know. Intent does matter for common law fraud and for punitive damages, which is why both claims are usually pleaded together.

Talk to a California business fraud attorney

If you invested on numbers that were false, or you are a founder facing that accusation, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents clients in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the documents, what was said, and the court.