Legal Standard for Materiality of Securities Misrepresentation: Rational Investor and Price Sensitivity Test

Abstract

In China's judicial practice, there are many difficulties in determining the transaction causation in misrepresentation securities transactions, and there is no uniform approach to the adoption of legal standards. Based on the current law, the latest judicial interpretation and cases, the author analyzed and identified limitations of the legal standards presently applied for transaction causation, and proposed a new method to apply the legal standards. The application of the rational investor standard should avoid the extreme tendency of over-weakness and over-strictness, and adhere to the combination of bottom-line thinking and the actual situation. The application of the price sensitivity standard should fully consider the shortcomings of its realistic basis, and avoid the simple application out of practicality, resulting in the determination of materiality losing scientificity. In addition, the rational investor standard and the price sensitivity standard have an inherent connection and consistency. The court should take the rational investor as the main judgment standard, and the price sensitivity standard as the bottom and supplement of the shortcomings of the rational investor standard, so as to reduce the uncertainty of judicial practice.