The Reasonable Investor of Federal Securities Law

Abstract

Federal securities law defines the materiality of corporate disclosures by reference to the views of a hypothetical “reasonable investor.” For decades the reasonable investor standard has been a flashpoint for debate — with critics complaining of the uncertainty it generates and defenders warning of the under-inclusiveness of bright-line alternatives. This Article attempts to shed fresh light on the issue by considering how the reasonable investor differs from its common law antecedent, the reasonable person of tort law. The differences identified suggest that the reasonable investor standard is more costly than tort law’s reasonable person standard — the uncertainty it generates is both greater and more pernicious. But the analysis also reveals promising ways to mitigate these costs while retaining the benefits of the flexible standard.