Securities Law Overview

The question of what is securities law pertains to a financial ownership device that confers on an individual or entity ownership in part of a company. This ownership can come in the form of a bond, which may be likened to an IOU to an individual from a company, or it can come in option form, which allows one to buy shares in the future at a pre-set price.

Securities are bought and sold by individuals, corporations, and governments as a way of investing their money. Because so many entities deal in securities, there are a number of laws in place to regulate the market. These laws and regulations fall broadly into three categories, and those are:

  • Federal laws requiring companies that sell securities to report their liabilities, assets, and other accounting data truthful and regularly.
  • Federal laws designed to prevent securities buyers from manipulating the system through secret information and insider trading.
  • Federal laws concerning what stockbrokers can and cannot do for their clients.

All of these laws comprise securities law, which was put in place after the unregulated speculation of the 1920s lead to the 1929 Stock Market Crash and the Great Depression to follow. Additionally, the Securities and Exchange Commission, or SEC, was created to administer the laws. Stocks, bonds, and mutual funds may all be regulated by the SEC.

Securities Law Requirements

Securities law has many requirements for companies subject to it. Broadly speaking, some of these requirements are:

  • Public disclosure. Publicly traded companies are required by law to file reports regularly with the SEC. These reports must disclose information related to their operating results, financial condition, executive compensation, and other details. Investors, brokers, and the financial markets in general use this information to determine their investing decisions.
  • SEC registration. Securities law also requires publicly traded companies to register with the SEC and provide complete information relating to the seller and their stock offering to investors. This registration process can be very complex, time-consuming, and expensive, it usually costs over $1,000,000. Because of this, venture capitalists and private sector companies often structure sales of securities so they can be exempt of SEC registration requirements, although other state securities laws may still need to be adhered to.
  • Compensation for wrongdoing. If a company fails to comply with securities law, a purchaser who was negatively affected by such malfeasance will be allowed to get their money back or receive damages as compensation. In certain extreme cases, a company may offer a rescission, or a buyback of the securities with interest, to those stockholders who bought securities that were offered in violation of securities law. This may be done by the company to eliminate the company’s exposure against rescission rights, and the company must be careful that the rescission itself is made in compliance with securities laws.

Public and Private Securities Offerings

Securities may be offered both publicly and privately. Public security offerings are those made to the general public without limitation. In this context, a bank will often act as an underwriter to the security and purchase the entirety of the security issue to then resell it to the public. Requirements of public offerings may include:

  • A letter of agreement between the company and the underwriting party.
  • A disclosure statement being filed with the SEC, which may include details on the business, financial conditions, liabilities, and the future prospects of the business.
  • SEC review, which may include extensive dialogue between the SEC and the lawyer of the company wishing to make a public offering.

Once the SEC is convinced that the appropriate level of disclosure has been made, the registration statement will be deemed effective and the securities sale may commence.

Private security offerings, on the other hand, simply involve the selling of debt or equity to an investor group more limited than the general public. Private offerings do not require disclosure statements to be filed with the SEC, but private disclosure statements must be issued to any potential investors.

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