Securities Law Overview
Securities Law Resources
A security is a type of transferable interest representing financial value. Securities may take a number of different forms, including stocks, bonds, notes, collateral trust certificates, voting trust certificates or investment contracts. Companies generally issue securities to investors to raise capital. Investors then trade these securities on either the national stock exchange or in the residual securities market. Trading securities in the residual securities market is also known as "over the counter" trading. Both federal and state laws regulate securities. The Securities and Exchange Commission (SEC) administers federal securities laws while a state's Securities Commissioner promulgates state securities law.
The Federal Securities Act of 1933
The Federal Securities Act of 1933, often referred to as the "truth in securities" law, governs the issuance of securities. The Act promotes the disclosure of significant information concerning securities being offered for public sale. This ensures that purchasers are given enough information about the various securities to make informed, well-reasoned investment decisions.
Registration Requirement
In order to ensure that all relevant financial information is accurately disclosed to purchasers, the 1933 Act mandates that all securities offered for sale in the United States must either be registered with the SEC, or qualify for an exemption from the registration requirement. To register, a company must provide a description of the company's properties, business, and the security to be offered for sale, information about the management of the company, and financial statements certified by independent accountants. While the SEC cannot guarantee the accuracy of the disclosures, companies are required to submit precise and truthful information. Certain offerings of securities are exempt from SEC registration requirements, including private offerings to a restricted number of persons, offerings of limited size, intrastate offerings and securities of municipal, state and federal governments.
The Federal Securities Exchange Act of 1934
The Federal Securities Exchange Act of 1934 governs the trading, purchase and sale of securities. Notably, the 1934 Act established the Securities and Exchange Commission. Under the 1934 Act, the SEC may register, regulate, discipline and oversee brokerage firms, transfer agents and clearing agencies. The SEC is also empowered to oversee self regulatory organizations, including the New York Stock Exchange and the American Stock Exchange.
Required Disclosures
In addition to establishing the SEC, the 1934 Act promotes the disclosure of certain information to ensure that shareholders make informed voting decisions. First, the Act regulates proxy solicitation. Absentee shareholders use proxies to elect directors or approve corporate action. The Act requires that information about the issues to be voted on be disclosed to shareholders before proxies may be solicited. Additionally, the Act requires that anyone seeking to gain control of a company through the purchase of securities must make certain disclosures to shareholders before the transaction is finalized. Thus, disclosures are required when anyone, through direct purchase or tender offer, attempts to acquire more than five percent of a company's securities.
The Sarbanes-Oxley Act of 2002
Congress passed the Sarbanes-Oxley Act of 2002 to promote public trust in accounting and reporting practices in the wake of several large-scale accounting scandals. The Act authorized a number of securities reforms to increase financial disclosures, discourage fraud by corporate insiders, and enhance criminal and civil penalties for violation of securities laws. Significantly, under Sarbanes-Oxley, all publicly traded companies are required to submit an annual report to the SEC on the effectiveness of their internal accounting controls.
Blue Sky Laws
Individual states regulate securities through a state Securities Commissioner. State securities laws are often referred to as "Blue Sky Laws." Each state has its own securities act which governs the state's registration and reporting requirements, fraud provisions, sanctions and civil liability.