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Securities Outline



• Premise of securities regulation is that mandatory disclosure (as well as antifraud provisions) will equip securities investors and their advisors with the information to move capital to its optimal uses. • Purposes of securities regulation:

o Assuring that when securities are created and offered to the public, investors have an accurate idea of what they are purchasing an interest in, and how much their interest represents. o To assure that there is a continuous flow of information about the corporation which is represented by securities being traded on secondary markets. o To prohibit a variety of fraudulent, manipulative, and deceptive practices, since the complexity of securities invites unscrupulous people to cheat or mislead investors. o Concerned with regulating people and firms that are part of the large industry that buys and sells securities, and assure that they don’t take advantage of their superior experience and access. • Securities transactions occur in two settings:

o Sales of securities to investors by issuers to raise capital for their business (issuer transactions). o Buy-sale transactions among investors of already-issued securities (trading transactions). • Securities markets serve three basic functions:

o Capital formation.
o Liquidity.
▪ The ability readily to sell an investment instrument—an important attribute of securities. o Risk management.
• The Securities Act of 1933
o Regulates public offerings of securities.
▪ §2(b) requires that when the SEC is engaged in rulemaking, they should consider whether the action is necessary in the public interest, whether it will protect investors, and whether the action will promote efficiency, competition, and capital formation. ▪ Basic provision is §5 which prohibits offers and sales of securities which are not registered with the SEC. ▪ §6 and §8 set forth the procedure for registration.

▪ §7 and §10 specify the information which must be disclosed. • §7 prescribes the information to be included in the registration statement. ▪ §3 and §4 list type of securities and types of transactions which are exempt from the registration requirement. ▪ §11 and §12 establish civil liability for damages.

• §11 sets forth in detail the liabilities arising from misstatements or omissions in a registration statement. • §12(a)(1) establishes civil liability for offers or sales in violation of §5. • §12(a)(2) establishes liability for misstatements or omissions in any offer or sale of securities, whether or not registered. ▪ §17 makes it unlawful to engage in fraudulent or deceitful practices in connection with any offer or sale of securities, whether registered or not. ▪ §28 authorizes the SEC to exempt any transaction or security from any provision of the 1933 Act, if it is in the public interest and consistent with the protection of investors.

• The Securities Exchange Act of 1934
o Extended federal regulation to trading in securities which are already issued and outstanding. o §2 outlines the reasons why the 1934 Act was enacted.
• National Securities Market Improvement Act of 1996
o Explicitly preempted state law in many areas of securities regulation—particularly in the area of registration and reporting requirements for securities transactions.


• The 1933 Act requires mandatory disclosure by making it illegal to offer or sell securities to the public unless they have been registered, which the issuer can do by filing with the SEC a registration statement.



• The Basic Tools:
o Efficient market hypothesis
▪ Suggests that all information contained in an issuer’s periodic reports is immediately reflected in the price of the issuer’s securities. • The average investor does not need to know the information to...
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