Main menu














Se a rch Go

 Create account
 Log in
Personal tools


Contents
 hide

(Top)


Overview
Toggle Overview subsection
o
Securities Act of 1933

o
Securities Exchange Act of 1934


History


Naming practices


Howey Test
Toggle Howey Test subsection
o
 Horizontal vs. Vertical Commonality


Registration Exemptions
Toggle Registration Exemptions subsection
o
Security exemptions

o
Transaction exemptions


Regulation A


Section 4(a)(2)


Regulation D


Crowdfunding


Intrastate Offerings


Private Offerings


Small Offerings


Resale of Restricted Securities


No-action letter


See also


References


External links

United States securities regulation

 2 languages
 Article
 Talk
 Read
 Edit
 View history
Tools










From Wikipedia, the free encyclopedia
(Redirected from Securities law)

Financial Industry Regulatory Authority (FINRA) in New York

Securities regulation in the United States is the field of U.S. law that covers
transactions and other dealings with securities. The term is usually understood to
include both federal and state-level regulation by governmental regulatory agencies, but
sometimes may also encompass listing requirements of exchanges like the New York
Stock Exchange and rules of self-regulatory organizations like the Financial Industry
Regulatory Authority (FINRA).[1]
On the federal level, the primary securities regulator is the Securities and Exchange
Commission (SEC). Futures and some aspects of derivatives are regulated by
the Commodity Futures Trading Commission (CFTC). Understanding and complying
with security regulation helps businesses avoid litigation with the SEC, state security
commissioners, and private parties. Failing to comply can even result in criminal liability.
[2]

Overview[edit]
The SEC was created by the Securities Exchange Act of 1934 to enforce the Securities
Act of 1933.[3] The SEC oversees several important organizations: for example, FINRA,
a self-regulatory organization, is regulated by the SEC. FINRA promulgates rules that
govern broker-dealers and certain other professionals in the securities industry. It was
formed when the enforcement divisions of the National Association of Securities
Dealers (NASD), FINRA, and the New York Stock Exchange merged into one
organization. Similarly, the Securities Investor Protection Corporation (SIPC) is
overseen by the SEC.[1]

Seal of the U.S. Securities and Exchange Commission

All brokers and dealers registered with the SEC under 15 U.S.C. § 78o, with some
exceptions, are required to be members of SIPC (pursuant to 15 U.S.C. § 78ccc) and
are subject to its regulations.[4]
The laws that govern the securities industry are: [5]

1. Securities Act of 1933 – regulating distribution of new securities

2. Securities Exchange Act of 1934 – regulating trading securities, brokers, and
exchanges
3. Trust Indenture Act of 1939 – regulating debt securities
4. Investment Company Act of 1940 – regulating mutual funds
5. Investment Advisers Act of 1940 – regulating investment advisers
6. Sarbanes-Oxley Act of 2002 – regulating corporate responsibility
7. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010  –
regulating trade, credit rating, corporate governance, and corporate
transparency
8. Jumpstart Our Business Startups Act of 2012 – regulating requirements for
capital markets
The federal securities laws govern the offer and sale of securities and the trading of
securities, activities of certain professionals in the industry, investment companies (such
as mutual funds), tender offers, proxy statements, and generally the regulation of public
companies. Public company regulation is largely a disclosure-driven regime, but it has
grown in recent years to the point that it has begun to dictate certain issues of corporate
governance.[3]
State laws governing issuance and trading of securities are commonly referred to
as blue sky laws and mostly deal with fraud and fraud investigation privileges,
registration of securities, and registration of broker-dealers. In general, states allow
injunctions to stop businesses from potentially fraudulent activity and states give broad
investigative power, generally to the attorney general, to investigate fraudulent activity. [3]
Securities Act of 1933[edit]
The Securities Act of 1933 regulates the distribution of securities to public investors by
creating registration and liability provisions to protect investors. With only a few
exemptions, every security offering is required to be registered with the SEC by filing a
registration statement that includes issuer history, business competition and material
risks, litigation information, previous experience of officers/directors, compensation of
employees, an in-depth securities description, and other relevant information. The price,
amount, and selling method of securities must also be included in the registration
statement. This statement is often written with the assistance of lawyers, accountants,
and underwriters due to the complexity and large amount of information required for a
valid registration statement. After a registration statement is successfully reviewed by
the SEC, the prospectus selling document provides all the relevant information needed
for investors and security purchasers to make an informed financial decision. This
document will include both favorable and unfavorable information about a security
issuer, which differs from the way securities were exchanged before the stock market
crash. Section 5 of the 1933 Act describes three significant time periods of an offering,
which includes the pre-filing period, the waiting period, and the post-effective period. If a
person violates Section 5 in any way, Section 12(a)(1) imposes a liability that allows any
purchaser of an illegal sale to get the remedy of rescinding the contract or
compensation for damages. Criminal liability is determined by the United States
attorney general, and intentional violation of the 1933 Act can result in five years in
prison and a $10,000 fine.[3]
Securities Exchange Act of 1934[edit]
The Securities Exchange Act of 1934 is different from the 1933 Act because it requires
periodic disclosure of information by the issuers to the shareholders and SEC in order to
continue to protect investors once a company goes public. The public issuers of
securities must report annually and quarterly to the SEC, but only annually to investors.
Under this law, public issuers are required to register the particular class of securities.
The registration statement for the 1934 Act is similar to the filing requirement of the
1933 Act only without the offering information. Another major reason for the
implementation of the 1934 Act was to regulate insider securities transactions to prevent
fraud and unfair manipulation of securities exchanges. In order to protect investors and
maintain the integrity of securities exchanges, Section 16 of this law states that statutory
insiders must disclose security ownership in their company 10 days prior and are
required to report any following transactions within two days. A corporation officer with
equity securities, a corporation director, or a person that owns 10% or more of equity
securities is considered to be a statutory insider that is subject to the rules of Section
16. Anyone that intentionally falsifies or makes misleading statements in an official SEC
document is subject to liability according to Section 18, and people relying on these
false statements are able to sue for damages. The defendant must prove they acted in
good faith and was unaware of any misleading information. Rule 10b-5 allows people to
sue fraudulent individuals directly responsible for an omission of important facts or
intentional misstatements. The SEC does not have the authority to issue injunctions, but
it does have the authority to issue cease and desist orders and fines up to $500,000.
Injunctions and ancillary relief are achieved through federal district courts, and these
courts are often notified by the SEC.

History[edit]
Securities regulation came about after the stock market crash that occurred in October
1929.[3] Before the Wall Street Crash of 1929, there was little regulation of securities in
the United States at the state and federal level. An economic depression followed
the Wall Street Crash of 1929, which motivated President Franklin Roosevelt to create
laws regulating securities transactions during his famous "first 100 Day” period of
his New Deal.[6] Congress discovered that the stock market crash was largely due to
problems with securities transactions, including the lack of relevant information about
securities given to investors and the absurd claims made by the sellers of securities in
companies that did not even exist yet. This lack of information lead to a disclosure
scheme that requires sellers of securities to disclose pertinent information about the
company to investors so that they are able to make wise financial decisions. The crash
spurred Congress to hold hearings, known as the Pecora Commission, after Ferdinand
Pecora.[3]

Crowds outside New York Stock Exchange after Wall Street Crash of 1929

Prior to the Securities Act of 1933, securities were mainly regulated by state laws, which
are also known as blue sky laws. After the Pecora hearings, Congress passed
the Securities Act of 1933 prescribing rules for the interstate sales of securities, and
made it illegal to sell securities in a state without complying with that state's laws. This
statute broadly defines a security as “any note, stock, treasury stock, security future,
security-based swap, bond, debenture, evidence of indebtedness, certificate of interest,
or participation in any profit-sharing agreement.” In simpler terms, a security is a
medium of investment that creates a certain level of financial obligation. [3] The statute
requires a publicly traded company to register with the U.S. Securities and Exchange
Commission (SEC). The registration statement provides a broad range of information
about the company and is a public record. The SEC does not approve or disapprove
the issue of securities, but rather permits the filing statement to "become effective" if
sufficient required detail is provided, including risk factors. [7] The main objective of the
act was to eliminate information gaps with two methods: first, companies were required
to give investors financial and other pertinent information about the securities offered,
and second, Congress disallowed fraudulent information and other misinformation in the
sale of securities.[5] The company can then begin selling the stock issue, usually through
investment bankers.
The following year, Congress passed the Securities Exchange Act of 1934, to regulate
the secondary market (general-public) trading of securities. Initially, the 1934 Act
applied only to stock exchanges and their listed companies, as the name implies. In the
late 1930s, it was amended to provide regulation of the over-the-counter (OTC) market
(i.e., trades between individuals with no stock exchange involved). In 1964, the Act was
amended to apply to companies traded in the OTC market. [5] Overall, these first two
statutes served to regulate the exchange of securities, require the disclosure of
information, and inflict consequences on individuals that do not disclose information
properly, whether it be intentional or erroneous. These laws were the first of many to
rebuild investor confidence and protection.
The government continues to reform security regulation. In October 2000, the SEC
issued the Regulation Fair Disclosure (Reg FD), which required publicly traded
companies to disclose material information to all investors at the same time. [8] Reg FD
helped level the playing field for all investors by helping to reduce the problem
of selective disclosure. In 2010, the Dodd–Frank Wall Street Reform and Consumer
Protection Act was passed to reform securities law in the wake of the financial crisis of
2007–2008.[9] The most recent regulation came in the form of the Jumpstart Our
Business Startups Act of 2012 which worked to deregulate capital markets to reduce
cost of capital for companies.[5]
Over the years the courts formed United States securities case law. Some notable
decisions include the 1988 decision by the Supreme Court of the United States in Basic
Inc. v. Levinson, which allowed class action lawsuits under SEC Rule 10b-5 and the
"fraud-on-the-market" theory, which resulted in an increase in securities class actions.
The Private Securities Litigation Reform Act and the state model law Securities
Litigation Uniform Standards Act was a response to class actions. [10]

Naming practices[edit]
Congress has amended securities acts many times. The Holding Company Act and the
Trust Indenture Act in particular have changed significantly since they originally passed.
The titles of securities acts, including the year of original enactment, are the so-called
"popular names" of these laws, and practitioners in this area reference these statutes
using these popular names (e.g., "Section 10(b) of the Exchange Act" or "Section 5 of
the Securities Act"). When they do so, they do not generally mean the provisions of the
original Acts; they mean the Acts as amended to date. When Congress amends the
securities laws, those amendments have their own popular names (a few prominent
examples include Securities Investor Protection Act of 1970, the Insider Trading
Sanctions Act of 1984, the Insider Trading and Securities Fraud Enforcement Act of
1988 and the Dodd-Frank Act). These acts often include provisions that state that they
are amending one of the primary laws. Other laws passed since then include Private
Securities Litigation Reform Act (1995), Sarbanes–Oxley Act (2002), Jumpstart Our
Business Startups Act (2012), and various other federal securities laws.[11]
Although practitioners use popular names to refer to federal securities laws, these laws
are generally codified in the U.S. Code, which is the official codification of U.S. statutory
law. They are contained in Title 15 of the U.S. Code: for example, the official code
citation for Section 5 of the Securities Act of 1933 is 15 U.S.C. section 77e. Not every
law adopted by Congress is codified because some are not appropriate for codification:
for example, appropriations statutes are not codified. There are also extensive
regulations under these laws, largely made by the SEC. One of the most famous and
often used SEC rules is Rule 10b-5, which prohibits fraud in securities transactions as
well as insider trading. Interpretations under rule 10b-5 often deem silence to be
fraudulent in certain circumstances. Efforts to comply with Rule 10b-5 and avoid
lawsuits under 10b-5 have been responsible for a large amount of corporate disclosure.
Due to the frequent use of the 10b-5 rule, codification becomes both efficient and
necessary.[11]

Howey Test[edit]
The Securities Act of 1933 has a broad definition for "securities" including notes, bonds,
security futures, treasury stock, certification of interest, and much more. The United
States Supreme Court heard several cases to define exactly what encompassed a
"security".[2] The Supreme Court has used the Howey test to define what securities are
since its decision in the 1946 SEC v. W. J. Howey Co. case. The Howey test defines
securities as investment contracts that involve investment of money or property, in a
common enterprise, with profits coming from the sole efforts of people other than the
investor.[12] With that definition there are several exemptions, both in types of securities
that are regulated and transactions that are regulated. [13] This is a significant test
because it determines whether or not certain transactions qualify for SEC registration
and adherence to disclosure rules. In 1946, the Supreme Court determined three parts
to this test that qualifies a transaction as an investment contract: [14]
1.     There is an investment of money or assets
2.     The investment is in a common enterprise
3.     There is a reasonable expectation of profits (or assets) and reasonable reliance on
the efforts of others
Horizontal vs. Vertical Commonality[edit]
There are two ways to define the common enterprise aspect of this test, which include
horizontal and vertical commonality. Horizontal commonality is when investors combine
funds and share profits proportionally. All courts allow horizontal commonality, but only
some courts will allow vertical commonality for the common enterprise requirement.
Vertical commonality refers to the investors and the promoter of the investments, and it
evaluates the similarity of how each person is affected. [3]

Registration Exemptions[edit]
Since the 1933 Act registration requirements can be very complex, costly, and take a lot
of time to complete, many people look for alternative ways to sell securities. There are
securities exemptions and transaction exemptions that do not require registration with
the SEC, but the issuers of these security transactions are still liable for any fraud that
may occur. Securities exemptions include insurance policies, annuity contracts, bank
securities, United States government issued securities, notes/drafts with a maturity date
less than nine months after the issue date, and securities offered by nonprofit (religious,
charitable, etc.) organizations. Transaction exemptions include intrastate offerings (Rule
147), private offerings (Rule 506, Regulation D), small offerings (Regulation A; Rules
504 & 505), and resale of restricted securities (Rule 144).[3]
Security exemptions[edit]
Under the Securities Act of 1933 there are several securities that are exempt from
registration.[3] The most important of which are listed below:[5]

1. Annuity contract or insurance policy

2. Securities issued by nonprofits, religious, educational, or charitable organizations
3. Securities issued by a savings and loan association or bank
4. Securities issued or guaranteed by a municipality, or any government entity in
the United States
5. Certain short term notes, generally less than nine months
A full list of exemptions can be found in sections 3(a)(2)-3(a)(8), 15 U.S.C. §§ 77c(a)(2)-
(a)(8) of the Securities Act of 1933.[2]
Transaction exemptions[edit]
Initial Public Offerings (IPO) can become very costly. According to PWC costs for
companies with revenue under $100 million can range from $2.6 million to $70.8 million
depending on the valuation of the deal.[15] These costs are mainly from the 11th section
of the Securities Act of 1933 requiring due diligence for companies going public.[2] The
following exemptions were made in order to foster capital by lowering cost of offerings
for small companies.[5]
Regulation A[edit]

Regulation A [16] Tier 1 Tier 2

One Year offering

$20 Million $50 Million
Limit
 Number and Type Non-accredited investors may have limits on
No Limit
investment
of Investors

Solicitation
Allowed
Requirements
Form 1-A; two years of audited financial
Filing Form 1-A; two years of
statements; annual, semi-annual, current, and exit
Requirements financial statements; exit report
reports
Resale Restrictions None
Section 4(a)(2)[edit]

Section 4(a)(2) [2]

One Year offering Limit No limit

Number and Type Investors must be "Sophisticated" according to court decision in SEC v. Ralston
Purina Co
of Investors

Solicitation
Disallowed
Requirements
Filing Requirements No
Resale Restrictions Restricted Securities
Regulation D[edit]
Main article: Regulation D (SEC)

Regulation D [2] Rule 504 [17] Rule 506(b)[18] Rule 506(c)[19]

One Year
$5 Million Unlimited
offering Limit

Number and No limit on accredited investors,

No limit on accredited investors,
Type but no more than 35 non-
No limit but issuer must take reasonable
accredited but sophisticated
steps to ensure accreditation
of Investors investors

Solicitation
Limited Disallowed Allowed
Requirements
Filing Form D Form D with additional Form D
Requirements information required for non-
 accredited investors
Restricted
Resale
securities in Restricted securities
Restrictions
most cases
Crowdfunding[edit]

Crowdfunding [20]

One Year offering

$1.07 Million
Limit

Number and Type

Limitations depending on annual income and net worth
of Investors

Solicitation
Limited and must be through internet
Requirements
Form C; two years of certified, reviewed, or audited financial statements; Annual
Filing Requirements
and progress reports
Resale Restrictions Resale must be after one year
Intrastate Offerings[edit]
Intrastate offerings are when securities are only offered to investors that live in the state
where the business resides. This type of transaction qualifies for the SEC registration
exemption on a federal level. However, state securities laws (blue sky laws) still have to
be followed. Rule 147 specifies that 80% or more of the issuer’s revenue and assets
must remain in the specified state, as well as 80% of the proceeds from the intrastate
offerings must be used in the same state.[3]

Intrastate [21] Section 3(a)(11) Rule 147 Rule 147A

One Year offering Limit No limit

Number and Type

Must be in-state resident
of Investors

Solicitation
Issuer must be in-state residence Allowed
Requirements
Filing Requirements No
Must end with in-state Resale must be within six months within the
Resale Restrictions
residents state
Private Offerings[edit]
A private offering is not open to the public, but rather only available to a small group of
purchasers that are able to safely invest due to their large amount of wealth or
extensive knowledge about investments. Rule 506 in Regulation D of the Securities Act
states that the issuer must reasonably determine if the investors qualify by being
accredited or experienced in financial investment matters, and the investors should sign
a suitability letter. Although these transactions are exempt from SEC registration,
issuers still must provide investors with substantial information that allows them to make
an informed decision. Rule 506 also restricts the issuer from offering securities publicly
and requires the issuer to try and make resale of securities remain private. [3]
Small Offerings[edit]
Rule 505 of Regulation D also allows for shorter disclosure forms when small offerings
are made of no more than $5 million in a period of one year. However, the issuer cannot
have a history of securities fraud or related crimes. Rule 505 does not allow general
selling efforts and requires disclosure similar to Rule 506, but purchasers do not have to
be experienced with investments. Rule 504 exempts SEC registration of a nonpublic
issuer of $1 million or less in securities within a period of one year as long as the issuer
discloses the relevant information required by state law. Rule 504 also allows general
selling efforts, has no limit on how many purchasers, and purchasers do not need
specific qualifications. Regulation A provides an exemption to SEC registration of small
market offerings of $5 million or less, and there is less of a disclosure requirement. The
disclosure statement is called an offering circular, which contains a balance sheet from
at most 90 days before the file date, two years of income statements, cash flow
information, and shareholder equity reports. Regulation A does not specify purchaser
number, sophistication, or resale requirements. In some cases, the SEC will exempt
offerings of $50 million or less since the amendment created by the JOBS Act. [3]
Resale of Restricted Securities[edit]
Securities in accordance with Rules 504, 505, and 506 (Regulation D) are considered
restricted securities.[3] These restricted securities are often acquired by investors through
unregistered or private offerings, meaning the securities cannot be resold for a period of
time unless registered with the SEC or it qualifies for an exemption. Rule 144 provides
an exemption to this rule and allows purchasers of restricted securities to resell under
certain circumstances. There is a holding period that must be met in order for anyone to
sell restricted securities. If the issuer of the security is a public company that reports to
the SEC, then the purchaser must hold the security for a minimum of six months. If the
issuer does not report to the SEC, then the purchaser must hold the securities for a
minimum of one year. Another requirement is that there must be current public
information readily available about the company that issued the securities before the
sale can happen. Affiliated investors must follow a trading volume formula and carry out
routine brokerage transactions in accordance to the SEC. [22] Investors that are
unaffiliated to the issuer company can sell all or a portion of the restricted securities
after complying with the holding time. An affiliated investor can only sell a limited
number of restricted securities and has to comply with more complicated requirements.
Affiliated resellers of restricted securities are required to file Form 144 with the SEC. [3]
No-action letter[edit]
The no-action letter is a tool to reduce risk and ensure the SEC will not take action in a
given situation. Prior to a transaction an individual can apply for a no-action letter with
the SEC outlining exactly what the individual plans to do. The SEC can then grant the
request by sending a letter promising to take no legal action if the individual acts as
indicated in the letter. This letter is not binding to state commissioners, but
commissioners generally follow the Federal precedent set by the SEC. Often no-action
letters are acquired before performing a transaction or security exemption. [3]

See also[edit]
 Financial regulation
 Securities Commission
 Securities market participants (United States)

References[edit]
1. ^ Jump up to:a b "SEC.gov | SEC and FINRA to Hold National Compliance Outreach Program for
Broker-Dealers on June 27, 2019".  www.sec.gov. Retrieved 2020-11-30.
2. ^ Jump up to:a b c d e f Steinberg, Marc (2009). Understanding Securities Law.
LEXISNEXIS. ISBN 142247349X.
3. ^ Jump up to:a b c d e f g h i j k l m n o p Business law  : the ethical, global, and e-commerce environment .
Mallor, Jane P. (17th ed.). New York. 2018.  ISBN  978-1-259-91711-0. OCLC  1004376405.
4. ^ "15 U.S. Code § 78ccc - Securities Investor Protection Corporation".  LII / Legal Information Institute.
Retrieved 2020-11-30.
5. ^ Jump up to:a b c d e f "SEC.gov | The Laws That Govern the Securities Industry".  www.sec.gov.
Retrieved 2020-11-12.
6. ^ "The Pecora Hearings - Other Unpublished Work - Faculty & Research - Harvard Business
School". www.hbs.edu. Retrieved 2020-12-17.
7. ^ "SEC.gov | Federal Securities Laws".  www.sec.gov. Retrieved 2020-11-30.
8. ^ "Selective Disclosure and Insider Trading". www.sec.gov. Retrieved  2020-11-30.
9. ^ "Dodd-Frank Act Rulemaking: Derivatives".  www.sec.gov. Retrieved 2020-11-30.
10. ^ Pritchard A. (2008). Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.: The Political
Economy of Securities Class Action Reform. Cato Supreme Court Review.
11. ^ Jump up to:a b "TOPN: Table of Popular Names".  LII / Legal Information Institute. Retrieved  2020-
11-30.
12. ^ SEC v. W. J. Howey Co., 328 U.S. 293 (U.S. Sup. Ct. 1946)
13. ^ "SEC.gov | Exempt Offerings". www.sec.gov. Retrieved  2020-11-29.
14. ^ "What Is the Howey Test?". Findlaw. Retrieved 2020-12-17.
15. ^ PricewaterhouseCoopers.  "Considering an IPO? First understand the costs".  PwC. Retrieved 2020-
11-29.
16. ^ "SEC.gov | Amendments to Regulation A: A Small Entity Compliance Guide*".  www.sec.gov.
Retrieved 2020-11-29.
17. ^ "SEC.gov | Exemption for limited offerings not exceeding $5 million—Rule 504 of Regulation
D".  www.sec.gov. Retrieved 2020-11-29.
18. ^ "SEC.gov | Private placements - Rule 506(b)".  www.sec.gov. Retrieved 2020-11-29.
19. ^ "SEC.gov | General solicitation — Rule 506(c)".  www.sec.gov. Retrieved 2020-11-29.
20. ^ "SEC.gov | Regulation Crowdfunding".  www.sec.gov. Retrieved 2020-11-29.
21. ^ "SEC.gov | Intrastate Offering Exemptions:A Small Entity Compliance Guide for
Issuers[1]".  www.sec.gov. Retrieved 2020-11-29.
 22. ^ "SEC.gov | Rule 144: Selling Restricted and Control Securities". www.sec.gov. Retrieved  2020-12-
17.

External links[edit]
 The Securities and Exchange Commission Official site
 The Securities Law Home Page
 Introduction to the Federal Securities Laws
 The Securities Compliance Index
Categories: 
 United States securities law
 Financial regulatory authorities of the United States
 This page was last edited on 6 February 2023, at 15:36 (UTC).
 Text is available under the Creative Commons Attribution-ShareAlike License 3.0; additional terms may apply. By
using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of
the Wikimedia Foundation, Inc., a non-profit organization.
 Privacy policy

 About Wikipedia

 Disclaimers

 Contact Wikipedia

 Mobile view

 Developers

 Statistics

 Cookie statement

Toggle limited content width