Securities for Businesses - An Overview

The federal security laws were a product of the stock market crash of the 1920s. Prior to the federal regulations there were very few rules regarding the reporting of material business information. In many ways, investors were left in the dark. Today, there are both federal and state securities regulations. Understanding which regulations and reporting obligations apply to your business can be complicated. A securities attorney can counsel your business on a variety of securities law issues.

A security is an investment in a common business enterprise. Securities may be stocks, bonds, notes, debentures, investment contracts, treasury stocks, transferable shares or mutual funds. Federal, state and private laws and regulations all play a part in building investor confidence by requiring the reporting of accurate information about the securities so that investors can make informed decisions.

Federal Securities Laws

There are two main federal securities laws. The Securities Act of 1933 requires that all securities offered for sale be registered with the Securities and Exchange Commission (SEC). It requires full disclosure of all relevant information about the security and submission to the SEC of a registration statement prior to the issuing of securities. This registration statement must include relevant information for investors.

The Securities Exchange Act of 1934 governs the trading, purchase and sale of securities. It creates a continuing obligation for publicly traded companies to disclose information about their operations, finances and management. The 1934 Act also contains antifraud provisions, reporting and other requirements for issuers of securities, provisions covering oversight of broker-dealers, requirements for proxy solicitations and rules regarding tender offers.

Other Federal Laws

The Trust Indenture Act of 1939 applies to debt securities such as bonds, notes and debentures offered for public sale. These types of securities may be registered under the Securities Act of 1933, but they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder (called a trust indenture) meets the requirements of this Act.

The Investment Company Act of 1940 regulates the organization of companies, such as mutual funds, that primarily invest, reinvest and trade in securities, and that offer their own securities to the public. When stock is initially sold and on a regular basis thereafter, these companies must disclose their financial condition and investment policies to investors.

Investment advisors are regulated under the Investment Advisers Act of 1940. Firms and individuals that are paid for providing advice about securities investments to others must register with the SEC. Under amendments made in 1996, generally only advisers with at least $25 million of assets under management or that provide advice to registered investment companies must register with the SEC.

The Private Securities Litigation Reform Act of 1995 (PSLRA) established new rules for securities class actions and implemented important changes in cases brought under the securities laws.

To get around the PSLRA's requirements, many plaintiffs decided to file a parallel suit in state court under state law. The Securities Litigation Uniform Standards Act of 1998 (SLUSA) was an attempt to stop this practice. Under SLUSA, no "covered class action" based upon state statutory or common law and alleging a misrepresentation or omission of a material fact in connection with the sale or purchase of a covered security, or that the defendant used manipulative or deceptive devices in connection with the purchase or sale of a covered security may be maintained in state or federal court by any private party. 15 U.S.C. § 78bb(f)(1).

The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to corporate and accounting scandals such as Enron. SOX aimed to tighten up regulations related to financial reporting so that investors receive honest and accurate financial information.

State Securities Law

In addition to federal statutes, business owners must also be aware of the relevant state securities laws. There are significant differences from state to state in the ways in which the laws are interpreted and enforced. Generally, you must comply with both the state and federal laws. State laws usually include registration or licensing requirements for brokers and dealers. They also may include registration requirements for those securities that are traded within the state. Most states also have provisions designed to eliminate securities-related fraud. Many states assign a Securities Commissioner to oversee and interpret the relevant law. Finally, some businesses may be exempt from state regulation under the National Securities Markets Improvement Act of 1996. A business owner should contact the relevant state agency to ensure compliance with the laws in states in which the company offers securities.

Exchange Regulations

A buyer or seller of securities must also be aware of private regulations. Private securities regulations may be imposed by a stock exchange, such as the New York Stock Exchange, or private organization of securities dealers. Violations of private regulations may result in a loss of membership in the exchange or private organization.

Conclusion

Securities laws and regulations can be complex, even for sophisticated businesses. An experienced securities lawyer can help your business comply with all the applicable regulations and avoid committing securities violations.

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