Key aspects of US securities law, including major acts, regulatory agencies, and compliance requirements for issuers and investors.
Corporate law · transactional law · securities law
In the United States, the securities law framework regulates the registration and public sale of securities, as well as the periodic reporting obligations of public companies. This framework is primarily established by:
- Securities Act 1933
- Securities Exchange Act of 1934, also known as the Exchange Act
- Other federal statutes
What’s true is that securities law can seem intimidating at first, mainly due to the complex and esoteric language used in the financial world. However, once you grasp the basic terminology and how banks and financial institutions operate, the laws and related corporate governance become much easier to understand and follow.
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Securities Exchange Act of 1934
Foreign issuers and US securities laws
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Meet your AI assistant ↗Principal regulatory agencies
The principal regulatory bodies for securities law in the United States include:
- Securities and Exchange Commission (SEC): The commission is the primary regulator of securities and administers all the laws, such as the Securities Act, the Exchange Act, the TIA, the ICA, and the Advisers Act. It protects investor interest and oversees market participants.
- Financial Industry Regulatory Authority (FINRA): It is a non-governmental authority under the supervision of SEC, it registers member firms, enforces securities regulations, and reviews underwriting arrangements to ensure fair compensation.
Securities Act of 1933
The Securities Act is responsible for regulating the offer and sale of securities. The main objective of the Act is to ensure that investors are offered the opportunity to access the merits of the securities that are being offered to them by providing the accurate details of the issuer and the offering. It is enacted by the U.S. Congress to ensure transparency in the financial markets and prevent fraudulent activities.
The means through which the Act achieves its goal is by requiring the issuer to provide a Registration Statement under Section 5 of the Act. The Act under Sections 11 and 12 holds issuers of the securities liable if there is any material misstatement or omission in the document which ensures that the issuers are held liable for it.
The statement is filed with the SEC, including:
- Company’s financial status
- Nature of the securities offered
- Any material risks
Section 5 of the Act also prohibits any sale of securities without an effective registration statement.
The Act of 1933 mandates registration unless an exemption applies. Like a convertible note, it’s a debt security, that is mandatory to be registered until exemption under Rule 144A or Regulation-D applies.
Under Regulation D it allows small companies to raise capital through private placements without full registration. Similarly, the Safe Harbor Rule, which includes Rule 144 permits the resale of restricted securities under specified conditions without requiring full SEC registration.
Securities Exchange Act of 1934
The Securities Exchange Act was enacted to regulate the secondary market for the securities to ensure that the trading is fair and transparent. The difference between the Securities Act 1933 and the Exchange Act is that the former governs the initial issuance of the securities, whereas the latter regulates the subsequent trading of the securities once the securities are issued to the public, ensuring that the protection of the investor is maintained while maintaining the market integrity.
Section 10 (b) and Rule 10b-5 provide for the liability if there is fraud or manipulation. This antifraud rule has formed the basis for significant private securities litigation and regulatory enforcement actions.
This makes it a powerful legal tool against market manipulation, insider trading, and securities fraud. The Act imposes strict registration on both issuers and market participants, facilitating informed investment decisions.
Other federal statutes
US securities laws consist of other statutes as well, some of which are discussed below.
Sarbanes-Oxley Act
This act was enacted in 2002, when corporate scandals were on the rise. It aims to enhance corporate responsibility, improve financial disclosures, and combat accounting fraud. It also establishes the Public Company Accounting Oversight Board (PCAOB) to regulate accounting firms auditing public companies.
Provisions of the act are as follows:
- Prohibition on personal loans by the company to its executive
- Strict criminal sanction if the corporation is committing fraud
- Certificates for accuracy and completeness of a company’s periodic reports
Trust Indenture Act
The Trust Indenture Act governs debt securities such as bonds, debentures, notes, etc. It requires the appointment of a trustee for the securities being issued to protect the rights of the bond holder. It also provides for information to be disclosed regarding the securities, eligibility, or disqualification criterion of a trustee, among other things.
Investment Company Act
This act regulates companies engaged in investing and trading securities for other companies, such as mutual funds. The purpose of the act is to address the conflicts of interest that arise from the transactions in which investment companies engage.
Investment Advisers Act
The Investment Advisers Act regulates individuals and firms that provide investment advice for compensation. It mandates that these advisers must be registered with the SEC and comply with the laws.
Blue sky laws
State securities laws are known as Blue Sky laws, which require state-specific laws to be adhered to for registration in the state. They provides licensing requirements for securities professionals, anti-fraud provisions , and more.
Technical terms
Securities law involves a host of terms that are required for basic a understanding. Some of them are discussed below.
Initial Public Offering — IPO refers to the process of offering shares to the public for raising capital. The companies may hire investment banks for marketing the securities and managing them in the market.
Follow-on Offering — The offerings which are made by the company after it has gone from private to public to raise more capital after the IPO
Syndicate — a group of underwriters that collectively share the risk and responsibility of selling new securities. A syndicate is led by a lead underwriter, who manages the process and allocates shares to investors.
Registered representative — a securities representative such as a stockbroker, or an account executive who has the license to sell securities such as stocks, bonds, options, mutual funds, limited partnership programs, and variable annuities for the client.
In simple terms, a registered representative is a financial professional who has the knowledge to deal with the client transactions in the securities markets.
Accredited investor — works in the financial industry. Among other criteria, they are qualified to invest in the complex or sophisticated types of securities, which are not closely regulated.
Those who want to sell securities that are not registered are allowed to sell only to accredited investors, who are deemed able to bear the risks. An accredited investor can be an individual or entity that meets certain financial criteria defined under Rule 501 of Regulation D of the Securities Act of 1933.
Penalty bid — an offer that imposes penalties on the purchase of securities if they are sold quickly. They aim to protect IPO investors from the selling pressure that might arise from early investors selling their shares shortly after the IPO transaction.
Syndicate short position — a practice where an underwriting syndicate, during an offering in an IPO or follow-on offerings, sells securities more than which it has previously agreed to purchase from the issuer, committed under a firm commitment underwriting agreement.
Under the Agreement Among Underwriters (AAU), the lead manager may authorize these sales to stabilize the market price of the securities.
Wire or Invitation Wire — a wire refers to a written communication that is sent via electronic means such as telex, telecopy such as fax, electronic data transmission, or other similar methods. It conveys important information about an offering.
An invitation wire is a type of wire that formally invites a party like an underwriter to participate in a particular securities offering. It serves as the official notice of an opportunity to be involved in the underwriting process.
Asset-Backed Securities (ABS) — ABS are financial instruments that are created through securitization, wherein multiple loans are pooled into a single security.
These securities ensure that the investor receives interest and principal payments while they are protected from the risk associated with the underlying assets. This enhances market efficiency and distributes credit risk among a broad range of investors.
ABS Underwriter Derived Information — this term is used for any analytical or computational calculations that are generated by an underwriter in relation to the offering.
It emphasizes that statistical data about ABS, such as yield, average life, maturity expectations, interest rate sensitivity, and other financial characteristics, all qualify as issuer information provided by the issuer, depositor, etc.
Prospectus — a legal document that is issued by a company to potential investors during a public offering. It provides detailed information about the company’s financials, business operations, risks, and the terms of the securities being offered.
Foreign issuers and US securities laws
If non-US companies access the US capital markets, then they have to comply with the US securities law. Foreign Private issuers are subjected to SEC reporting obligations if they:
- Conduct a public securities offering in the US
- List securities on a US national exchange
- Exceed 300 US resident shareholders and hold $10 million in assets without qualifying for the Rule 12g 3-2(b) exemption
However, certain accommodations exist to encourage foreign private issuers to enter the US markets, which are as follows:
- Confidential filing of initial registration statements on Form F-1
- Exemptions from US proxy rules and Regulation FD
- Limited executive compensation disclosure requirements
Securities Law Handbook, 2024 ed.
In-depth coverage of basic and specialized issues, including types of offerings, registration, reporting, potential violations, and enforcement.
Buy now ↗Practice notes and more resources
- Deciphering Terms Used in the Master Agreement Among Underwriters
- Using a Glossary to Enhance Prospectuses and Other Public Filings
Q&A
Who is considered a dealer under securities law?
- A dealer is any person regularly engaged in the business of buying or selling securities, either for their own account or for the accounts of others — Resales Under Rule 144
Who is considered a broker under securities law?
- A dealer is any person regularly engaged in the business of buying or selling securities, either for their own account or for the accounts of others — Resales Under Rule 144
Can public statements required by securities law reporting obligations violate the antitrust laws?
- Possibly. Quarterly filings, press releases, and earnings calls are public and any disclosed business decisions and strategies may be readily accessed by competitors — Invitation to Collude
