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New to Securities Law? Get up to Speed With the Financial Regulations

Securities law governs all investors, traders, and corporations offering securities. But if you’re just starting out with securities law, you may be confused about how it works and what laws affect your trading activity. You may have heard about the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2022, the Dodd-Frank Act of 2010, and the JOBS Act of 2012. However, many aren’t entirely sure of what these laws mean and how it affects them. Here’s a look at securities law, and why it’s important to be knowledgeable about these laws, especially if you deal with securities.

What is Securities Law

Securities law regulates investments such as stocks, bonds, commodities and various other financial products. Such regulations are designed to protect investors from fraud, misrepresentation and insider trading. To accomplish these goals, securities law has spawned a large number of regulations that govern nearly every aspect of an investment transaction.

Many securities laws also have criminal implications for individuals who willfully violate them. Any individual or company selling an investment in any jurisdiction must comply with relevant securities regulations in that jurisdiction. As such, there is no single body of U.S. securities law but rather a collection of federal and state regulations enacted by Congress and state legislatures.

Laws Governing Securities

This description seems straightforward, but it can get very tricky. There are many complicated rules that are difficult to follow, and it’s complicated by technical terms you may not be familiar with. First, you need to understand what a security is.

In the United States, a security may be anything from stocks and bonds to rights, debt securities, or derivatives on a company.

Three Main Categories of Securities

  1. Equity securities

Typically, equity refers to stock and a share of ownership in a company that’s held by the shareholder. Shareholders usually make money from dividends given by their equity securities. On the other hand, an equity security will change in value in accordance with the state of the markets, and the company’s finances or other indicators or events investors and speculators focus on.

  1. Debt securities

A debt security, unlike an equity security, is characterized by borrowed money and the selling of a security. There are many different types of bonds, which are debts created by governments, businesses, or private investors and traded to people to pay with money that includes an initial loan, a specified interest rate, and a maturity date (when the borrower will have paid off the original amount).

Examples of debt securities are bonds, bank notes, and Treasury notes. It is an agreement that two parties made and specified how much the debtor was borrowing and how it was to be paid back with a return on investment.

  1. Derivatives

A derivative is a slightly different type of security, since it has its value calculated based on the worth of a given asset that is then bought and repaid with a specific interest rate and maturity date already designated at the initial transaction.

Individuals selling derivatives do not need to have an ownership interest in the underlying asset. They may simply return a certain amount of cash to the buyer or offer a second derivative that has a contract between the parties that takes care of the obligation to provide an interest in the asset as soon as the option period expires.

A derivative is based on the value of commodities such as gas or precious metals like gold and silver. It can also be structured on currencies, interest rates, Treasury notes, bonds, and stocks.

securities act of 1933

The Securities Act of 1933

The Securities Act of 1933 was created in response to the stock market crash of 1929. Often referred to as the “truth in securities” law, the Securities Act of 1933 has two basic objectives[1]:

  1. Require that investors receive financial and other significant information concerning securities being offered for public sale.
  2. Prohibit deceit, misrepresentations, and other fraud in the sale of securities.

A primary means of accomplishing these goals is to disclose important financial information. This information enables investors, not the government, to make informed judgments about whether to purchase a company’s securities.

Due to legal requirements, the SEC requires the information provided to be accurate but doesn’t necessarily confirm it. Investors who purchase securities and sustain losses have crucial restoration rights if they can prove that there was inadequate or inaccurate disclosure of vital data.

Required Information For Registering Securities

Typically, securities in the United States must be registered. The registration forms that companies file give crucial information while minimizing the burden and expense of complying with the law. Typical registration forms ask for[1]:

  • A description of the company’s holdings and operations.
  • A description of the security available for sale.
  • Management information about the company.
  • Financially verified and reported to by accountants who are independent of the business.

Certain types of securities don’t need to be registered with the commission[1]. For example:

  • Prive offerings to a limited number of individuals or institutions.
  • Limited-size offerings.
  • Intrastate offerings.
  • Securities of municipal, state, and federal governments.

If small offerings don’t need to be registered, the costs of bringing their securities to the public will be lowered, allowing them to prosper and better raise capital.

The Securities Exchange Act of 1934

With this Act, Congress was able to empower the SEC with broad authority over all aspects of the securities industry. This includes the power to regulate firms in the securities industry including registration, transfer agents, and clearing agencies as well as the various securities exchanges including the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options. The Financial Industry Regulatory Authority (FINRA) is also a Self-Regulatory Organization (SRO).[2]

The Act also identifies and prohibits certain types of activities in the markets and gives the Commission disciplinary powers over people who work in the industry.

The Act also gives the SEC the authority to request periodic reports from companies with publicly traded securities.

The SEA established the Securities and Exchange Commission (SEC), which is the SEA’s regulatory arm. This SEC has the power to oversee stocks, bonds, and over-the-counter securities, in addition to regulating the conduct of financial professionals and market trades. This is beyond what they publish in their public statements and only based on what they reported to the SEC.[2]

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to help protect investors from fraudulent financial reporting by corporations.[3]

Also known as the SOX Act of 2002, it mandated strict reforms to existing securities regulations and imposed tough new penalties on lawbreakers.

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of corporate financial statements and led many to demand an overhaul of decades-old regulatory standards.[3]

dodd-frank act

Dodd-Frank Wall Street Reform and Consumer Protection Act

Signed into law by President Obama on July 21, 2010, Dodd-Frank Wall Street Reform and Consumer Protection Act’s stated goal was to reform and redefine the U.S. regulatory system in a number of ways, including but not limited to better-regulating consumer protection, controlling trading, providing new oversight for credit ratings, reforming regulations for financial products, changing how companies are governed, and requiring more transparency.[4]

Changes to The Dodd-Frank Act

In 2016, Donald Trump was elected President and he promised to repeal Dodd-Frank. Trump signed a new law in 2018 which stripped the Obama-era regulatory law of much of its force. Following the dissenters, the US Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which reduced some provisions of the Dodd-Frank Act. President Trump signed it into law on May 24, 2018.[5]

Due to the Dodd-Frank Wall Street Reform and Consumer Protection Act, major financial firms have to be monitored closely, since their collapse can seriously destabilize the US economy.

The Consumer Financial Protection Bureau is tasked with preventing predatory mortgage lending. The Volcker Rule makes banks limit speculative trading and ban the purchase of other financial companies. The SEC’s Office of Credit Ratings was charged with checking whether agencies provide valid and reliable credit ratings of the entities they evaluate.[4]

The Dodd-Frank Act updated and strengthened the existing whistleblower program mandated by the Sarbanes-Oxley Act.

jumpstart our business startups act JOBS act

The JOBS Act of 2012

In April of 2012, U.S. President Barack Obama signed a piece of legislation named the Jumpstart Our Business Startups (JOBS) Act. The legislation lowered regulations instituted by the Securities And Exchange Commission (SEC) on small businesses, lessening reporting and disclosure requirements. Furthermore, the JOBS Act allowed the advertising of securities offerings. It’s also easier to tap into crowdfunding and, therefore, is good for companies that don’t have access to it, meaning they won’t have to go through the SEC.[6]

Under the JOBS Act, for-profit corporations are more leniently scrutinized for information reporting, accountability, and advertisement purposes.[6]

The law is such that, as a company is less than $1 billion in revenue, they are able to disclose less information to investors.

Non-accredited investors are now allowed to invest in startups via crowdfunding and mini-IPOs.

The intent of the JOBS Act was to help restart the US small business sector and improve America’s employment prospects by boosting entrepreneurialism, helping existing businesses, and generating jobs.

Under the JOBS Act, businesses can tap funding while also heightening the risk of fraud and fraudsters deceiving investors.

Final Remarks: Why There is a Need for Securities Law

There are numerous reasons why there is a need for securities law. These laws exist to protect both investors and the markets, which in turn create investor confidence and healthy, functioning markets. If you’re considering entering the stock market or need to raise funding, whether you run a corporation or cryptocurrency, or you’re just looking for a review of the basics, it’s essential to understand these laws. Keep in mind, that these are not the only securities laws out there, and it’s crucial to conduct due diligence or seek legal help if you need it.

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Legal Favor

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Sources

Legal Favor is all about providing legal information in bite-sized chunks. Our staff uses reputable sources in order to support their work. These sources include: government documents and data, white papers, comments from industry experts, and other publishers when appropriate.

  1. Investor.gov. (n.d.). Registration under the Securities Act of 1933. Registration Under the Securities Act of 1933 | Investor.gov. Retrieved May 9, 2022, from https://www.investor.gov/introduction-investing/investing-basics/glossary/registration-under-securities-act-1933
  2. Blokhina, K. (Ed.). (2019). Securities exchange act of 1934. Legal Information Institute. Retrieved May 9, 2022, from https://www.law.cornell.edu/wex/securities_exchange_act_of_1934
  3. U.S. Congress (2002). H.R.3763 – Sarbanes-Oxley Act of 2002 107th Congress (2001-2002). Congress.gov. Retrieved May 9, 2022, from https://www.congress.gov/bill/107th-congress/house-bill/3763
  4. U.S. Congress. (2010). H.R.4173 – 111th congress (2009-2010): Dodd-Frank Wall Street Reform and Consumer Protection Act. U.S. Congress. Retrieved May 9, 2022, from https://www.congress.gov/bill/111th-congress/house-bill/4173/text
  5. U.S. Congress. (2018). S.2155 – 115th congress (2017-2018): Economic Growth, regulatory relief … U.S. Congress. Retrieved May 9, 2022, from https://www.congress.gov/bill/115th-congress/senate-bill/2155
  6. U.S. SEC. (2017, February 1). Spotlight on jumpstart our business startups (JOBS) act. U.S. Securities Exchange Commission. Retrieved May 9, 2022, from https://www.sec.gov/spotlight/jobs-act.shtml