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Securities Regulation
Southern Illinois University School of Law
Koehler, Michael

Securities Regulation – Prof. Koehler

· Course overview:

o Business has a bright idea for a new product, or new service

o To best exploit the idea, product or service that business needs $$$

o One way to raise money is to offer ownership in the business (security)

o When an ownership interest is deemed a security there are a variety of legal and regulatory implications

o This course is about those legal and regulatory implications

o Understanding why securities are regulated

§ Understanding the dual foundations of the securities laws – disclosure of material info.

· Learning objective

o Understanding the legal rules and regulations governing the public offering of securities

§ Securities Act (’33 Act)

§ JOBS Act

o Understanding the legal rules and regulations governing issuers after an IPO

o Engaging in critical analysis of disclosure obligations

o Understanding the role of various securities market participants

o Understanding the public and private enforcement of securities law

o Understanding the real world events that motivated Congress to enact various securities laws and the goals of securities laws

§ Enron and related scandals

· Building Blocks

o Capital markets

§ Primary and secondary market transactions

o Types of securities

§ Common shares, preferred shares, bonds

o Securities laws

§ ’33 Act

§ ’34 Act


§ Dodd-Frank

§ JOBS Act

o Role of SEC

· Purpose of the Securities Laws

o To protect investors by encouraging full disclosure and deterring fraud

o “The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”

· Capital Markets

o Primary transaction

§ Issuer offers and sells its own securities to investors and money goes into corporate treasury

· Most often in IPOs, but not always

o Secondary transaction

§ Issuer does not participate in the transaction, the transaction is between investors

o Market

§ New York Stock Exchange

§ NASDAQ Stock Exchange

§ Exchange in other countries

o Types of Securities

§ Common shares

§ Preferred shares

§ Bonds

§ Right to share in profits

§ Voting power/control

§ Right to assets upon liquidation

o Common shares

§ Most common type of security

§ If the board of directors of the company declares a dividend, legally entitled to a pro-rata share

§ Certain voting rights including board of directors

§ Weakest claim to assets in the event of liquidation

o Preferred Shares

§ Wide range of attributes negotiated between the issuer and investor

§ Rights to profits will generally be negotiated

§ Generally, no voting rights

§ Preferred position compared to common stock upon liquidation

o Bonds

§ Issuer owes bondholders a fixed principal amount plus periodic interest payments until the maturity date of the bond

§ Wide range of attributes negotiated between the issuer and investor

§ No ownership interest

§ No right to vote or control

§ Priority compared to equity securities upon liquidation

o ’33 Act

§ Primary market transactions

· Disclosure via registration statement and prospectus

· Regulates the time period prior to the offering

· Fraud provisions

o ’34 Act

§ Secondary market transactions as well as market professionals and institutions that facilitate such transactions

· Disclosure via required and periodic filings

· Fraud provisions

o SOX (2002)

§ Increased regulation of various financial professionals

§ Enhanced corporate responsibility and financial disclosures

· Executive certifications

· Assessment of internal controls

§ Whistleblower retaliation provisions

o Dodd-Frank (2010)

§ Disclosure provisions impacting certain industries

§ Whistleblower bounty provisions

§ Shareholder say on pay

o JOBS Act

§ Relaxation of certain registration and disclosure requirements (both ’33 Act and ’34 Act) for “emerging growth companies”

o Role of SEC

§ An administrative agency that develops rules and regulations to interpret and implement the securities laws

§ A civil law enforcement agency that enforces the securities laws.

o Definition of a Security

§ While a boring topic, it is an important topic

§ IF an ownership interest, financial interest, etc. is deemed a security, THEN the securities laws apply.

· Is the field goal good here?

§ In many cases, there is no dispute that an ownership interest, financial interest, etc. is a security

§ But in many other cases there is a gray area

§ Statutory definitions of security

· Investment Contract is included in the definition

· But investment contract is not otherwise defined

o Court comes up with factors to determin

romises of variable returns for purposes of the test

§ “Investments pitched as low-risk are particularly attractive to individuals more vulnerable to investment fraud, including older and less sophisticated investors”

o SEC v. Merchant Capital

§ Solely from the efforts of the promoter or a third party

§ Should not be interpreted to narrowly; an interest does not fall outside the definition of investment contract merely because the purchaser has some nominal involvement in the operation of the business

§ The focus should be on the dependency of the investor on the entrepreneurial or managerial skills of the promoter or other party

§ A general partnership interest may qualify as an investment contract if a partner in fact retains little ability to control the profitability of the investment

· Power

· Experience and knowledge

· Dependent on some unique entrepreneurial or managerial ability of the promoter or manager

o Various forms of business organizations

§ Partnerships

§ Franchises

o NOTES – Reves v. Ernst & Young

§ Because the definition of security includes note, there is a presumption that every note is a security

§ Presumption can be rebutted if the note is to facilitate the purchase and sale of a minor asset or consumer good, to correct the seller’s cash flow difficulties, or to advance some other commercial or consumer transaction


· When an ownership interest is deemed a security there are a variety of legal and regulatory implications

· The def. of a security is flexible

· The goal of the securities laws is to protect investors from a wide variety of schemes devised by those who seek the use of money of others on the promise of profits

o Unless an exemption applies

§ There are certain securities exempt from the ’33 Act registration requirements

§ In other words, some business organizations can offer and sell securities without having to register with the SEC