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Securities Regulation
St. Johns University School of Law
Perino, Michael A.

Securities Regulation
Outline – Perino
Spring 2016
Part A: The Framework of Securities Regulation
I.                   Securities Transactions
a.      Securities laws exist because of the unique informational needs of investors.
                                                              i.      Securities in themselves are not inherently valuable, worth only comes from claims they entitle their owner to make upon the assets and earnings of the issuer.
b.      Thus, deciding whether to buy or sell a security requires reliable information and disclosure about the issuer such as:
                                                              i.      Financial condition of issuer
                                                            ii.      Products
                                                          iii.      Markets
                                                          iv.      Management
                                                            v.      Competitive climate.
1.      With this disclosure and data, investors can attempt a reasonable estimate of the present value of the bundle of rights ownership of a security confers.
c.       Securities are bought and sold in two principal settings:
                                                              i.      Issuer Transactions (Or Primary):
1.      These are transactions involving the sales of securities by the issuer to various investors.
a.       Capital-raising method
                                                                                                                                      i.      Sale can involve a private placement, and IPO, or a secondary public offering.
                                                                                                                                    ii.      The majority of primary (issuer) distributions are for debt, not equity.
b.      Issuer transactions are subject to the Securities Act of 1933
c.       Frequently to grow, issuer must grow ownership base or issue bonds.
                                                            ii.      Trading Transactions:
1.      In contrast to “primary distributions” (Issuer transactions involving public offering of securities), trading transactions involve the buying and selling of outstanding securities among investors.
a.       Can be privately negotiated or transacted on public market.
                                                                                                                                      i.      However, most trading transactions occur in the organized securities market (NYSE, NASDAQ, etc.)
II.                The Legal Framework of Securities Regulations
a.      In the face of the financial crisis of 1931, Congress takes action to regulate Wall Street.
                                                              i.      The goal of any federal securities regulation is “Disclosure not Merit”.
1.      The Investor should have proper relevant knowledge prior to decision to invest in a certain security.
                                                            ii.      “Information Asymmetry”
1.      “A situation in which one party in a transaction has more or superior information compared to another.”
a.       In context of securities law, the Issuer has much more information at disposal than any investor has access to.
2.      Key problem legislation was designed to address.
b.      Securities Act of 1933
                                                              i.      Disclosure, not merit regulation enacted in wake of financial crisis.
1.      Key concept in applying the disclosure regime is materiality.
2.      Not meant to be an insurance policy against market risk and not meant to tell people what they can and cannot buy.
                                                            ii.      33’ Act Registration Process:
1.      Preparation of registration statement seeks to assure full and fair disclosure in connection with public distribution of securities.
a.       Thorough description of the business and property of issuer.
b.      Capital needs, solvency, etc.
c.       Rights and privileges of ownership of security.
d.      Special risks (no pre-existing market, losses, etc.)
2.      Objective of registration statement and process is the production of a prospectus that includes most of the information in reg. statement.
3.      Prospectus guides investor and disseminates information to public markets.
4.      Underwriters selling efforts cannot commence until filing of reg. statement with SEC.
a.       No sale or delivery of securities until statement is effective.
                                                          iii.      Section 3:
1.       Exempts a large portion of securities mainly insurance and government.
                                                          iv.      Section 4:
1.      Exempts certain types of transactions
                                                            v.      Section 5: “Register or find an exemption from registration”
1.      Requires filing a registration statement with the SEC and disseminating a prospectus to investors.
                                                          vi.      Section 11:
1.      Provides private right of action for materially false statements in registration statement.
                                                        vii.      Section 12

orcing federal securities law and create rules.
2.      Chairman and 4 commissioners.
3.      Divisions:
a.       Corporate Finance.
b.      Enforcement
c.       Market Regulation
d.      Investment
e.       Management
f.       General Counsel
4.      Sources of SEC regulation and Guidance:
a.       Formal rules and regulations
b.      Releases
c.       No-action letters
d.      Informal guidance
e.       Speeches.
Part II: “The Definition of a Security”
I.                   What is a Security?
a.      Defining a security is the equivalent of subject matter jurisdiction in the context of securities regulation.
                                                              i.      Classifying an investment product as a security has a significant bearing on regulatory hurdles and disclosure requirements.
b.      Two Relevant Definitions of “Security”:
                                                              i.      §2(a)(1) of the Securities Act:
1.      (a) When used in this title, unless the context otherwise requires—
(1)   The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
a.       “Any interest commonly known as a security draws the most scrutiny.
b.      “Investment Contract” also of issue.