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Securities Regulation
Temple University School of Law
Huang, Peter H.

Securities Regulation Outline


Two Statues govern this area of law:

(1) Securities Act of 1933

· enacted in response to ‘29 crash
· policy of regulation through disclosure
· requires registration of securities

(2) Securities Exchange Act of 1934

· deals with regulation of security exchanges
· once you have disclosed under the ’33 Act you have continuing regulation under the ’34 Act
· act seeks to insure fair and orderly securities markets by prohibiting certain types of activities and by setting forth rules regarding the operation of the markets and participants

Securities and Exchange Commission (SEC)

· administers federal securities law and issue rules and regulations to provide protection for investors
· independent commission
· 5 members serve staggered five year terms
· no more than 3 members of the same party

PURPOSE Registration is intended to provide adequate and accurate disclosure of material facts concerning the company and the securities it proposes to sell.

Division of Corporate Finance (of the SEC)

· ensures disclosure requirements are met (executive role)
· interprets security laws (judicial role)
· drafts rules and regulations (legislative role)

In administering the securities statutes, the Commission issues a large number of rules and pronouncements:

Releases: a type of pronouncement in which the Commission interprets rules and statutes that have been brought to their attention, do not have force of law but are given that effect as a practical matter

No-action letter: is only binding upon the person to whom the letter is issued – if action recommended is taken then the SEC will recommend to the Commission that no action be taken – however this does not preclude someone else in Commission from taking action

Note: one reason for the ’29 crash was that shares were overvalued because investors did not have a lot of info on the companies – this is why the emphasis of the ’33 Act is on disclosure

Financial info is the big component of the disclosure requirement. The info is disclosed through a registration statement. The most prominent form is the S-1. The prospectus is contained in the registration statement.


“Going public” is the transformation of a closely held corporation to one in which the general public has a proprietary interest

A company goes public by selling its securities (primary offering) or by having present shareholders sell their securities to the public (secondary offering)

Both offerings are accomplished by means of a registration statement filed with the SEC pursuant to the ‘33 Act

Investment banking: term used to encompass such functions as acting as underwriter, dealer, broker, or market maker (see text p.29)

Underwriting: the function of helping a company, or one or more of its major shareholders, sell securities to the public through an offering under the Securities Act

Three types of underwriting: (text p.28)

(1) Firm Commitment underwriting: underwriter purchase securities from a company at an agreed price and then attempts to resell securities to the public.
(2) Best efforts underwriting: underwriter agrees to use its best efforts to sell an agreed amount of securities to the public
(3) Standby underwriting: company directly offers its existing security holders the right to purchase additional securities at a given price

If a company decides to go public, the management goes to investment bankers who agree to underwrite the stock offering – that is to buy all the public shares at a set price and resell them to the general public, hopefully at a profit. The underwriters help the company prepare a prospectus, a detailed analysis of the companies financial history, its products and services, and management’s background and experience

The primary reason for going public is too obtain new capital. Other reasons include:
· Obtaining negotiability for securities
· Obtaining future capital on more favorable terms
· Prestige

Disadvantages of going public include:
· Expenses
· Additional disclosure obligations
· Market expectations may deter a company from making long-term investment decisions
· Loss of control
· Higher estate tax valuation

Some Definitions:

Dealer: refers to a firm when it buys and sells securities for its own account

Broker: refers to a firm when it buys and sells as an intermediary for a customer

Secondary market: market in which securities that have been bought and sold are traded – brokers and dealers make the trades in this market

Transfer agents: individuals who keep track of the stock ownership record – who owns what and how much


Pre-Filing Period

There are three time periods in an offering:

(1) pre-filing period – period before a registration statement is filed

(2) the waiting period – the period after filing but before the registration statement becomes effective

(3) post-effective period – the period after effectiveness

These periods are important because you can’t do publicity by virtue of a press release or other means – you h

awful to transmit a prospectus relating to any security unless the prospectus meets the requirements of section 10

§2(a)(10) defines a prospectus as a written offer or confirmation of sale – specifically it means “any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security

Key language: written communication or communication by radio or television

Moreover, a prospectus shall contain the information contained in the registration statement (however, some info is unknown at the time of filing and hence a preliminary prospectus may contain omissions or contents may later be changed)

In SUM: during the waiting period, no offer, in writing or by radio or television, may be made except by a section 10 prospectus or a communication meeting the requirements of exception (b) to sec. 2(a)(10). The sections prohibit confirmations of sale. The prohibition on oral offers is lifted.

So can have: ORALS OFFERS

Rule 134: you can have a tombstone as long as it meets the requirements of Rule 134

You can’t deliver a prospectus unless it meets the requirements of §10 (which basically requires it to contain the info in the registration statement)

During the waiting period, underwriters try to sell securities and give out prospectuses but you cannot have a contract for a sale

§5(b)(2) It shall be unlawful for any person, directly or indirectly– to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 10 of this title.

What is a sale?

2(a)(3) defines sale as “every contract of sale or disposition of a security or interest in a security, for value”

Ordinary offers should not be made in the waiting period, rather offerors should condition their offers in such a way that they cannot be accepted until the registration statement is effective – so