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Securities Regulation
University of Connecticut School of Law
McCoy, Patricia A.

We will be primarily concerned with two principal settings….
1)           Issuer transactions
2)           Trading transactions
Issuer Transactions
These involve the sales of securites by an ISSUER to investors. This is the means by which business raise capital to develop etc.
·         The most expedient manner of doing this is through private placement of securities…. This means selling securities to a select number of investors
o   Sometimes it is possible to do this by approaching a few select investors. However, sometimes this doesn’t raise enough cash and they then have to buy securities through a large number of diverse investors. This is done through an IPO.
Trading Transactions
This is the purchase and sale of outstanding sales among investors.
·         The initial public offering is the primary distribution
·         This resale of the stocks is a secondary sale.
Federal Securities Laws….
The Securities Act of 1933: The great depression led to an outcry for a mandatory disclosure system. Therefore, this act was somewhat intended to bring honesty and integrity back to the sale of stocks. “Sunlight is said tot be the best of disinfectants: Electric light the most efficient policeman.” – Justice Bandeis.
The 33 Act requires the preparation of a registration statement to ensure full and fair disclosure in connection with the public distribution of securities.
The Act is also extremely paternalistic towards investors. It should be noted that underwriters’ selling efforts cannot commence until the registration statement has been filed with the SEC, and NO sales or deliveries of securities may occur until after the registration statement is effective.
The Securities Exchange Act of 1934: Note that the Securities Act specifically empowers the FTC to discharge a spcific and well defined task: The registration of public offerings of securities not otherwise exempt from the Act.
The Exchange Act however is more intended to address the problems and violations that are inherent in the trading of securities. Thus, the Exchange Act’s concern is trading markets and their participants (whereas the 33 Act is more concerned with primary distributions) Note some history; the Sec. Act 33’ was passed with little opposition. However, traders got wise to the Exchange Act and thus the final product is somewhat compromised since they exerted significant influence and pressure. 
Some Important Aspects of the Exch. Act:
§ Continuous disclosure requirements
§ Self Regulatory Organizations (SROs): 
§ Anti fraud and anti manipulation protections
Sarbanes Oxley Act 2002: Prompted by the scandals of the late 90s (ie Enron and WorldCom) this set forth broad prescriptions for corporate governance, authorized the SEC to develop rules for professional conduct for lawyers, and regulates areas that have always been the province of states, such as loans to officers and directors.
The Investment Company Act: Investment companies are companies formed for the purpose of buying, selling, and holding a portfolio of securities for investment, rather than for control purposes. (ie money market funds and mutual funds)
This act regulates the independence of the company’s board of directors, and requires annual review of any management contract between an IC and its investment advisor (one who is engaged in the business of rendering investment advise to others for compensation.
Structure and Function of the SEC
There are four principal divisions…
·         Division of Corporate Finance: This deals with disclosure requirements through a review of reg. statements for pub offerings and annual reports.
·         Division of Market Regulation: This oversees secondary trading markets
·         Division of Investment Management: This oversees administration of the Investment Company Act etc.
·         Enforcement Division: This is basically the prosecution unit (note that the Justice Department actually prosecutes crimes.)
Blue Sky Laws: These are state securities laws that serve as much of the basis for modern federal securities law.
The Structure of Trading Markets
There are three major distinct parts of the US Securities Market…
1)           The over the counter market…. The National Association of Securities Dealers Automated Quotation… otherwise known as NASDAQ
2) The rest of the over the counter market
2)           Exchanges (the most famous being NYSE.. note that different exchanges have different requirements…. Some, like the NYSE being more rigorous than others.
Fiber optics and the satellite now allow money to move quickly throughout the world, so that raising capital and investing can happen anywhere and in fact happen everywhere. Some countries markets, like the US, will be more attractive than others.
Previously, individuals owned 90 percent of American equities. However now, large institutions, like insurance companies, have bought up approximately one half of all American equities.
Derivative Markets
A derivative is a financial instrument whose value depends on the price of some underlying instrument.
·         The most common derivative is the Option
An Option is a right to buy or sell securities from or to another at some predetermined price and date.
·         Another type is Futures Contract: This calls for the future delivery of some commodity at a fixed price and date…. These are governed by the Commodities Futures Trading Commission.
This describes the theory of the relationship between the disclosure of financially significant information and changes in securities market prices.
How to Conceptualize: If future payouts of a corporation to its shareholders could be predicted with certain

t of all shares must be sold during a specific period of time before the offering can close: proceeds of all sales are placed in escrow until the minimum number of shares is sold. If the deal falls through escrow is returned to the purchasers.
ú Exch Act Rule 15c2-4: It is fraudulent, deceptive or manipulative to close out an offering before satisfying its stated conditions.
3)           All or none: All securities must be sold before the deal is completed
·         In a Firm Commitment Under writing: One or more investment banking firms agree to purchase the securities from the issuer for resale to the public at a specified offering price. This group of banks is called an underwriting syndicate.
o   Syndicate members have an agreement among underwriters establishing the obligations of each member
Underwriters and selected dealers agree to sell the security to the public at a fixed offering price. The difference between this price and the amount received by the issuer is called “the gross spread.” This spread covers management costs etc.
Note that often times there is a difference in the after market price and the original price of the IPO…. This is underpricing, and is problematic because the sale value should reflect the highest amount possible (since the issuer will is selling the IPO to raise capital)
·         Typically, IPO is a good short term investment, but over time will gradually decline
The central objective of the Securities Act is the preparation of a registration statement for securities offered to the public.
Section 7 of the act requires disclosure of all information specified in Schedule A… the SEC is then given broad power to determine what information this should include (since congress recognized its own limitations)
There are roughly 4 categories of information that must be included in a regisration statement
1)                           Info bearing on the registrant
2)                           Info about the distribution and use of its proceeds
3)                           Description of the securities of the registrant
4) Various exhibits and undertakings that must be filed as part of the regisration statement
o   Note however that only the first three categories need to be included in the prospectus.
First: Information with Respect to the Registrant