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Securities Regulation
University of Kansas School of Law
Lovitch, Fred B.

Securities Regulation — Fall 2007
1. Public Distribution of Securities
a. Seven Incentives to Regulate the Public Markets — (1) consumer protection; (2) informational needs of investors; (3) previously inadequate incentives to disclose; (4) allocative efficiency (ensure accuracy of securities prices); (5) corporate governance/“agency costs”; (6) economic growth, innovation, and access to capital; and (7) maintaining a competitive market.
b. Consequences of a Securities Transaction — (1) mandatory disclosure system becomes applicable; (2) stiff federal anti-fraud rules apply; and (3) financial intermediaries become subject to regulation by SEC.
c. Functions of Financial Markets — (1) match lenders and investors with businesses seeking financing; (2) permit investors to reduce exposure to risk by, e.g., diversification and hedging; and (3) provide liquidity, i.e., assure that one investor’s trade will not affect the market price.
d. Equity Markets
i. Primary vs. Secondary Markets
1. Primary — sales of securities by issuers to investors.
2. Secondary — trading transactions between investors.
ii. Venture Capital Markets — venture capitalists buy large blocks of stock and negotiate for certain control rights, e.g., representation on board of directors and right to veto certain transactions. VC investors usually don’t acquire absolute control; their goal is to profit alongside the company founders in an IPO. VC investors buy convertible preferred stock. If the company succeeds, the stock is converted to common stock; if the company fails, the VC investors get priority on dissolution funds.
iii. Public Equity Market — two basic kinds of secondary markets for equity securities:
1. Exchange Market — auction markets in which a specialist matches incoming buy and sell orders and intervenes itself only as a buyer or seller of last resort. See, e.g., New York Stock Exchange.
2. Dealer Market — dealers compete for customers’ buy and sell orders. Until recently, every transaction was between a public customer and a dealer. See, e.g., NASDAQ.
e. Regulatory Framework — authority for regulation and oversight of securities markets is primarily shared among three levels of regulators:
i. Securities and Exchange Commission (SEC) — federal agency established by ’34 Act.
ii. Nat’l Assoc. of Securities Dealers

ate material that might condition a market prior to the actual offer of securities for public sale pursuant to a registration statement.
vi. Gun Jumping — companies need to be careful of “jumping the gun”, or arousing interest in a security prior to the appropriate time. If a company jumps the gun, the SEC can require a cooling down period to counteract the arousal of any public interest from the improper public announcement.
1. Rule 135 is the SEC’s checklist for what can be disclosed without gun jumping. Limited to purely factual information. Precludes projections, forecasts, opinions, etc. No bright line rule. Must include legend stating that notice does not constitute an offer for sale. Cannot name underwriter (constrains downstream marketing efforts).
Rule 135 is an exclusive list of allowed information; assigning a value to offered shares is not allowed under Rule 135 and thus constitutes an offer to sell. Chris-Craft.