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Securities Regulation
University of Kentucky School of Law
Campbell, Rutheford "Biff"


I. INTRODUCTION – Underwriting, The Registration Process, State Blue Sky Laws

A) Why do we regulate securities?

1) Ability to find investment information is much more limited than other goods

2) Market confidence is vital to the economy

B) Efficient Market Hypothesis:

1. Meaning: The market is efficient where prices reflect all publicly available information.

2. Semi-Strong Form: security prices reflect all publicly available information

3. Noise: pricing influences not associated with rational expectations about asset value

C) Sources of Financing

1) Private: borrow money from a bank, etc.

2) Public

a) CEO does himself (very difficult)

b) Hire investment bank (underwriter) – 90% of the time

D) Underwriters

1) Criteria underwriters use in deciding to represent client: is the company seasoned; is it an IPO; the size of the deal (need low transaction costs); profit potential; possibility of long-term client

2) Participate in 2 ways

a) Best Efforts: broker-dealers do not purchase the securities from the issuer but instead agree for a fee to use their best efforts to sell the securities on behalf of the issuer at the offering price.

1. Issuer bears risk of loss

b) Firm Commitment: one or more investment banking firms agree to purchase the securities from the issuer for resale to the public at a specified public offering price.

1. Underwriter bears risk of loss

3) Firm Commitment: typically in a firm commitment, investment banking firms organize an underwriting syndicate. The syndicate is managed by the managing underwriter who, on behalf of the syndicate, executes with the issuer an “underwriting agreement”.

a) Underwriting Agreement: spells out the terms of the offering and the amount of securities that each syndicate member is committed to buy or underwrite. The underwriter wants the issuer to make warranties, representations, etc. in the agreement in order to limit their liability. This is filed as an exhibit to the RS.

b) The syndicate members also execute an “agreement among underwriters” that establishes the obligations of each member. It typically grants the managing underwriter broad discretionary authority to conduct the offering. The dealers are not part of the underwriting syndicate, and therefore are not in privity of contract with the issuer.

C) THE FEDERAL SECURITIES LAWS: In addition to being subject to the federal securities laws, an company or person may be subject to state blue sky laws and the rules of self-regulatory organizations (exchanges).

1) The Securities Act of 1933 [The Truth in Securities Act]: provide investors with adequate information upon which to base their decisions to buy and sell securities

a) PURPOSE [Section 2(b)]: Whenever the Commission is engaged in rulemaking and is required to consider whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

b) RULE [Section 5]: absent an applicable exemption, prohibits the offer and sale of securities unless a registration statement has been filed with the SEC. It further requires the delivery of a prospectus to purchasers as well as offerees.

1. Objectives: informing all those involved in distributing the registered security of all material facts bearing on the issuer and the security. Moreover, information, once made public, is within the reach of all sophisticated market participants, so that any secondary market in which the registered security is traded will be equally informed by information contained in the registration statement and prospectus.

2. Section 3 exempts securities (because of the nature of security)

3. Section 4 exempts transactions

4. These are registration exemptions, and do not exempt from antifraud provisions


1. Section 7: information required in RS

2. Section 10: information required in prospectus


1. Section 11: provides a private right of action for investors who have purchased securities offered pursuant to a materially misleading registration statement.

2. Section 12(a)(1): imposes civil liability on persons who sell securities in violation of section 5’s registration and prospectus requirements.

3. Section 12(a)(2): imposes civil liability on persons who sell securities using materially misleading statements.

3. Section 17: embodies general antifraud proscriptions in connections with the offer or sale of securities.

i. No private right of action but imposes criminal penalties in actions brought by the SEC and Department of Justice

2) The Securities Exchange Act of 1934: while the 33 Act is concerned primarily with the distribution of securities, the 34 Act is aimed at correcting trading abuses in outstanding securities, both on exchanges and over the counter markets. The 34 Act created the SEC to deal with a laundry list of problems.

a) Jurisdictional Basis:

1. Regulation triggered by use of an instrumentality of interstate commerce.

– No offers or sales

– Securities must be accomp./ preceded by 10a

B) THE PREFILING PERIOD (no offers, no sales, no deliveries) – public policy of limited activity relates to aim of 33 Act to provide full disclosure so investors are informed and therefore protected in making their decisions.

1) Events occurring at this time

a) A series of documents precedes any public offering of securities. In combination they provide a contractual web that binds the underwriting syndicate and the issuer together.

1. Letter of Intent: represents the culmination of the preliminary negotiations and tentative understandings between the managing underwriter and the issuer.

i. It is a nonbinding “agreement” as to the sale, but provides for fees that must be paid if there is a busted agreement

2. Agreement among the underwriters: usually signed during the waiting period,

3. Underwriting Agreement: never signed at this time

b) The Registration Statement: it can take up to 2 months to complete, in which cost become very high.

1. RS must comply with the appropriate “S” form.

i. “S1” is for smaller, less seasoned issuer

ii. “S3” for seasoned companies.

a. Registration Requirements: US Company and 34 Act Company

b. Transaction Requirements: Primary offering and $75 million float (amount of equity held by non-registrants)

c. Incorporation by reference items in S-K. This is for companies that have already made filings with the SEC, in that they are allowed to direct the investor to these items referencing their location.

2. Rule 473 provides that a delaying amendment may be filed waiving the effective date.

3) §5(c) prohibits any offer to sell or offer to buy prior to the filing of the registration statement.

a) Offer [§2(a)(3)] – includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.