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Securities Regulation
University of North Carolina School of Law
Hazen, Thomas Lee

Securities Regulation – Professor Thomas Hazen – Spring 2012
I.       Introduction
A.     What are the various securities laws?
1.      State securities laws
a.       1911 was the first, in Kansas
b.      Nickname is “blue sky laws”
i.        The laws were enacted by the Kansas legislature to protect its residents from eastern industrialists trying to sell them “a piece of the blue sky”
c.       Every state has some form
d.      Used to impose “merit regulations”
i.        State securities commissioner had authority/obligation to look at investment and decide if it is good enough for the state’s residents
(1)   Analyze the merit/fairness of the offer
(2)   Had to qualify for registration
2.      Federal laws
a.       Congress decided NOT to take a merit approach
i.        Adopted a “disclosure” approach
(1)   “Sunlight is the best disinfectant”
(2)   Ensure adequate information is available to investors so that they can make their own choice, to invest wisely or otherwise
ii.      The role of the SEC is not to determine whether the investments are good or bad; they are only concerned with whether the disclosures are adequate
b.      Securities Act of 1933 (“Securities Act” or “’33 Act”)
i.        Addressed the public offerings of securities (narrow problem)
(1)   IPO’s
(2)   Subsequent primary public offerings
(a)    Additional offerings
(b)   By the same company!
(3)   Secondary offerings
(a)    When a shareholder or group of shareholders sell a large amount of securities into the market and triggers the registration requirements
(i)     For the resale
ii.      *Only applies when new securities are being offered or sold!
iii.    § 5
(1)   Unlawful to sell or offer securities unless a registration statement has been filed
(2)   Unlawful to sell unless it has become effective
iv.    §§ 6, 7
(1)   Establish what the registration requirements are
(2)   In a registered public offering, will be a prospectus:
(a)    Written document with mandated disclosures
(b)   Tells investors everything they reasonably would want to know about the company, offering, company’s principals and officers, directors, major shareholders, affiliated companies, etc.
v.      §§ 3, 4
(1)   Exemptions from requirements
vi.    § 28
vii.  §§ 11, 12
(1)   Liability provisions
viii.§ 10
(1)   Prospectus requirements
ix.    § 2
(1)   Definitions
x.      Preemption provisions
(1)   NSMIA takes states out of registration requirements
(2)   Preempts states from doing anything other than having a notice requirement
(3)   Takes states out of the business of registering public offerings
(a)    Except for offerings confined to the borders of one state
c.       Securities Exchange Act of 1934 (“Exchange Act” or “’34 Act”)
i.        Created the Securities & Exchange Commission
(1)   Before its creation, the FTC administered the securities laws
ii.      Applicable to:
(1)   Public companies
(a)    As defined by § 12
(2)   Any company with a ’33 Act registration
iii.    Has periodic reporting requirements
(1)   Q’s, K’s
iv.    Any proxy rules
v.      Insider trading rules
vi.    General anti-fraud rule of 10b-5
(1)   Basis of most private securities litigation
vii.  Self-regulation
(1)   SEC has oversight of securities professionals
(a)    Exchanges
(i)     NYSE
(ii)   NASDAQ
(b)   Self-Regulatory Organizations (SRO’s)
(i)     NASD used to be largest, but when it went public, sectioned off NASDR as an SRO (and NYSE Regulatory Authority as an SRO)
(ii)   NASDR and NYSERA merged into FINRA
Þ     Is not a regulatory body
Þ     Has members (broker-dealers must be members)
Þ     Polices its members
Þ     When it wants to adopt rules, it sends them to the SEC for approval
Þ     So is a two-tiered system of regulation
(2)   Broker-dealers must register with SEC
(3)   SEC regulates clearing agencies
viii.Contains tender offer provisions
d.      1935 Public Utility Holding Company Act (PUHCA)
i.        Repealed in late 1950’s
ii.      Regulatory provisions now are carried out by FERC
e.       1939 Trust Indenture Act
i.        Addresses public sale of private, corporate debt securities
(1)   Corporate bonds
ii.      Requires certain substantive provisions for publicly traded corporate bonds
(1)   In addition to registration that could be required under ’33 Act!
iii.    ’34 Act does regulate the dealers of these bonds
f.       Investment Company Act of 1940
i.        Regulates investment companies – whose business it is to invest in other companies
(1)   Mutual fund
(2)   Money market fund
(a)    Invest in supposedly high-value, low-risk government and corporate obligations to gain a better yield
g.       Investment Advisors Act of 1940
i.        Applies to
(1)   Investment companies’ management
(2)   Someone who sells his investment advice services to investors generally
ii.      Stock brokers do NOT have to register under this, so long as their advice is merely incidental to brokerage activities
(1)   Neither do bank lenders, etc.
iii.    Financial planners does NOT have to register so long as he does not make specific recommendations as to securities
(1)   Could just say put 30% of your funds in securities, and let your stock broker or IA tell you where to put it
h.      Securities Investor Protection Act (SIPA)
i.        Created the SIPC
(1)   Basically the FDIC of the securities industry
(2)   Ensures against broker-dealers going insolvent
ii.      SEC has some authority under this
i.        Williams Act of 1968
i.        Tender offers
ii.      Probably will not get to this
j.        Sarbanes-Oxley Act
i.        Very important amendments to securities laws
B.     Securities & Exchange Commission
1.      Has just about every power that a federal agency could have
a.       BUT does not have the power to adjudicate disputes between private parties
i.        Cf. CFTC, which has reparations proceedings
b.      Division of Enforcement
i.        Can investigate wrong-doing

d as an investor project
ii.      Question: is the offering of units of a citrus grove development, coupled with a contract for cultivating, marketing and remitting the net proceeds to the investor, a security under § 2(1)?
iii.    Practically, investors had no choice about using Howey-in-the-Hills
(1)   Investors had no right to travel to their plot (no implied easement), so if their plot was in the middle, they couldn’t get to it anyway
(2)   Even if they had access, the economies of scale made it such that no investor could compete, because Howey-in-the-Hills had most of the contracts
(3)   Most investors had no experience in or equipment for cultivating oranges anyway
iv.    These groves were marketed to out-of-towners, not to local Floridians
(1)   Solidifies that these are for investment purposes only; individuals are not going drive down just to pick an orange
(2)   Also shows that these investors needed protection – not knowledgeable in harvesting oranges
(a)    Consider the purpose of the Securities Act
v.      The legal AND economic realities were that investors would purchase the service contract
vi.    Many of these cases come out of managed commodities
(1)   Give broker the discretion to make investments on your behalf
(2)   If the broker is operating a commodity pool, that is a security!
(a)    Modified BOTH by SEC and CFTC (under Commodities Act)
vii.  Court held it WAS an investment contract, and because it was not registered, violated securities laws
(1)   Investment of money
(a)    Money is anything of value
(b)   International Bhd. Of Teamsters v. Daniel (US 1979) page 30 – says pension plan does constitute an investment of money
(i)     Employee compensation plan where employee receives stock in partial exchange for services (it is compulsory, but employees pay nothing to the plan themselves)
(ii)   Just because the employee works here and in exchange receives this compensation plan, so in a very abstract sense he “exchanges” part of his labor for these possible benefits, this does not make it an investment for the future
Þ     He is selling his labor to make a livelihood, not as an investment
(iii) Court finds this is NOT  security
(iv) NOTE: it is an involuntary plan here; employees do not choose to enter into it
Þ     Not the only reason this is not a security here (see below), but an optional employee plan is much more likely to be a security