Securities

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Securities in the United States became much more regulated after the stock market crash in 1929, mostly due to two acts: the Securities Act of 1933 and the Securities Exchange Act of 1934. The Security Exchange Commission is an administrative agency which regulates securities sales under these two acts.The Securities Act of 1933 regulates the initial sales of securities, which are contracts of investment which show that the owner has participated in a business transaction. The definition of securities is very broad, and in order to determine if something is in fact a security, the Howey test is used; it states that an investment is a security if its investor expects to earn profits due to the efforts of another person. Under the 1933 Act, a person who wishes to sell securities, unless there is an exemption, must file a registration statement and prospectus, a document that shareholders are required to have. The SEC then reviews the materials using the full-disclosure standard, which requires that certain information is present. It does not determine if the investment is good; it just ensures that the information is accurate and fair. Before the SEC approves a security, there can be no selling of securities. However, the seller can issue a tombstone ad or a red herring prospectus informing others of the upcoming sale, but they must make it clear that the sale is only forthcoming.Once the securities are on the market, the Securities Exchange Act of 1934 regulates them. It states that these securities must be registered and that those with more than $10 million in assets and 500 or more shareholders must register the equity stock. These companies must also file a quarterly financial report and an annual report at the end of the year. The act also regulates the propriety of sales of securities to ensure that all buyers and sellers can access the same information. Withholding of information is considered fraud, and one can be found guilty of it if information is misstated or omitted. The use of insider information when buying or selling is stock is not allowed. In addition, officers, directors, and 10 percent shareholders must file reports during their holdings of stock, and if they sell and purchase stock within a 6 month period, they are required to give these short-swing profits to the company. The act also requires that prior filing and demonstration of shareholder interests be present when soliciting proxies.There are also states? securities laws to regulate securities trade even further, called blue sky laws. Issuers must follow both federal and state laws unless the case falls under a certain exemption. For the purposes of registration, there are two types of blue sky laws. One type follows the same standards as the Securities Exchange Commission for full disclose, and the other follows a merit review standard where the agency which enforces the securities examines the offering and applies a ?fair, just, and equitable? standard. States have exemption from registration, similar to federal exemptions. State agencies also control securities brokers? and agents? licensing. There is an exemption from federal laws for intrastate offerings since the Commerce Clause does not permit the federal government to regulate matters that are fully within a state. In this case, the investor would only have to follow the blue sky laws concerning registration.The Securities Exchange Act of 1934 also created The Securities Exchange Commission to regulate the sale of securities. It announces the rules which give the registration requirements of securities and has the ability to issue injunctions, set up criminal proceedings, and enforce rules. Recently, during Hurricane Katrina, it set up emergency relief to investors, companies, and securities affected by the hurricane. It created extensions of filing deadlines, suspended requirements to deliver documents to areas affected by the hurricane, and enabled broker-dealers to provide access to accounts held at offices that were no longer operable. It also provided telephone and e-mail hotlines to answer questions. Such assistance worked to keep people from worrying about filing governmental documents during such a time.Securities regulation is an important part of business, since it keeps the sometimes conflicting interests of business and investors in balance. The stock market crash of 1929 showed how crucial such regulation could be, and led to two major acts which keep securities in order. Without such acts, shareholders would be less protected and the lack of regulation in the securities market could lead to chaos.