United States securities regulation

The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, but sometimes may also encompass listing requirements of exchanges like the New York Stock Exchange and rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

It was formed when the enforcement divisions of the National Association of Securities Dealers (NASD), FINRA, and the New York Stock Exchange merged into one organization.

Public company regulation is largely a disclosure-driven regime, but it has grown in recent years to the point that it has begun to dictate certain issues of corporate governance.

With only a few exemptions, every security offering is required to be registered with the SEC by filing a registration statement that includes issuer history, business competition and material risks, litigation information, previous experience of officers/directors, compensation of employees, an in-depth securities description, and other relevant information.

Criminal liability is determined by the United States attorney general, and intentional violation of the 1933 Act can result in five years in prison and a $10,000 fine.

In order to protect investors and maintain the integrity of securities exchanges, Section 16 of this law states that statutory insiders must disclose security ownership in their company 10 days prior and are required to report any following transactions within two days.

Rule 10b-5 allows people to sue fraudulent individuals directly responsible for an omission of important facts or intentional misstatements.

An economic depression followed the Wall Street Crash of 1929, which motivated President Franklin Roosevelt to create laws regulating securities transactions during his famous "first 100 Day” period of his New Deal.

[3] The statute requires a publicly traded company to register with the U.S. Securities and Exchange Commission (SEC).

The SEC does not approve or disapprove the issue of securities, but rather permits the filing statement to "become effective" if sufficient required detail is provided, including risk factors.

Initially, the 1934 Act applied only to stock exchanges and their listed companies, as the name implies.

In the late 1930s, it was amended to provide regulation of the over-the-counter (OTC) market (i.e., trades between individuals with no stock exchange involved).

In October 2000, the SEC issued the Regulation Fair Disclosure (Reg FD), which required publicly traded companies to disclose material information to all investors at the same time.

Some notable decisions include the 1988 decision by the Supreme Court of the United States in Basic Inc. v. Levinson, which allowed class action lawsuits under SEC Rule 10b-5 and the "fraud-on-the-market" theory, which resulted in an increase in securities class actions.

Efforts to comply with Rule 10b-5 and avoid lawsuits under 10b-5 have been responsible for a large amount of corporate disclosure.

The United States Supreme Court heard several cases to define exactly what encompassed a "security".

[13] This is a significant test because it determines whether or not certain transactions qualify for SEC registration and adherence to disclosure rules.

Vertical commonality refers to the investors and the promoter of the investments, and it evaluates the similarity of how each person is affected.

[3] Since the 1933 Act registration requirements can be very complex, costly, and take a lot of time to complete, many people look for alternative ways to sell securities.

[15] These costs are mainly from the 11th section of the Securities Act of 1933 requiring due diligence for companies going public.

[2] The following exemptions were made in order to foster capital by lowering cost of offerings for small companies.

[3] Rule 505 of Regulation D also allows for shorter disclosure forms when small offerings are made of no more than $5 million in a period of one year.

Regulation A provides an exemption to SEC registration of small market offerings of $5 million or less, and there is less of a disclosure requirement.

In some cases, the SEC will exempt offerings of $50 million or less since the amendment created by the JOBS Act.

Another requirement is that there must be current public information readily available about the company that issued the securities before the sale can happen.

Affiliated investors must follow a trading volume formula and carry out routine brokerage transactions in accordance to the SEC.

[22] Investors that are unaffiliated to the issuer company can sell all or a portion of the restricted securities after complying with the holding time.

An affiliated investor can only sell a limited number of restricted securities and has to comply with more complicated requirements.