Ownership of a Corporation (part C)
by
Charles Lamson
Laws Regulating Stock Sales
In order to protect investors and corporations, a number of laws have been enacted. These laws seek to prevent fraudulent activities and protect investors from loss as a result of stockbrokers becoming insolvent.
Blue-Sky Laws
The purpose of so-called blue-sky laws is to prevent fraud through the sale of worthless stocks and bonds. State blue-sky laws apply only to intrastate transactions.
These security laws vary from state to state. Some prescribe criminal penalties for engaging in prohibited transactions. Others require that dealers be licensed and that a state commission approves sale of securities before a corporation offers them to the public.
Securities Act of 1933
Because the state blue sky laws apply only to intrastate sales of securities, in 1933 Congress passed the federal Securities Act to regulate the sale of securities in interstate commerce. Any corporation offering a new issue of securities for sale to the public must register it with the SEC and issue a prospectus, which is a document containing specified information about the stock offering and the corporation, including the information contained in the registration statement. This act does not apply to the issuance of securities under $5 million nor does the act regulate the sale or purchase of securities after the corporation has issued them.
In addition to filing the registration statement with the SEC, the corporation must furnish a prospectus to each purchaser of the securities. Full information must be given relative to the financial structure of the corporation. This information must include the types of stock to be issued; types of securities outstanding, if any; the terms of the sale; bonus and profit-sharing arrangements; options to be created in regard to the securities; and any other at data the SEC may require.
The company, its principal officers, and a majority of the board of directors must sign the registration statement. If either the registration statement or the prospectus contains misstatements or omissions, the SEC will not permit the corporation to offer the securities for sale. If the corporation sells them before the SEC ascertains the falsity of the information, an investor may rescind the contract and sue for damages any individual who signed the registration statement. Any failure to comply with the law also subjects the responsible corporate officials to criminal prosecution.
Securities Exchange Act of 1934
The security exchanges and over-the-counter markets constitute the chief markets for the sale of securities after the initial offering. In 1934 Congress passed the Securities Exchange Act to regulate such transactions. The act requires the registration of stock exchanges, brokers, and dealers of securities traded in interstate commerce and SEC regulated, publicly held corporations. The law also requires regulated corporations to make periodic disclosure statement regarding corporate organization and financial structure.
Under rule-making authority of the Securities Exchange Act, the SEC has declared it unlawful for any broker, dealer, or exchange to use the mails, interstate commerce, or any exchange facility to knowingly make an untrue statement of a material fact or engage in any other act that would defraud or deceive a person in the purchase or sale of any security. This provision applies to sellers as well as buyers.
The act requires certain disclosures of trading by insiders---officers, directors, and owners of more than 10 percent of any class of securities of the corporation. The corporation or its stockholders suing on behalf of the corporation may recover any profits made by an insider in connection with the purchase and sale of the corporation securities within a six-month period. Such profits are called short-swing profits.
A 1975 amendment to this act attempts to foster competition among the securities brokers by reducing regulation of the brokerage industry.
Securities Investor Protection Act of 1970
In order to protect investors when the stock broker or investment house with which they do business has severe financial difficulty that threatens financial loss to the customers, Congress passed the Securities Investor Protection Act of 1970. This federal law requires generally that all registered brokers and dealers and the members of a national securities exchange contribute a portion of their gross revenue from the securities business to a fund regulated by the Securities Investor Protection Corporation (SIPC).
The SICP is a not-for-profit corporation whose members are the contributors to the fund. If the SIPC determines that any of its members has failed or is in danger of failing to meet its obligations to its customers and finds any one of five other specified indications of its being in financial difficulty, the SIPC may apply to the appropriate court for a decree adjudicating the customers of such member in need of the protection provided by the act. if the court finds the requisite financial problems, it will appoint a trustee for liquidation of the SIPC member. The SIPC fund may be used to pay certain customers' claims, up to $500,000 for each customer.
INTERNET RESOURCES FOR BUSINESS LAW *SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 424-426, 428*
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