Frequently Asked Questions about Securities

Securities Law: An Overview

Q: What is a security?

A: A security is an investment in a common business enterprise. Securities may be stocks, bonds, notes, debentures, investment contracts, treasury stocks, transferable shares or mutual funds.

Q: What does it mean to "go public?"

A: "Going public" is when a business transforms from a privately held company to a public company. The business registers securities so that it can offer and sell them to investors. Commonly, a company will do an initial public offering (IPO) of stock in which the company registers the stock with the SEC and sells equity ownership to the public.

Q: Is a company required to register its securities?

A: If a company wishes to sell securities, it must register them. Section 5 of the Securities Act of 1933 requires that all securities offered for sale be registered with the Securities and Exchange Commission (SEC) unless otherwise exempted. A company may not sell securities until the SEC has declared the registration statement "effective." The registration process has three periods: the pre-filing period, the waiting period and the post-effective period.

Q: Are there exemptions from SEC registration requirements?

A: Some companies' securities may qualify for an exemption from SEC registration requirements. There are a number of securities and transactions that are exempt from registration. The exemptions are listed in sections 3 and 4 of the Securities Act of 1933. The party claiming the exemption has the burden of proving that it applies.

Q: What are the main federal securities laws?

A: The two main federal securities laws are the Securities Act of 1933, which requires that all securities offered for sale be registered with the Securities and Exchange Commission (SEC), and the Securities Exchange Act of 1934, which governs the trading, purchase and sale of securities. There are several other federal securities laws, as well as state securities laws.

Q: What are some common securities abuses?

A: Companies, officers, directors and broker-dealers can all be liable for securities violations. Common securities abuses by a company or its officers include fraud, misrepresentation and omissions; market manipulation; and insider trading. Common abuses by a broker or dealer of securities include unauthorized trading; churning; misappropriation; unsuitability; fraud, misrepresentation and omissions; and market manipulation.

Q: What is "insider trading?"

A: Insider trading is the illegal trading of securities by officers, directors, major shareholders or others who hold non-public inside information that allows them to benefit unfairly from the buying or selling of stock.

Q: What is a "prospectus?"

A: A prospectus is a formal written offer to sell securities. It sets out the business plan and contains all facts that an investor needs to make an informed decision regarding a purchase of securities. The prospectus must be accessible to anyone who buys or offers to buy the new issue.

Q: What is SOX?

A: SOX refers to the Sarbanes-Oxley Act of 2002. SOX was enacted in response to the high-profile corporate and accounting scandals such as Enron and WorldCom. SOX sets forth requirements regarding financial reporting so that potential investors receive accurate and honest financial information.

Q: What is the PSLRA?

A: PSLRA refers to the Private Securities Litigation Reform Act of 1995. The PSLRA established new rules for securities class actions and implemented important changes in cases brought under the securities laws. The PSLRA was designed to prevent the "routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action…." H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 730.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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