Securities are merely an investment in a company; they should not be confused with the security system and surveillance equipment set up in your house or place of business. Any tangible evidence of ownership or debt that may be sold is referred to as a security.
Stocks, bonds, options, loans, mortgages, treasury stocks, investment contracts, and fractional interests in oil, gas, and mineral rights are just a few of the many distinct types of securities.
Many businesses sold stocks in the 1920s, promising huge returns, but often failed to provide prospective investors with important information regarding the business’s assets or the stock. The stock market crash of October 1929 occurred as a result of the massive security fraud, which resulted in millions of people losing their assets right before the start of the great depression.
The US Congress passed federal securities regulations in response, and the SEC was established to oversee their enforcement. The Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) are the names of these two pieces of legislation.
The federal law known as the Securities Act mandates that companies selling securities to the general public register with the SEC. Any prospective investors were obligated to be provided with accurate and comprehensive information regarding the company and the stock offering.
The Exchange Act fundamentally controls how stock exchanges and trading are conducted by establishing the SEC (“Securities and Exchange Commission”). The purchase, sale, and establishment of security interests are governed by securities law, which is made up of several categories of legislation. Securities regulations, however, are not just federal. The states also govern securities.
What Distinctions Exist Between State and Federal Securities Law?
Several federal and state laws are applicable to publicly traded businesses. The legislation protects shareholders and investors. Compliance is also enforced by the legislation.
Publicly traded businesses are required by federal law to submit reports to the SEC. These reports include details on a company’s financial standing, operational performance, and CEO compensation. Brokers and investors base their investment decisions on the accuracy of this information. The exploitation of insider knowledge for monetary benefit or market manipulation is forbidden by federal law.
“Blue Sky” laws are the name given to state securities regulations. They forbid the sale of securities by deceit. The laws cover sanctions, civil liability, registration requirements for brokers and dealers, registration requirements for securities to be offered within the state, and registration requirements for brokers.
Federal securities regulations are supplemented by “Blue Sky” legislation, which imposes registration obligations on brokers and dealers not only in their home states but also in any other states where they wish to transact in securities.
State securities laws aim to ensure that relevant information about the securities is disclosed and that potential investors are given trustworthy information about the securities. There may be distinct filing specifications for registering offerings in each jurisdiction within a state. Reference to the laws in your jurisdiction is crucial.
How Does Securities Fraud Work?
Securities fraud occurs when a company or individual tries to illegally manipulate the stock market by using deception to sell securities. Corporations may make attempts to illegally manipulate the market for financial gain, individual investors, financial consultants, dealers, brokers, and analysts.
For instance, the Enron case in 2001 was brought on by dishonest accounting methods that materially overvalued the company, leading to excessive stock prices that shareholders and investors were unaware of. The SEC brings administrative and civil lawsuits to pursue securities fraud.
Criminal charges, such as those levied against Enron executives, may potentially be pursued in connection with fraud on the scale of Enron. Corporate fraud, which happens when a business knowingly alters or conceals facts to appear successful when, in reality, they typically are not, is best shown by the example of Enron.
Additional allegations for violations of securities law and securities litigation include:
- Market Manipulation: This type of security violation happens when a brokerage firm, investor, or securities company takes part in any action that gives the wrong impression about the cost, accessibility, or distribution of a security;
- Insider Trading: Insider trading is a security infraction that happens when someone uses inside information about a company’s stock activity to their benefit in a trade;
- Breach: When a trustee or broker administers another’s securities and has a conflict of interest that prohibits them from remaining loyal to the beneficiary, this security violation is known as a breach of fiduciary duty;
- Churning: When a broker engages in excessive trading to increase their sales commissions, a security violation takes place. The laws governing securities ban this as it is unethical;
- Unauthorized Trading: When brokers trade against the stockholder’s wishes, they breach the securities laws.
- Malpractice or Incompetence: This security breach often happens when someone represents themselves as a professional broker when they are not.
What Does the Securities Act Aim to Achieve?
The Assets Act protects investors from having to make impulsive purchases of stocks, bonds, mutual funds, and other securities. According to the Act, investors must get comprehensive financial and other information about their investments.
For instance, if an investor purchased stock in a publicly traded firm, the company would be required to provide the investor with financial documents like balance sheets and budgets and a summary of the company’s mission and objectives.
Furthermore, the Act stipulates that there may be no fraud or misrepresentation in the sale of securities. In other words, to the best of the supplier’s knowledge, the information presented to investors must be true and truthful.
How Are Investors Told Information About Securities?
The Securities and Exchange Commission must be notified of the registration of most securities.
The SEC must receive the following information regarding the securities in order for them to be registered:
- A description of the corporation issuing the securities, highlighting its operations, goals, and holdings
- What categories of securities are being sold?
- Who oversees the business?
- Budgets, balance sheets, and other financial statements that must be certified by independent accountants
The SEC makes this information public once it has been registered. However, it is becoming customary for businesses to make that information accessible on their own websites, so investors might not need to go through an SEC database to get details on a specific asset from a certain company.
What Are Class Actions in Securities Law?
Securities class action lawsuits are often filed on behalf of a group of investors who suffered financial losses due to a violation of the securities laws.
For instance, in the Enron case, the company’s management made false and misleading claims about the company’s nature and stock valuation, which led potential investors to pay more for their stock.
Enron, however, wasn’t as solid as its management stated. Enron was sued in a class action by the investors for breaking the securities laws. They received a $7.2 billion settlement from the banks allegedly involved in the accounting fraud scheme.
What Should I Do If Information Received from a Public Company Proves to Be Inaccurate and Causes a Significant Loss in My Investment?
The SEC cannot guarantee that the data businesses submit as part of the registration process is correct. Still, it requires it if you can demonstrate that a company intentionally gave incorrect information to you and you invested in stocks. As a result, you may wish to speak with a securities law attorney.
If you file a case against the company, your attorney can inform you of your legal options and your entitlement to monetary damages. If the SEC hasn’t already discovered the incorrect information, you might also want to file a complaint with them.
