What are Securities Laws?


Securities law is something you might hear in the news because of some violation or in relation to white-collar crime. With the wild ride that the stock market, including the gradual introduction of permissible, legal trading of cryptocurrencies (like bitcoin) and tokens from initial coin offerings (“ICO’s”), has securities laws a popular, researched and well-debated topic among entrepreneurs, businesses, investors, lawyers, and regulators. But, what are these laws? Securities laws are detailed and complex laws that govern securities. Below, we discuss some of the basic concepts of securities laws. For more information, contact a Mountain View transctional attorney today.

Understanding Securities

A security is a common word used in investment circles. It is a broad term that refers to the instrument used in certain transactions, financing or investments that are sold in various financial markets. The Supreme Court uses the Howey Test to determine whether a transaction represents and investment contract (and thus a security) by using the following definition of when an investment contract is a security: “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Examples of securities include:

  • Stocks (or shares of such)
  • Bonds
  • Mutual funds
  • Certificate of interest
  • Oil, gas, or other mineral lease or royalty agreement
  • Promissory note
  • Notes
  • Warrants
  • Profit-sharing agreement
  • Investment contract

Basic Securities Laws

All securities are governed by a complex set of federal laws and related regulations. States can also add additional safeguard requirements. The purpose of these laws is to safeguard investments, discourage fraud and misappropriation, and deter “bad” behavior with strict enforcement of penalties. The Securities and Exchange (SEC) is a federal agency that assists in the governance and control of the industry. There are several main federal laws:

  • Federal Securities Act of 1933:  This federal law governs the issuing of securities by companies.
  • Federal Securities Exchange Act of 1934: This federal law governs the purchase, trade, and sale of all securities.
  • Private Securities Litigation Reform Act: This law was enacted in 1995 to bring reform under the circumstances when a plaintiff can bring a securities fraud case. The intent is to avoid frivolous claims.
  • Sarbanes-Oxley Act of 2002 This Act affects corporate governance, management of risk, and financial accountability reporting for publicly-traded companies. The goal is to deter corporate fraud.
  • Blue Sky Laws:  These state laws govern securities at the state level. You should be aware that federal securities laws often preempt Blue Sky laws.

Types of Security Abuse

From time-to-time, news breaks that there is a new Ponzi-scheme mastermind that has been charged with securities frauds or other related crimes. The securities laws are meant to protect investors and ordinary individuals from abuse by the individuals and companies.  When companies or individuals break these laws, they can face stiff penalties, including stiff fines, disbarment from the securities industry for life, and prison time. Here are some of the more common types of security abuse:

  • Securities Fraud: This occurs when investors make investment decisions on false information. Sometimes, the false information is provided by corporate level executives to potential investors. Enron is a classic example of securities fraud.
  • Insider Trading: This occurs when an “insider” (e.g., employee) has a fiduciary duty to others and uses non-public information to make decisions with securities based on the non-public information. Martha Stewart was guilty of insider training.   
  • Manipulating the Market: This occurs when someone does something that gives a false impression about particular securities. It can either be oral or an action. For example, buying a large number of stocks to create a false representation about demand could intentionally manipulate the market.

A Mountain View Intellectual Property Lawyer Can Help You Understand Securities Laws

Understanding securities can be essential for your business. The Structure Law Group team has experience dealing with Securities Laws and to ensure a safe and smooth initial offering. Contact us online or call us at 408-441-7500!