Test Your Knowledge of Securities Regulation in the US

Overview of Securities Regulation in the United States:

• Securities regulation covers transactions and dealings with securities at the federal and state level.

• The primary securities regulator at the federal level is the Securities and Exchange Commission (SEC), while futures and some aspects of derivatives are regulated by the Commodity Futures Trading Commission (CFTC).

• Brokers and dealers registered with the SEC are required to be members of the Securities Investor Protection Corporation (SIPC) and subject to its regulations.

• The federal securities laws govern the offer and sale of securities, trading of securities, activities of certain professionals in the industry, investment companies, tender offers, proxy statements, and generally the regulation of public companies. State laws governing issuance and trading of securities are commonly referred to as blue sky laws and mostly deal with fraud and fraud investigation privileges, registration of securities, and registration of broker-dealers.

• The Securities Act of 1933 regulates the distribution of securities to public investors by creating registration and liability provisions to protect investors.

• The Securities Exchange Act of 1934 requires periodic disclosure of information by issuers to shareholders and the SEC to protect investors once a company goes public.

• Securities regulation came about after the 1929 stock market crash, which spurred Congress to hold hearings known as the Pecora Commission and pass securities acts to regulate the exchange of securities, require the disclosure of information, and inflict consequences on individuals that do not disclose information properly, whether it be intentional or erroneous.

• The government continues to reform security regulation with acts such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act of 2012.

• The Howey test defines securities as investment contracts that involve investment of money or property, in a common enterprise, with profits coming from the sole efforts of people other than the investor.

• Securities exemptions include insurance policies, annuity contracts, bank securities, United States government-issued securities, notes/drafts with a maturity date less than nine months after the issue date, and securities offered by nonprofit (religious, charitable, etc.) organizations.Transaction Exemptions Title

• Initial Public Offerings (IPOs) can become very costly, with costs ranging from $2.6 million to $70.8 million for companies with revenue under $100 million due to the 11th section of the Securities Act of 1933 requiring due diligence for companies going public.

• Regulation A is an exemption made to foster capital by lowering the cost of offerings for small companies.

• Section 4(a)(2) of the Securities Act of 1933 exempts transactions by an issuer not involving a public offering.

• Regulation D provides exemptions for private offerings, small offerings, and crowdfunding.

• Intrastate offerings are when securities are only offered to investors that live in the state where the business resides, qualifying for the SEC registration exemption on a federal level.

• Private offerings are not open to the public, but rather only available to a small group of purchasers that are able to safely invest due to their large amount of wealth or extensive knowledge about investments.

• Small offerings of no more than $5 million in a period of one year can be made under Rule 505 of Regulation D, with no history of securities fraud or related crimes, and with disclosure similar to Rule 506.

• Rule 504 exempts SEC registration of a nonpublic issuer of $1 million or less in securities within a period of one year as long as the issuer discloses the relevant information required by state law, allows general selling efforts, has no limit on how many purchasers, and purchasers do not need specific qualifications.

• 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.

• Securities in accordance with Rules 504, 505, and 506 (Regulation D) are considered restricted securities, which can only be resold after a holding period and under certain circumstances.

• The no-action letter is a tool to reduce risk and ensure the SEC will not take action in a given situation, acquired before performing a transaction or security exemption.

• No-action letters are not binding to state commissioners, but commissioners generally follow the Federal precedent set by the SEC.