Companies issue securities in order to raise capital. A security's value depends on the issuer's financial condition and future prospects. Securities markets, either stock exchanges or over-the-counter markets, are the means by which those securities are issued, bought, and sold.
A stock exchange is a place for buying and selling securities. To have its securities bought and sold on a stock exchange, a company must list its securities with an exchange. In the U.S., the Securities and Exchange Commission (SEC) regulates stock exchange rules.
Any sale or purchase of a security that does not occur on a stock exchange occurs in an over-the-counter market. Anyone involved in buying and selling securities both on the stock exchanges and in the over-the-counter markets must be registered with the SEC.
Securities law is concerned with regulation of those markets, principally by insuring that those who buy securities have accurate information. Both federal and Illinois laws regulate securities.
Stocks and bonds. The two most common types of securities are stocks and bonds. A stock is a document that represents an ownership interest in a company. They are sold in shares. Obviously, the more shares someone owns, the larger ownership interest he or she has. Some companies pay dividends on their shares, which means that they distribute profits to shareholders. Other companies reinvest their profits in the company, which they argue increases the stock's value.
A bond is a document that represents a debt owed by the company to the bond purchaser. Bondholders are repaid the original investment plus interest. Bonds are usually secured with collateral, which gives the bondholder a chance to collect the debt if the issuer defaults. Government bonds are generally the safest investment of all because repayment is guaranteed.
Securities Act of 1933. The first key piece of federal securities legislation was the Securities Act of 1933, which regulates the public offering and sale of securities in interstate commerce. It requires that securities be registered before they can be offered for sale and requires that certain information be disclosed to prospective purchasers. Its two objectives were to require that investors receive significant information about securities being offered for public sale and to prohibit fraud in the sale of securities. The registration process allows investors to make informed judgments about whether to purchase a company's securities. Although the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses can recover from the issuer if they can prove that there was incomplete or inaccurate disclosure of important information.
Registration forms typically require a description of the company's properties and business, a description of the security to be offered for sale, information about the management of the company, and financial statements certified by independent accountants. Registration statements become public after they are filed with the SEC.
Because public offerings can be expensive, the laws exempt certain types of offerings from the registration requirements. Those include private offerings to a limited number of persons or institutions, offerings of limited size, intrastate offerings; and securities of municipal, state, and federal governments.
Securities Exchange Act of 1934. The Securities Exchange Act of 1934 established the SEC. The SEC has broad authority over all aspects of the securities industry, which includes the power to regulate brokerage firms and securities self-regulatory organizations, such as the New York Stock Exchange and the American Stock Exchange.
The law also requires issuers of securities to file various reports with the SEC. Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual reports.
The Securities Exchange Act requires that proxy solicitations be filed with the SEC in advance of any solicitation, and requires that they disclose all important facts concerning the issues on which holders are asked to vote. Furthermore, anyone seeking to acquire more than 5% of a company's securities by direct purchase or tender offer must disclose information to the SEC.
The securities laws prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities, including insider trading. Insider trading occurs when someone trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.
Trust Indenture Act of 1939. This law established standards for the public sale of debt securities such as bonds, debentures, and notes.
Investment Company Act of 1940. This law applies to mutual funds that trade in securities, and whose own securities are offered to the investing public. The law tries to minimize conflicts of interest that arise in this area by requiring regular financial disclosures.
Investment Advisers Act of 1940. This law requires that investment advisors register with the SEC and conform to regulations designed to protect investors. Generally only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the SEC.
Illinois laws. State securities laws are commonly known as blue sky laws, which comes from a reference in a long-ago opinion that investors should be protected from swindlers who offered ventures with about "as much value as a patch of blue sky." Illinois is one of the states that has not adopted the Uniform Securities Act, but it does have securities laws that regulate brokers and protect investors.
The Illinois Securities Law of 1953 requires that all securities, except those that are exempt, be registered with the state before they can be sold. It also requires certain disclosures to investors and prohibits unsolicited phone calls to those who aren't already customers. The Securities Department within the Secretary of State's office has the responsibility for enforcing Illinois' securities laws.
Venture capital companies. Venture capital companies are those that specialize in investing in new companies or markets. New companies without a track record of success often seek out venture capital companies when they have difficulty getting traditional bank loans. Some venture capital companies are willing merely to buy stock in a company, but most of them want some management control and usually at least one seat on the board. However much the owner doesn't want to give up control, if venture capital funds are his only hope, he won't have much choice. Many venture capital firms specialize in lending to certain markets where they have expertise. For example, venture capital firms in Silicon Valley specialize in investing in technology start-ups.