U.S. Capital Markets

Financing in the United States can take different forms, some of which we’ve already mentioned. The most common are personal assets, private loans, commercial bank borrowings and equity or debt offerings. Personal assets are limited. Not everyone has connections to private loans from high-net-worth individuals or wealthy friends and relatives. Commercial bank borrowings may not satisfy all financial needs for several reasons: They are difficult or impossible to obtain for some companies (especially start-ups), they require high annual interest rates for payback, and only a limited amount is available. Therefore, companies may choose to seek capital in public markets or private transactions by offering participation in the company’s future profits to proposed investors.


The laws governing private or public offerings of company interests, known as securities offerings, are extensive and require strict compliance, including registration with various regulatory organizations. Securities transactions are subject to regulations under both federal and state laws.


All securities offerings in the United States must either be registered with the Securities and Exchange Commission (SEC) or completed in compliance with an exemption from the registration requirements and applicable state securities laws. Failure to comply with these requirements exposes the issuer and its officers and directors to potential civil and criminal liability.


Because of the cost and time required to complete a registered public offering of securities, many securities offerings are completed as private placements, pursuant to an exemption from registration. Private placement is an offering of securities for sale to a limited number of sophisticated investors. Several exemptions are available, but it is essential that the issuer consult with an attorney who specializes in securities matters before offering or selling securities in the United States.


In addition to satisfying the registration requirements, issuers planning to offer securities in the United States must also comply with the disclosure and anti-fraud provisions of the federal and state securities laws. In general, these laws impose liability both for misstatements and omissions of material facts in connection with a securities offering. The liability extends to the issuer, its officers, directors, and other involved parties. 


Companies that complete a registered public offering of securities or that list shares for sale in the United States are subject to the periodic reporting requirements of the federal securities laws.


State securities laws, commonly known as “blue sky” laws, coexist and regulate various securities transactions simultaneously with the federal laws. Although states continue to seek greater uniformity in these blue sky laws, state security laws are still characterized by great diversity of language and interpretation. It is very important to know precisely applicable state laws before taking any action in relation to securities. 


The facilities through which securities are traded are known as markets. The biggest American securities markets—the New York Stock Exchange, the American Stock Exchange, and NASDAQ—have their own rules and regulations concerning operating and listing standards. If a company or any other market participant wants to work through these markets, they must confirm the current requirements and abide by them.


While laws differ from state to state, the federal securities law basically consists of eight statutes that are periodically amended.


        Securities Act of 1933


        Securities Exchange Act of 1934


        Trust Indenture Act of 1939


        Investment Company Act of 1940


        Investment Advisers Act of 1940


        Securities Investor Protection Act of 1970 (SIPA)


        Sarbanes-Oxley Act of 2002


        Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010


        Rules and Regulations


Securities Act of 1933


This Act regulates initial public offerings of securities. It has two basic provisions:


·        Prohibits offers and sales of securities that are not registered with SEC to ensure that investors receive financial and other significant information concerning securities being offered for sale, and

·        Prohibits deceit, misrepresentations, and other fraudulent practices in any offer or sale of securities.


There is no stipulation that all offerings of securities must be registered with the SEC. The SEC exempts certain securities offerings from the registration process in order to alleviate the financial and administrative burden for the companies that make a small offering, with a minimal risk of hurting the general public. The exceptions 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


This Act regulates trading in securities that are already issued and outstanding (secondary markets). It is much more extensive than its predecessor in 1933 and contains a number of distinct groups of provisions aimed at different participants in the securities trading process. The 1934 Act:


·           Authorizes SEC to administer the 1933 Act;

·           Imposes disclosure and other numerous requirements on publicly held companies;

·           Regulates proxy solicitations, tender offers, and insider trading;

·           Prohibits various manipulative or deceptive practices in connection with the purchase or sale of securities;

·           Restricts the amount of credit that may be extended for the purchase of securities;

·           Requires brokers and dealers to register with the SEC and regulates their activities; and

·           Empowers SEC with broad authority over all aspects of securities industry, including registration, regulation, and supervision of national securities exchanges and associations, clearing agencies, transfer agents, and securities information processors.


Trust Indenture Act of 1939


This Act applies to debt securities such as bonds, debentures, and notes in excess of a specified amount, offered for public sale. Even though such securities may be registered under the 1933 Act, they must also be qualified under this Act, which imposes the standards of independence and responsibility on the indenture trustees and requires other provisions to be included in the indenture for the protection of the investors.


Investment Company Act of 1940


This Act regulates publicly owned companies that are primarily engaged in the business of investing and trading in securities. It regulates their organization, management, capital structure, contracts, and policy and requires companies to disclose their financial conditions and investment policies to the investors on a regular basis with the purpose to avoid the conflict of interest and to enable the investors to make informed decisions knowing the company’s structure, investment objectives, and other material information.


Investment Advisers Act of 1940


This 1940 Act regulates the registration and business activity of investment advisers (individuals and firms compensated for advising others about securities investments) who have more than $100 million of assets under management or advise a registered investment company. Their home state laws regulate advisers with less than $100 million of assets under management.


Securities Investor Protection Act (SIPA) of 1970


SIPA supervises the liquidation of securities firms that are suffering financial difficulties and directs the payment of claims asserted by their clients.


Sarbanes-Oxley Act of 2002


The Act makes extensive reforms to corporate governance and disclosure requirements for public companies. It adopted a number of corporate governance regulations to enhance corporate responsibility and financial disclosures. It also increased accountability of corporate officers, attorneys, and accountants, combats corporate and accounting fraud and imposes increased criminal penalties for violations of securities laws.


Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010


This legislation set out to reshape the U.S. regulatory system in a number of areas, including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance, disclosure, and transparency.


Other Securities Rules and Regulations


In addition to the above federal statutes, various agencies have authority to issue their own rules and regulations, which are mandatory to follow for the securities markets participants. The SEC has broad rule-making powers, and it exercises these by prescribing different kinds of regulations, issuing forms, reports, and engaging in informal rule-making, such as the publication of releases, no-action letters, and statements that demonstrate the view of the agency in a particular matter. Self-regulatory organizations such as stock exchanges regulate the activities of their members, in addition to federal and state agencies. If an individual or a firm is using facilities of a self-regulated organization, they should comply with certain rules and requirements issued by that organization. Also, court and administrative decisions present a comprehensive body of law and interpret the application of current federal statutes. The combination of all these rules governs all securities-related activities, and it is important to know which are applicable to the transaction or market participant at hand.

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