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An overview on Securities Law and Corporations
The securities law exists because of unique informational
needs of investors. Securities are not inherently valuable; their
worth comes only from the claims they entitle their owner to make
upon the assets and earnings of the issuer, or the voting power
that accompanies such claims. The value of securities depends
on the issuer's financial condition, products and markets, management,
and competitive and regulatory climate. Securities laws attempt
to ensure that investors have accurate information of the type
of interest they are purchasing and its value.
The Securities exist in form of notes, stocks, treasury stocks,
bonds, certificates of interest or participation in profit sharing
agreements, collateral trust certificates, preorganization certificates
or subscriptions, transferable shares, investment contracts, voting
trust certificates, certificates of deposit for a security, and
a fractional undivided interest in gas, oil, or other mineral
rights. Certain types of notes, such as a note secured by a home
mortgage or a note secured by accounts receivable or other business
assets are not securities.
There are two principle settings for buying and selling securities:
issuer transactions and trading transactions. Issuer transactions
are the means by which businessmen raise capital and involve the
sale of securities by the issuer to investor. Trading transactions
are the purchasing and selling of outstanding securities among
investors. Outstanding securities are traded through securities
markets that can be either stock exchanges or "over-the-counter".
A stock exchange provides a place, rules, and procedures for buying
and selling securities. Generally, to have their securities sold
and bought on a stock exchange, a company must list its securities
on a given exchange. Stock exchange rules are subject to approval
by the Securities and Exchange Commission (SEC). All transactions
that do not take place on a stock exchange are said to be executed
in the over-the-counter market, which is the residual securities
market. Only dealers and brokers who are registered with the SEC
may engage in securities business both on stock exchanges and
over-the-couner market. Most of the broker-dealers serving the
public are members of the National Association of Securities Dealers
(NASD), a national securities association registered with SEC.
Securities regulations focus mainly on the market for common
stocks. Both federal and state laws regulate securities. Federal
securities laws are generally administrated by the Security and
Exchange Commission which was established by the Securities Exchange
act of 1934. The first of the federal securities laws enacted
was the Federal Securities Act of 1933, which regulates the public
offering and sale of securities in interstate commerce. The 1933
Act prohibits the offer or sale of a security not registered with
the Securities Exchange Commission and requires the disclosure
of certain information to the prospective security's purchaser.
The objective of the 1933 Act's registration requirements is to
enable a purchaser to make a reasoned decision based on reliable
Securities Exchange Act of 1934 requires that issuers, subject
to certain exemptions, register with SEC if they want to have
their securities traded on a national exchange. Issuers of securities
registered under the 1934 Act must file various reports with SEC
in order to provide the public with adequate information about
companies with publicly traded stocks. The 1934 Act also regulates
proxy solicitation and requires that certain information be given
to a corporation's shareholders as a prerequisite to soliciting
votes. The 1934 Act permits the SEC to promulgate rules and regulations
to protect the public and investors by prohibiting manipulative
or deceptive devices or contrivances via mails or other means
of interstate commerce. Rule 10b-5 of The 1934 Act protects against
State securities law are commonly known as Blue Sky Laws. Typical
provisions include prohibition against fraud in the sale of securities,
registration requirements for brokers and dealers, registration
requirements for securities to be sold within the state, and sanctions
and civil liability. A majority of states, with the exception
of New York and California, have adopted the Uniform Securities
Act, at least in part.
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Learn about Corporations
A corporation is a legal entity created through the laws of its
state of incorporation. Individual states have the power to promulgate
laws relating to the creation, organization and dissolution of
corporations. Many states follow the Model Business Corporation
Act. (See Minnesota's adoption.) State corporation laws require
articles of incorporation to document the corporation's creation
and to provide provisions regarding the management of internal
affairs. Most state corporation statutes also operate under the
assumption that each corporation will adopt bylaws to define the
rights and obligations of officers, persons and groups within
its structure. States also have registration laws requiring corporations
that incorporate in other states to request permission to do in-state
There has also been a significant component of Federal corporations
law since Congress passed the Securities Act of 1933, which regulates
how corporate securities are issued and sold. Federal securities
law also governs requirements of fiduciary conduct such as requiring
corporations to make full disclosures to shareholders and investors.
The law treats a corporation as a legal "person" that
has standing to sue and be sued, distinct from its stockholders.
The legal independence of a corporation prevents shareholders
from being personally liable for corporate debts. It also allows
stockholders to sue the corporation through a derivative suit
and makes ownership in the company (shares) easily transferable.
The legal "person" status of corporations gives the
business perpetual life; deaths of officials or stockholders do
not alter the corporation's structure.
Corporations are taxable entities that fall under a different
scheme from individuals. Although corporations have a "double
tax" problem --both corporate profits and shareholder dividends
are taxed -- corporate profits are taxed at a lower rate than
rates for individuals.
Corporate law has important intersections with contract and commercial
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