What is Securities Regulation?

I wanted a general post on basic Securities Law so I went to Kermit Hall’s Oxford Guide to American Law (I get nothing if you buy these books from the links provided, but I’m giving you a taste of them and I trust you will all buy them anyways).  I was reading the entry on Securities Law and lo and behold it was written by Thomas Lee Hazen.

Thomas Lee Hazen is everywhere.  I have a six or seven volume treatise on Securities Regulation in my office, a booked called “Securities Regulation In a Nutshell” and a casebook that I should probably at least consider for my 2017 Securities Regulation Course (I currently use Choi & Pritchard).

He writes some good stuff, which I will paraphrase here.

“Securities are different from most other commodities in commerce in that they have no intrinsic value; they merely represent rights in something else. Most goods are produced, distributed, and used or consumed; governmental regulation for these goods focuses on protecting the consumer against dangerous goods, false advertising, and unfair or noncompetitive pricing practices.  Securities are different from goods in many respects, and these differences are reflected in the federal securities laws.

“Securities represent nothing more than intangible rights in a company or some other entity.  Unlike goods, securities are not produced; they are merely created by the entity issuing the securities.  Securities can be issued in unlimited amounts virtually without cost for the very reason they are nothing in themselves and represent only an interest in something else. An important focus of securities laws, therefore, is assuring that when securities are offered to the public, investors have an accurate idea of what this “something else” is and how much of an interest in it the particular security actually represents.  Purchasers of securities do not consumer securities.

“Securities are a form of currency, traded in the so called “secondary markets” at fluctuating prices determined by supply and demand. Securities law is designed to ensure that there is an efficient market for securities based on a continuous flow of information into the market place concerning the company or other entity whose securities are being traded.  Disclosures are required. … The trading markets for securities are susceptible to manipulative and deceptive practices.[i] Securities laws contain general “anti-fraud” provisions which apply to trading “insiders” on the basis of nonpublic information and to various kinds of misstatements by corporate management and others. The regulation of brokers, dealers, and professional traders is designed to ensure that these professionals do not use their superior experience to take advantage of investors…”

“The federal securities laws consist of separate statutes…

“The Securities Act of 1933 regulates public offerings of securities. With certain exemptions, the Act prohibits offers and sales of securities that are not registered with the Securities and Exchange Commission. Registration requires that securities be offered only through the use of specified disclosure documents. The Act prohibits fraudulent practices in any offer or sale of securities. The rationale underlying the Act and the other federal securities laws that followed was to require full disclosure in order to enable investors to make an informed investment decision.  The federal laws rejected the legislative approach taken in many states, popularly known as “blue sky” laws of trying to regulate the merits of securities offerings and trying to prevent the sale of stock in fly-by-night companies.

“The Securities Exchange Act of 1934 extended federal regulations to trading in the secondary markets of securities that are already issued and outstanding. The Act established the Securities and Exchange Commission (“SEC”) and gave it responsibility for administration of the federal securities laws.  The Act contains a number of distinct disclosure and registration provisions aimed at different participants in the securities markets. The Act regulates securities of publicly held corporations; prohibits various “manipulative or deceptive devices or contrivances” in connection with the purchase and 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 provides for SEC registration and supervision of national securities exchanges and associations, clearing agencies, transfer agents, and securities information processors.”


This is just a preview of the entry on Securities Law.  Again, such interesting concepts to break down. For example, the overall concepts and philosophies presented in the new Title III of the JOBS Act (i.e., crowdfunding) is consistent with Hazen’s definition and philosophy of a security as a form of currency and the efficient flow of information is contemplated because the “Crowd” should help itself determine the benefits of investing in the companies.  This will essentially be a “Wikipedia” of securities disclosures.   The main concern regulators have is whether the “crowd” will be intentionally misled by insiders who are trying to pump the stock price up.  Since the securities are restricted for a year hopefully that will curb some of the abuses.


[i] A Fascinating read about securities market manipulation is “Reminiscences of a Stock Operator” which takes place before the Securities Act of 1933 and Exchange Act of 1934 existed.  It is the best example that I can think of that illustrates the need for these laws.