Legal Definitions - securities act

A securities act is a law, established at either the federal or state level, that aims to protect investors and ensure fairness and transparency in financial markets. These laws achieve this by setting clear rules for how investment products, such as stocks, bonds, and mutual funds (collectively known as "securities"), are created, registered with government bodies, initially offered for sale to the public, and subsequently traded between investors.

Here are a few examples illustrating how a securities act operates:

• Example 1: A Company's Initial Public Offering (IPO)

  Imagine a technology startup decides to sell its shares to the public for the very first time through an Initial Public Offering (IPO). Before it can do so, a federal securities act requires the company to file a detailed registration statement with the Securities and Exchange Commission (SEC). This statement must disclose comprehensive information about the company's finances, business operations, risks, and management. This process ensures that potential investors have access to all material facts before deciding to buy shares, thereby protecting them from making uninformed decisions and regulating the offering of these new securities.

• Example 2: Preventing Insider Trading

  Consider a scenario where an executive at a publicly traded pharmaceutical company learns, before it's announced to the public, that their company's new drug failed clinical trials. Knowing this information will likely cause the company's stock price to drop significantly, the executive sells all their shares. This action would violate a federal securities act that prohibits insider trading. Such laws regulate the trading of securities by preventing individuals from using non-public, material information for personal gain, which would create an unfair advantage and undermine public trust in the market.

• Example 3: State-Level Investment Regulation

  Suppose a small, local real estate development company in a particular state wants to raise capital by selling limited partnership interests to residents within that state. Even if this offering is too small to trigger federal registration requirements, a state-level securities act (often called a "blue-sky law") would likely require the company to register the offering with the state's securities regulator. This state act ensures that even smaller, localized investment opportunities are reviewed for legitimacy and that investors receive adequate disclosures, preventing fraudulent schemes and protecting the public at a local level by regulating the offering and registration of these specific securities.