PART ONE: RAISING CAPITAL
I. SECURITIES REGULATION OVERVIEW
A. Goals of Securities Regulation: The goals of securities market focus on the issuance of securities. These laws are all about disclosure. Investors need information. They are not able to kick the tires or to squeeze the fruit to test the product. So they need to make an informed decision when buying the product – a future stream of earnings. Nearly 84 million Americans (43.6%) of the US own some sort of stock. Institutional (pension funds, mutual funds, commercial banks, insurance companies) own the rest. 1) Assuring Informed Investor Decision-Making & Consumer Protection: Investors need to trust that the company they are investing in is doing the right thing. Securities laws instill trust because the disclosure of information will mean that the investor can be confident in the company. The investor knows that that there are protective measures and legal recourse. However: this can also lead to complacency. Ex. Enron: Thus investors not confident when laws not enforced. Enron’s forms hadn’t been looked at in 3 years. 2) Allocative Efficiency: We want to ensure that stocks and other securities are priced accurately according to their true objective value. So long as the information that the regulations require is processed appropriately on the market, capital will flow to productive uses. The higher the value, the higher the price of the security and vice versa. We don’t want money being spent in places it shouldn’t be. However, corporations may restrict the outflow of information to prevent later liability actions.
3) Corporate Governance and Agency Costs: Sometimes agent/corporate interests will diverge from shareholder interest. Securities regulation mitigates these concerns, telling corporate managers don’t cook your books or stock will go down. Brandeis: “Sunlight is the best of disinfectants.”
4) Economic Growth, Innovation, Access to Capital: We want companies to be able to expand and grow. Securities regulation ensure that investors will feel confident about investing and then companies can get capital, expand, grow. A securities-centered economy like the US encourages entrepreneurial ventures. A banking-centered economy like Europe’s encourages firms dominance and corporate consolidation.
5) The Market for Lemons: Investors need to know which companies are lemons, which aren’t. Rigorous scheme of securities regulation allows the non-lemons to signal to market that they’re not lemons and thus investors won’t be afraid of investing. B. Overview of the Financial Markets: The securities markets are a subset of the many financial markets. There are non-securities markets (bank loans, treasury bills, CDs and commercial paper) and equity markets. The decision of which market for a company to enter is based upon the cost of capital in the particular market, the time necessary to effect a transaction, and regulatory supervision. When a financial product is considered a security, the breadth of the securities laws applies.
C. The Equity Markets:
1) The Trading Markets: a) The Primary Market: The primary market is issuer transactions sold to investors.
b) The Secondary Market: The secondary market are trading transactions between investors, done on NYSE, NASDAQ, Electronic Communications Markets.
D. Regulatory Framework:
1) The SEC: The Securities & Exchange Commission is an independent administrative body charged with the administration of the securities laws. Subject to the Administrative Procedure Act, thus there are open meetings, advance notice of regulatory changes, opportunities for interested parties to comment. Very New Dealesque. Maintains EDGAR (Electronic Data Gathering, Analysis and Retrieval).
a) The Composition: One Chairman and four commissioners. Each commissioner has a five-year term, staggered, no more than three can be from the same party.
b) The Divisions: