If you have incorporated your business and are considering offering
securities to outsiders, or if you are an investor considering buying
the securities of a corporation, you may want to know what laws may
be involved in the transaction. The Securities and Exchange
Commission receives a number of inquiries about transactions that are
not the usual "run-of-the-mill" stock transaction in which an
investor purchases securities of a well-known company through a
broker. What follows is a summary of the very complicated laws
governing incorporation and security sales.
Every state has laws governing companies incorporated in that state,
and some have statutes pertaining to all corporations doing business
within their boundaries. State law generally governs the process of
incorporating. Such laws specify the number of incorporators, when
and where the corporation's charter must be filed with the state
government, and requirements for shareholders to approve certain
matters by particular majorities. In addition, all states have "blue
sky laws" which specifically cover securities offered by companies
incorporated or doing business in the state.
Most states have adopted Article 8 of the Uniform Commercial Code,
which defines what is meant by a "security" and governs negotiability
and transfer of stock certificates, including the responsibilities of
corporations and their transfer agents. The Stock Transfer
Association, composed of transfer agents, also has rules to cover the
transfer of corporate stock certificates.
Federal securities laws and the rules of the SEC adopted under these
laws apply generally to securities offered to the public and traded
in interstate commerce. Neither the SEC's review proceedings nor its
rules are intended to judge the merits or propriety of a proposed
transaction and offerings. Rather, they are meant to insure complete
disclosure of accurate and important facts to actual and potential
investors so that investors may make informed investment decisions.
When a new corporation offers its securities to the public, or when
an older corporation makes a public offering, their securities are
often required to be registered with the SEC under the Securities Act
of 1933. The act also requires that the company distribute a
prospectus to actual or potential securities purchasers. Some
securities, such as those issued by federal, state and local
governments, and many bank securities, are exempted from registration
by virtue of their nature. Other offerings, such as those made to
such a small number of investors that they are not considered to be
public offerings, are also exempted from the registration
requirements. An attorney's competent legal advice is useful in
understanding the detailed provisions of these laws.
Whether an initial public offering of securities is registered with
the SEC or not, the corporation must meet the reporting requirements
of the Securities Exchange Act of 1934 if (1) its securities are
traded in interstate commerce, (2) it has 500 or more shareholders of
a single class of equity securities, and (3) it has more than $1
million of assets. Under these circumstances, the corporation must
file certain information with the SEC including annual and periodic
reports and other filings concerning such corporate events as proxy
solicitations, mergers, tender offers, or "going private"
Finally, all transactions in securities, regardless of whether they
are required to be registered with the SEC, may be subject to the
federal securities laws if there is fraud involved in the purchase or
sale of the securities. Private individuals may sue the perpetrators
of such fraud under the federal securities laws.
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