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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.
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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" transactions.
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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