For some time, there has been a rough separation between corporate and securities law. Securities law requires public companies to make disclosures to investors while corporate law sets forth a regulatory system in the internal affairs and operation of the corporation. Public companies in the United States must comply with both federal securities law and state corporation law. Securities law is uniform and mandatory because investors have a common interest in fair valuation when trading. Corporate law is diverse and enabling because the ownership interests of investors are more difficult to reconcile.
Many authors argue that securities law is a federal version of corporate law
However, one can point out a couple of differences between corporate law and securities law. Corporate and securities law can be distinguished based on the type of protection they provide to the investors. Both corporate law and securities law serve to protect the investors’ interest, but they do so at two different phases of the investment process.
Securities law protects investors as traders, while corporate law protects investors as owners. For example, when purchasing or selling stock, an investor can be vulnerable to make a transaction at an unfair price. During the period when an investor owns a stock, he can be vulnerable to corporate misconduct. Distinguishing between trading and ownership protection provides a strong basis for regulating corporate law and securities law in different ways.
The corporation is a separate legal entity created under the laws of the state of incorporation and the main goal of the corporation is to conduct business activities
A corporation can be sued and can sue separately from the shareholders. The process of creating, organizing as well as dissolving a corporation is done according to state laws. These laws are different from state to state. For instance, Delaware is known to have a business-friendly legislation and therefore it is the favorite state for incorporation. Any corporation pays taxes and it should also comply with all the laws regulating a business entity.
On the other hand, federal and state laws regulate securities and all the activities connected with these financial instruments. Most financial transactions (other than a loan from a bank or a group of banks) requires the issuance of securities (some of which need to be registered under federal and state laws or be exempt from those laws).
A corporation issuing securities must follow strict rules and has to file documentation and reports with the Securities and Exchange Commission (SEC) or the state regulators under the blue sky law. Within the federal regulation in the United States one can enumerate The Securities Act of 1933 and the Securities Exchange Act of 1934. The blue sky laws are an extra regulatory layer of protection for investors to the federal securities laws. The laws vary state by state and typically require sellers of securities to register their offerings with the state regulator. In addition, the blue sky laws mandate state licenses for brokerage firms, investment advisors, and individual brokers offering securities within the state.
Contrary to popular belief that all companies issuing securities must register with the SEC, the federal securities law requires registration only in a limited number of circumstances. As a result, most issuers of securities are exempt from registration with the SEC and must instead register with the state regulator.
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