What is Securities Law?
Securities law is the legal body of federal statutes that address the ownership and trading of financial instruments, company ownership, and issuer stocks. The Securities Exchange Commission (SEC) oversees and administrates securities law. Securities lawyers and lawyers for startups represent securities law matters.
You can visit the SEC’s homepage here .
Purpose of Securities Law
The primary purpose of securities law is to prevent fraudulent stock market practices. Without the proper regulations in place, it would be impossible to avoid market manipulation, creating distrust. These elements go against the foundation of a free market.
Securities law also addresses several other legal issues, such:
- Ensuring that securities reflect undistorted market prices
- Providing penalty guidelines for punishing fraudulent acts
- Encouraging firm material disclosure regarding investor decisions
The SEC quickly adopted and addressed all of these issues, in addition to a variety of others. Over time, they developed a body of regulatory law and a system of administrative courts and proceedings, which laid the groundwork for modern securities and securities trading administration. While times have changed and the process as a whole has evolved significantly, the fundamental laws as originally established have remained remarkably unchanged.
This web page also discusses securities law.
What Do Securities Lawyers Do?
A securities lawyer advises and represents clients in legal matters involving stocks and financial instruments. They can work with clients directly in private practice or engage in an employment relationship with federal and state governments.
Below, we’ve outlined a few tasks and responsibilities of securities lawyers:
Advise Investors
Securities attorneys must understand who regulates which types of securities, how specific situations typically unfold and stay current on regulatory changes to advise clients adequately. They generally have a deep network of complementary experts in finance, marketing, research, and economics.
Types of investor advisement services include:
- Analyze broker contracts
- Fraud detection
- Market manipulation detection
- Act as a client spokesperson
- Mitigate financial exploitation of the elderly
Businesses should always consult with a securities lawyer if they need personalized legal advice regarding an investment-related issue. This strategy can help them avoid unintended legal mistakes that can become expensive in the future.
Handle Stockbroker Matters
When investors open a brokerage account, they sign an arbitration agreement requiring all disputes to resolve via the Financial Industry Regulatory Authority (FINRA) or securities arbitration. This distinct practice area has its code of conduct and arbitrators who must receive special training.
Types of stockbroker matters handled by securities lawyers include:
- Breach of fiduciary duty
- Broker reselling
- Conflicts of interest
- Inflationary assets
- Unregistered securities
They can also provide ongoing legal services, such as contract review, as a preventative measure against stockbroker fraud, misappropriation, or malpractice.
Represent Litigation and Class Action Lawsuits
A class-action lawsuit is a civil case brought against a company or individual who similarly defrauded many investors. A well-known example of securities fraud is a Ponzi scheme. Other class actions may allege that companies made false SEC filings or misled investors differently.
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Securities Law for Startups
Startups should adhere to federal and state securities laws when issuing stocks and options and arranging for friends and family financing. These rules also apply to the issuance of simple agreements for future equity (SAFEs), or SAFE agreements , convertible notes , convertible debts. Ensure that you understand these rules to comply with relevant laws while taking advantage of valuable opportunities.
Here are a few essential considerations when it comes to securities law from startups:
Law 1. Blue Sky Laws
Startups often overlook the legal implications of equity issuances under federal and state securities laws. While compliance with these “ blue sky laws ” is mandatory, the effect of non-compliance often increases legal fees and time to close. A more prudent strategy would be to ensure ongoing compliance with securities laws and store all filings in the company’s records.
Law 2. Securities Registration
Startups must register their securities with the federal and state governments or apply for an exemption from registration. Due to the impracticality and expense of registering shares, startups may want to look into their options.
Law 3. Section 4(a)(2)
At the federal level, the issuance of founders stock) is exempt from registration under Section 4(a)(2) of the Securities Act of 1933 for transactions that do not involve an initial public offering. Section 4(a)(2) and state exemptions may also be invoked when issuing SAFEs or convertible notes.
Law 4. Regulation D
SAFE Notes and Convertible Notes are increasingly being issued in larger denominations. In this situation, it could be better to rely on a federal exemption under Regulation D. There are advantages and disadvantages of these exemptions, meaning you should consult with counsel before deciding.
Law 5. Contract Law
Startups should also install the proper contracts for the given transaction while considering startup costs . Agreements can prevent many legal disputes and foster communication by and among the parties.
Types of contracts included in securities law can include:
Law 6. Rule 701
Equity incentive plan issuances are exempt from federal securities laws under Rule 701 of the Securities Act. Under Rule 701, specific numerical tests apply to equity issuances. Certain online cap tables keep track of these calculations on a per-option basis.
Securities Law Violations
Securities law violations occur when a company or individual makes fraudulent misrepresentations or untrue statements to influence market securities. It can also entail actions associated with breaches in fiduciary responsibility. Securities must be managed carefully since mismanagement can result in severe legal consequences for trustees.
Here are a few common types of securities law violations:
Violation 1. Market Manipulation
A securities company, broker, or investor commits a securities law violation if they manipulate markets unfairly. These actions can include the creation of false price impressions, availability, or distribution.
Violation 2. Insider Trading
Another violation is insider trading, which occurs when a person or company uses internal company information to gain a trading advantage.
Violation 3. Fiduciary Breach
If a trustee or broker has a conflict of interest that precludes them from acting in the beneficiary’s best interests, they cannot manage the beneficiary’s securities.
Violation 4. Churning
Churning happens when a broker makes excessive trades to increase sales commissions. This practice is unethical and prohibited by law and can result in steep fines, jail time, and victim restitution.
Violation 5. Unauthorized Trading
Trustees have some discretion in investing prudently and reasonably. They are, however, prohibited from making trades that are contrary to the stockholder’s wishes and directives. Unauthorized transactions can result in steep consequences.
Violation 6. Incompetence
When an unqualified individual poses as a professional, malpractice can occur. Brokering transactions without a valid license, for example, is considered malpractice.
Securities fraud can result in severe legal consequences. For instance, a minor violation could result in a criminal misdemeanor charge, including a fine and jail sentence. Serious infractions can result in felony charges, which can change the entire trajectory of one’s life and affect your legal rights.
If a trustee is unable to manage securities assets in accordance with professional standards, the holder may bring a civil lawsuit against them. The plaintiff in the case may sue the trustee for damages to compensate for economic losses. Depending on the violation, the party could also face civil litigation.
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Dallas-Fort Worth
11 Yrs Experience
Licensed in TX
Juris Doctor – Pepperdine University School of Law – Malibu, California
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