Federal and California Securities Laws
Federal and California Securities Laws Summary
Securities laws govern the offer and sale of any ownership interest or evidence of indebtedness falling within the legal definition of a security. All such offers and sales should be carefully reviewed by a securities attorney to ascertain whether or not a security is present in the transaction. If a security is present, the required registration, qualification, or exemption from registration or qualification must be completed in accordance with federal and state securities laws. Completing the required registration, qualification, or exemption from registration or qualification allows a business to:
• Legally raise capital from investors;
• Avoid criminal or civil liability for securities fraud;
• Attract investors by providing all appropriate documentation; and
• Minimize the risk of investor lawsuits through proper disclosure.
Federal and California Securities Laws Details
Federal Securities Laws
The United States federal government began regulating securities in 1933 in response to the financial scams and scandals leading to the stock market crash of 1929. The Securities Act of 1933 is a disclosure act, requiring the issuers and underwriters of securities to file registration statements, prospectus, offering circulars, advertisements, and intent to sell notices with the federal government. The Securities Act of 1933 creates liability for those who materially misrepresent or omit facts about the securities being offered.
The Securities Act of 1933 was closely followed by the Securities Exchange Act of 1934. While the Securities Act of 1933 regulates the issuance of securities, the Securities Exchange Act of 1934 regulates the secondary trading of securities meaning the purchase and sale of securities not involving the issuer of the securities. Most notably, the Securities Exchange Act of 1934 makes it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Other federal regulations followed the Securities Exchange Act of 1934, including the Investment Company Act of 1940.
State Securities Laws (Blue Sky Laws)
All fifty states, the District of Columbia, Guam, and Puerto Rico have enacted state securities laws, commonly referred to as “blue sky laws”. To varying degrees, these acts regulate offers, subscriptions, sales, and issuances of securities by businesses and individuals. Like federal securities laws, blue sky laws are intended to protect the public against fraudulent investment schemes through the full disclosure of any and all information an investor would find useful in making an informed investment decision. Blue sky laws also protect the issuers of securities and investors by regulating the commissions that may be lawfully earned by a securities broker.
California Securities Laws (California Blue Sky Laws)
The California Corporate Securities Law of 1968 regulates all offers and sales of securities in California. All securities offered or sold must be either qualified with the California Department of Business Oversight or exempted from registration by a specific rule or California securities law.
Exemptions from qualification do not limit issuer liability for fraud, either criminally or civilly, but instead merely exempt the offer or sale from the cost and formalities of qualification. While federally the Securities Act of 1933 and Securities Exchange Act of 1934 are separate laws dealing with the issuance and secondary sales of securities, respectively, the California Corporate Securities Law of 1968 regulates offers and sales of securities from both issuers and secondary sellers.
Like federal securities laws and the blue sky securities laws of other states, the California Corporate Securities Law of 1968 is intended to protect the public from fraud and deception in transactions involving securities. The California Corporate Securities Law of 1968 achieves this regulation in part by providing statutory remedies in addition to common law remedies for those damaged in securities transactions which violate the California Corporate Securities Law of 1968.