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Securities Law – 3 Interesting Facts

16.09.2020

Securities law might seem like a complicated topic at first. But you shouldn’t be intimidated by it! There are many interesting facts and figures that we’d like to share with you. Keep reading to find out three interesting facts about securities law!

Introduction to Securities

Before we dive into the specifics of securities law, let’s have a look at some definitions. 

To put it as simply as possible, securities are financial contracts that grant the owner a stake in an asset. They have two main features: they give certain rights to the owner; and they can be traded in the financial markets. There are various types of securities. For instance, bonds, stocks and options.

Let’s get a bit more technical. When looking for a more precise definition, we should talk about the Securities and Exchange Act of 1934. It states: “The term ‘security’ means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement”. The original definition goes on for eight more lines. But the key takeaway from this definition is that securities are complex to define.  

Would you like to read more about what are securities? Or get to know the securities market better? Check out our comprehensive guides on this topic! 

3 Facts About Securities Law

Now that you know more about securities, let’s dive into some cool legal facts!

1929 Stock Market Crash Initiated the Securities Law 

The Securities Act of 1933 was passed by Congress on in the wake of the 1929 Stock Market Crash and the following Great Depression. So, what was the motivation of passing this act at that particular time?

The law required companies that sold bonds and stocks to provide full, complete and truthful information to investors. Essentially, the bill implemented registration requirements, allowed time for investors to study the registration statement (a 20 day cooling off period) and gave the buyer power to sue for losses. On a related note, the Securities and Exchange Commission (SEC) was established on June 6, 1934 to enforce federal securities laws to regulate the Stock Market and prevent fraud.

Howey Test

Who is Howey? What did he test? And how is this related to securities law? This term actually  comes from 1946, when the Supreme Court handled an important case. This would lay down the foundation for the currently infamous Howey Test. 

In short, the cases entailed two corporate defendants that had offered real estate contracts for tracts of land. They offered buyers the option of leasing any purchased land back to the defendants, who would then tend to the land. Most of the buyers were happy to lease the land back to the defendants. And this is where the SEC stepped in.

The SEC deemed this illegal and sued the defendants. They saw a problem in defendants not filing a securities registration statement. Their investigation showed that the leaseback was indeed a security.

This became a landmark decision and a test framework was developed to determine whether a transaction is an investment contract or not. The Howey Test is still used in determining whether a token qualifies as a security.

Blue Sky Law

For this fact, we have to go back to 1933 when the Securities Act was passed. The term “Blue Sky” was a phrase used by Supreme Court Justice McKenna to address speculative schemes. that “have no more basis than so many feet of blue sky”. In more official terms, it is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales.

Now that you know more about the securities law, why not get practical? Head over to our security token platform and start exploring!