SECURITY LAW

1. SECURITY LAW Presented by Rebecca. Wang Civil&Commercial Law School

2. The Merchandise of Securities is really traffic in the economic and social welfare of our people. Such traffic demands the utmost good and fair dealing on the part of those engaged in it. If the country is to flourish, capital must be invested in the enterprise. FRANKLIND.ROOSEVEIT

3. The creation of the Security and Exchange Commisson (SEC) was a direct result of the stock market crash of October 29, 1929. The crash and ensuing economic depression caused the public to focus on the importance of securities markets for the economic well-being of the nation. The feverish trading in securities during the preceding decade became the subject of

4. widespread attention, and numerous reports were circulated concerning the speculative, manipulative, and at times unscrupulous trading that occurred in the stock markets. ----- 30/10,29NEWYORK TIMES

5. Contents • Preface: Objects of Security Law • Chapter 1: Public (private) offering of security • Chapter 2:Security Exchange • Chapter 3:Security Supervision • Summary: The Modification and the Tendency of Security Act of P.R.C

6. Preface: Objects of Security Law • 1. Securities:Definition by Comparative Study. • (1)Securities vs. Other types of goods. • (2)Statutory Definition of Securities • 2. The Security Markets • 3. The Security Industry • 4. The legal relationship concerning securities.

7. 1. Securities: Definition by comparative Study • (1)Securities vs. Other types of goods. • (2)Statutory Definition of Securities( Security Act of 1933 vs. Security Act of 1999vs.Security Act of 2005)

8. (1)Securities vs. Other types of goods • Sample of securities:

9. No.1

10. No.2

11. (1)Securities vs. Other types of goods • Securities have no intrinsic value in themselves-they represent rights in something else. They are created, rather than produced. • Securities are not used or consumed by their purchasers. They become a kind of currency traded in the so-called “secondary markets” at fluctuating prices.

12. (2)Statutory Definition of Securities • The Securities Act of 1933 to include” any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional, undivided interest in oil, gas, or other mineral rights, or, in

13. general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, tem-porary or interim certificate for ,receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” • The Security Act of 1999 to include” stock, company bonds, government bonds and other typies stipulated by state government.

14. 2006年《证券法》：在中华人民共和国境内，股票、公司债券和国务院依法认定的其他证券的发行和交易，适用本法；本法未规定的，适用《中华人民共和国公司法》和其他法律、行政法规的规定。 政府债券、证券投资基金份额的上市交易，适用本法；其他法律、行政法规有特别规定的，适用其规定。证券衍生品种发行、交易的管理办法，由国务院依照本法的原则规定。

15. 2. The Security Markets Warren. E. Buffett George Solows

16. (1)Definition of Securities Markets • The facilities through which securities are traded are known as ”markets”. These markets may have physical locations, but in many cases are simply formal or informal systems of communication through which buyers and sellers make their interests known and consummate transactions.

17. (2) Sorts of Security markets • A. Different criterion • B. Different sorts 股市有风险，入市需谨慎. 纵览沪深市，坐看熊牛争.

18. Exchange vs. OTC • An “exchange” market , of which the New York Stock Exchange (NYSE) is by far the largest, operates in a physical facility with a trading “floor” to which all transactions in a particular security are supposed to be directed.

19. In the OTC market, on the other hand , there is no exchange floor, only a computer and telephone communication network. The principal market for the stocks of large companies traded in the OTC market is NASDAQ( National Association of Securities Dealers Automated Quotation) National Market System.

20. Other types • Offering Markets vs. Exchange Markets • Bonds Markets vs. stock Markets vs. future Markets “ the main board market” vs. “ the second board market” (the growth enterprise market”)

21. 3. The Securities Industry • (1)Definition and its subjects. • (2)Relationships among the whole financial industry.

22. (1)Definition and its subjects. • The securities industry is characterized by great diversity, both in size and function. Firms registered as broker- dealers in securities range from large firms engaged in brokerage, market –making, underwriting, investment advice and fund management, as well as commodities, real estate dealings and a variety of other financial service activities, down to one-person firms engaged solely in selling mutual fund shares or dealing in a few specialized securities.

23. (2)Relationships among the whole financial industry. • The Glass-Steagall Act of 1933, prohibiting banks from dealing in securities(except government bonds), the securities business has consisted of a relatively separate and well- defined group of firms. • However, with the increasing tendency for individuals to make their equity investment indirectly through institutions, rather than

24. Trading directly in stock for their own account, and with the development of many new and complex forms of “hybrid” financial instruments, securities forms have come increasingly into competition with banks, insurance companies, and other providers of financial services. • This competition has placed severe strains on the existing regulatory structure, under which different categories of firms are regulated by different agencies with different concerns and approaches.

25. 4. The legal relationship concerning securities. • Security offering relationship • Security exchange relationship • Security supervision relationship

26. Chapter 1: Public (private) offering of security • Section 1: Case Summary • Section 2: Definition and concerning theories • Section 3: Comparative Studying

27. Historical Background • Before the 1950s, bowling alleys employed persons to reset bowling pins after each bowler took his or her turn. In 1946, an automatic pinsetting machine was displayed at a national bowling tournament in Buffalo, New York. Automatic pinsetting equipment was made widely available to the owners of bowling alleys in the early 1950s. Owing in part to the speed and

28. Accuracy with which an automatic pinsetter could reset the pins, bowling increased in popularity in bowling alleys that used the new equipment, and bowling became the leading U.S. indoor sport. Consequently, business was good for manufacturers and installers of automatic pinsetters. Not all lanes in all bowling alleys could accommodate the new equipment, however .Thus, business was also good for those who constructed and sold bowling alleys built to accommodate the new pinsetters.

29. Because the buyers of the new bowling alleys could not always pay cash, the builders would sometimes finance the sale, accepting a small down payment and a promissory note for the remainder of the price. Ordinarily, however, the builders’ suppliers would not accept promises to pay in the future but insisted on cash. For there reasons, the builders of the new bowling alleys were often in need of additional capital to expand their businesses.

30. Case Summary • BarChris Construction Corporation was an expanding company that built bowling alleys and was in constant need of cash to finance its operations. In 1961, Barchris Construction Corporation issued securities after filing the appropriate registration statement with the Securities and Exchange Commission. By early 1962, the company’s financial difficulties had become

31. Insurmountable, and BarChris defaulted on the interest due on the debentures one month after petitioning for bankruptcy. Purchasers of the Barchris bonds brought a lawsuit under section 11 of the Securities Act of 1933. The plaintiffs challenged the accuracy of the registration statement filed with the Securities and Exchange Commission and charged that the text of the prospectus was false and that material information had been omitted. There were

32. Three categories of defendants: BarChris and all of the signers of the registration statement, the underwriters, and BarChris’s auditors. • In the investigation, the court found: In the registration statement: there were the overstatement of sales and gross profit for the first quarter, the understatement of contingent liabilities as of April 30, the overstatement of orders on hand and the failure to disclose the true facts with respect to officers’ loans, customers’ delinquencies, application of proceeds and the prospective operation of several alleys.

33. Question : We need what kind of regulation during the process of the public offering? And we need what kind of principle of it?

34. Section 2: Definition and concerning theories • A. Definition&Principles of Securities Offering • Public offering: The process by which a corporation or other issuer offers and sells its securities to the public. • What’s the meaning of Public? • 1. uncertain public • 2. more than 200 • 3. other offerings stipulated by other regulations.

35. Principles of Securities Offering • Disclosure • Fairness • Justice

36. B. Disclosure • The offering regulation was designed to prohibit various forms of fraud and to stabilize the securities industry by requiring that all essential information concerning the issuance of securities be made available to the investing public.

37. a. Disclosure in Registration Statement • Contents in Section 5 of S.A. 1933 • 1. A description of the significant provisions of the security offered for sale, including the relationship between that security and the other capital securities of the registrant. Also, the corporation must disclose how it intends to use the proceeds of the sale

38. Contents in Section 5 of S.A. 1933 • 2. A description of the registrant’s properties and business. • 3. A description of the management of the registrant and its security holdings, remuneration, and other benefits, including pensions and stock options. Any interests of

39. directors or officers in any material transactions with the corporation must be disclosed. • 4. A financial statement certified by an independent public accounting firm. • 5. A description of pending lawsuits.

40. b. Disclosure in Prospectus • Investors must be provided with a prospectus that describes the security being sold, the issuing corporation, and the investment or risk attaching to the security. • Red Herring Prospectus

41. Disclosure Requirements • No overstatement, no understatement, no material omits and falses • Correctness, Accuracy, Integrated, In time

42. Section 3. Comparative Studying • Security Act of P.R.C 1999 • Security Act of P.R.C (Modified 2006) • Security Act 1933

43. Chapter 2:Security Exchange • Section 1: Cases&Practices • Section 2: Theories and Procedures concerning listing of Security • Section 3: Continuing Disclosure of Information • Section 4: Prohibited Trading Activities • Section 5: Takeover of Listed Company

44. Section 1: Cases&Questions • Questions: • What is security exchange ?Why we need it ? Do it has some specialities comparing to other transaction? • Where to exchange of security? • How to exchange of security? We need what kind of security exchange regulation?

45. Section 2: Theories and Procedures concerning listing of Security • A. Definition of listing of security. • B. Classifications of listing of security. • C. The value of listing of security • D. The Qualification of listing. • E. The Procedure of listing • F. The Suspending and Terminating of listing • G. Listing abroad China and Second listing

46. A. Definition of listing of security. • What? • Where? • How? • Comparing to offering of security?

47. B. Classifications of listing of security. • Different criterions • Different types. • C. The value of listing of security • To the listing companies • To the investers

48. D. The Qualification of listing. • Basic Requirements a. scale b. operation c. shareholder’s quantity • Specific Requirements a. For stocks b. For bonds

49. E. The Procedure of listing Listing Direction Listing Application Proclamation Ratification Listing Agreement Arrangement

50. financial statements, which may mislead the investors; (3) Where the company has any major irregularity; (4) Where the company has been operating at a loss for the latest 3 consecutive year; or (5) Under any other circumstance as prescribed in the listing rules of the stock exchange.