“Securities” is a term that refers to any kind of tradable asset. Securities typically refer to stocks, but they can refer to other types of assets and investments as well. The main categories for securities include:
- Debt-based securities such as bonds and banknotes
- Equity-based securities (i.e., common stock)
- Derivative contract securities (i.e., futures, options, etc.)
Securities law encompasses a wide range of different assets which individuals and businesses can own. Securities law is often included under the broader category of “finance law.” Finance law deals with assets, loans, and other valuables.
What Are Securities?
Securities are tradable financial assets. The term can be used to refer to any type of financial instrument. The legal definition of security depends on the jurisdiction. Some jurisdictions exclude everything other than equities and fixed-income instruments from being securities.
Securities may be represented by a certificate or electronically. Shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options, and limited partnership units are considered securities.
In the United States, securities are tradable financial assets of any kind. Securities may be categorized into:
- Debt securities (banknotes, bonds)
- Equity securities (common stocks)
- Derivatives (futures, options, swaps)
The company or entity that issues the security is called the issuer. A country’s regulatory structure determines what may or may not qualify as a security. For example, a private investment pool may have the same features as securities. Still, they may not be registered or regulated as a security if they don’t meet various restrictions.
Securities are the traditional way that commercial enterprises raise new capital. Commercial enterprises may offer an alternative to bank loans depending on their pricing and market demand. Bank loans are not advantageous as a source of financing because the bank may seek a measure of protection against default by the borrower through financial covenants. Capital is provided to investors who purchase the securities when they are initially issued through securities. Similarly, governments may issue securities when they choose to increase the government debt.
What Are Securities Violations?
Securities are very highly regulated because they often have a great monetary value. Securities laws regulate such violations as:
- Insider trading and other stocks violations
- Securities fraud
- Loan fraud
- Business non-compliance violations
- Tax-related violations
Securities violations can overlap with tax laws, property laws, and white-collar crime laws.
What Are Debt Securities?
Debt securities may be called bonds, deposits, notes, or commercial papers. What debt is called depends on the debts’ maturity and collateral. The holder of a debt security is entitled to principal and interest payment. Holders of debt security typically have the right to receive certain information from the issuer.
Debt securities are typically issued for a fixed term. They are redeemable by the issuer at the end of the term. Debt securities may be protected by collateral. If a debt security is unsecured, it may be senior to other unsecured debt, meaning the holders would prioritize the issuer going bankrupt.
Corporate bonds represent the debt of commercial or industrial entities. Notes have a short maturity, while debentures have a long maturity. Commercial paper is a simple form of debt security representing a post-dated check with a maturity of 270 days or less.
What Is Equity Security?
Equity security is a share of equity interest in the capital stock of a company, trust, or partnership. The most common form of equity is common stock. Preferred equity is also a form of capital stock. The holder of equity is called a shareholder. Shareholders own a share or a fractional part of the issuer. Unlike debt securities, which typically require regular interest payments to the holder, equity securities are not entitled to any payment. In bankruptcy, equity securities share only in the residual interest of the issuer after all other obligations have been paid out to creditors.
However, equity generally entitles the owner to a portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity holders have the right to profits and capital gain. Holders of debt securities receive only interest and repayment of principal, regardless of the issuers’ financial performance. Debt securities do not have voting rights outside of bankruptcy Equity holders are entitled to the business’s upside and control.
What Are Some Penalties for Security or Finance Violations?
Securities violations can result in hefty legal penalties. Many securities and finance violations can result in federal charges associated with strict penalties. Penalties can include:
- Misdemeanor or felony charges
- Civil and criminal fines
- Jail or prison sentences
- Business penalties (suspension of an operating license, loss of broker certification, etc.)
Securities violations sometimes result in class action lawsuits. If a company fraudulently issues stock, it affects a whole group of stockholders. Those stockholders could file a class-action lawsuit. Class-action lawsuits can take several years to complete and involve substantial amounts of money.
What Are the Types of Security Holders?
Retailers, members of the public, and other businesses may invest in securities.
Financial institutions acting on their own account or on behalf of clients represent the greatest percentage of investments. Institutional investors include investment banks, insurance companies, and pension funds.
What Is Collateral?
Securities are increasingly used as collateral. Purchasing securities with borrowed money secured by other securities or cash is called buying on a margin.
Collateral arrangements are divided into two categories:
- Security interests
- Outright collateral transfers
Commercial banks, investment banks, government agencies, and mutual funds are significant collateral takers and providers. Private parties may use stocks and other securities as collateral.
Collateral sources are changing. Gold has become a more acceptable form of collateral. Exchange-traded funds have become more readily available and acceptable today.
How Are Securities Regulated?
In the United States, the public offer and sale of securities must be registered with the U.S. Securities and Exchange Commission (SEC) if they are not offered and sold pursuant to an exemption. Securities are regulated by federal authorities, like the SEC and state securities departments. The brokerage industry is self-policed by Self Regulatory Organizations (SRO) such as the Financial Industry Regulatory Authority.
Do I Need a Lawyer for Help with Security Finance Laws?
Securities regulations typically involve complex laws and statutes that are difficult to understand. You may need to hire a securities lawyer for assistance with security law issues. Your attorney can provide you with legal advice, guidance, and representation for your claim. If you have state or federal issues, use LegalMatch’s services to find a lawyer in your area who can research the laws that may apply to your claim.
Unless you are an expert in securities regulation and law, hiring a business or financial lawyer to assist you with your legal issue is wise. LegalMatch’s services are free to use. By sorting through our business and financial lawyers database, you can find the right attorney for you today. LegalMatch allows you to search for lawyers by narrowing down the specific issues in your case. There is no fee to set up a consultation, and our services are 100% confidential. Use LegalMatch’s services to find an experienced business lawyer in your area today.