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Securities Outline Regulating the Market through Disclosure I Regulating Securities a Special Characteristics of Securities that require regulation system i Information Disparity individuals involved in the corporation are the people who need to sell the product which is hard to quantify ii Intangible Product possibly greater risk of fraud because you can t identify taste or quantify what you are getting 1 Bundle of contractual rights that can be defined by the parties iii Importance of investment and the capital markets capital markets can t exist and economy can t grow without investment iv Irrationality v Collective Action Problems small amounts invested from a large group of people mean that the incentives of any individual share holder might not be sufficient to take the kind of action necessary b Types of Regulation Systems ex ante rules and ex post sanctions are possible i Merit Based regulation system 1 Determining if a product is good and then determining if people should be able to purchase 2 Against market based American system ii Disclosure based regulation system 1 Disclosure of info about the underlying economics of enterprise 2 Designed to overcome information disadvantages iii Education based regulation system 1 Courses to educate the investor before allowing them to participate 2 Blurred with forced disclosure which should educate c Purposes of Securities Regulation i Asymmetric information ii Collective Action problems iii Protection of the Unsophisticated Investor iv Importance of the Capital Markets v Lack of an Alternative Regulatory Scheme vi Securities regulation is partly historical because systems are developed to deal with the rules and revamping the structure would be very costly 1 We end up w rules upon rules definitions safe harbors etc d The Laws i Securities Act of 1933 gate keeping process for entry into market ii Securities Exchange Act of 1934 Regulates secondary market transactions 1 Created SEC Administrative agency in charge of

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