Premises for Reforming the Regulation of Securities Offerings: An Essay

JAMES D. COX [*] I INTRODUCTION One of the most significant characteristics of the Federal Securities Act of 1933 [1] is its durability. Even though the Securities Act has been amended several times since its enactment, the architecture and fundamental assumptions of the Act remain largely unchanged from their Depression-era beginnings. The Securities Act's underlying structure has not changed even though remarkable changes in securities markets have occurred, including the evolution of institutional investors' domination of securities markets, investment strategies and capital-raising occurring across borders, and the emergence of digital transmissions to replace the paper-based communication system that existed when the Act became law. The Securities Act's critics may see the continuing presence of regulatory tenets formed in the 1930's as further evidence of the necessity of radical reform of the U.S. securities laws. They may also argue forcefully that continuing adherence to the status quo reflects the political truth that powerful co alitions--regulators, investment bankers, accountants, and attorneys--have an interest in preserving the provisions of the Securities Act of 1933. [2] Any change in the public offering process introduces the potential for lost rents for each of these constituencies; therefore, that change meets resistance. On the other hand, we can argue that the continuing vitality of a securities law enacted seven decades ago underscores the wisdom of its fundamental tenets, its inherent flexibility, and the SEC's wise oversight of its provisions. In this article, I discuss six fundamental tenets that should guide the regulation of public offerings of securities. The approach followed in Part II assumes that regulation is to be re-examined from the ground up, with no political or regulatory constraints. Political reality is, however, re-introduced in Part III, which examines the reach of the exemptive authority that the SEC currently possesses, in order to determine whether the principles advanced in Part II can be carried out without Congressional action. Consideration of the scope of the SEC's authority to change its regulatory approach reflects a stark political reality: It is not likely that a major overhaul of the U.S. securities laws will be undertaken by Congress. Even if legislative reform were undertaken, it is unlikely to achieve better results than those that can be accomplished under the existing framework of the Securities Act. II REGULATORY TENETS Whether it is the debates within Congress or the frequent expressions of courts, the incantations regarding the broad objective of the securities laws are the same: to provide full and fair disclosure for the protection of investors and to enhance the allocational efficiency of U.S. capital markets. These regulatory goals are not unique to the United States. The quest for improved allocational efficiency, deterrence of fraud, and enhanced investor decision-making are the objectives pursued by securities laws throughout the world community. [3] Moving from these objectives to their implementation within a digital, globalized economy requires that the underlying tenets of regulation be isolated and reexamined. Six such tenets are considered below. A. The Filtration Process in the Digital Age The dominant theme animating the securities laws is the facilitation of informed, intelligent investment decisions. At the same time, the current view is that the individual investor does not read the prospectus produced by the registration process. The Securities Act's provisions support this hiatus between its stated objective and the reality of practice among individual investors by mandating only that the prospectus reach the investor after the security has been purchased. [4] Nevertheless, the Securities Act still can be seen as fulfilling its objective despite this important omission, because its realistic objective transcends the information needs of the individual purchasing investor. …