SECURITY LAWPresented by Rebecca. Wang

Civil&Commercial Law School

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

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

widespread attention, and numerous reports were circulated concerning the speculative, manipulative, and at times unscrupulous trading that occurred in the stock markets.

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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

Preface: Objects of Security Law 1. Securities:Definition by Comparative Stu

dy. (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 securit

ies.

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)

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

No.1

No.2

(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.

(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

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.

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。

2. The Security Markets

Warren. E. BuffettWarren. E. Buffett George Solows

(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.

(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 .

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.

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.

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”)

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

financial industry.

(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.

(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

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.

4. The legal relationship concerning securities.

Security offering relationshipSecurity exchange relationship Security supervision

relationship

Chapter 1: Public (private) offering of security

Section 1: Case SummarySection 2: Definition and

concerning theoriesSection 3: Comparative

Studying

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

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.

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.

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

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

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.

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

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 regulat

ions.

Principles of Securities Offering

DisclosureFairnessJustice

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.

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

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

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.

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

Disclosure Requirements No overstatement, no understatem

ent, no material omits and falses Correctness, Accuracy, Integrated,

In time

Section 3. Comparative Studying

Security Act of P.R.C 1999

Security Act of P.R.C (Modified 2006)

Security Act 1933

Chapter 2:Security Exchange

Section 1: Cases&Practices Section 2: Theories and Procedures concer

ning listing of Security Section 3: Continuing Disclosure of Informa

tion Section 4: Prohibited Trading Activities Section 5: Takeover of Listed Company

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 w

hat kind of security exchange regulation?

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

A. Definition of listing of security.

What? Where? How? Comparing to offering of security?

B. Classifications of listing of security.

Different criterions Different types. C. The value of listing of security To the listing companies To the investers

D. The Qualification of listing.

Basic Requirements a. scale b. operation c. shareholder’s quantity Specific Requirements a. For stocks b. For bonds

E. The Procedure of listing

Listing DirectionListing Direction ListingListingApplication Application

RatificationRatification

ArrangementArrangementListing Agreement Listing Agreement

ProclamationProclamation

 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.

F. The Suspending and Terminating of listing

a. Suspending Causations (Stocks vs. Bonds)

b. Terminating Causations (Stocks vs. Bonds)

C. Decision Authority d. ST vs. PT

Article 55 Where a listed company is in any of

the following circumstances, the stock exchange shall decide to suspend the listing of its stocks: (1) Where the total amount of capital stock or share distribution of the company changes and thus, fails to meet the requirements of listing; (2) Where the company fails to publicize its financial status according to the relevant provisions or has any false record in its  

Article 60 After any corporate bonds are listed, where

the relevant company is in any of the following circumstances, the stock exchange may decide to suspend the listing of its corporate bonds :

(1) Where the company has any major irregularity; (2) Where the company has any major change and thus fails to meet the requirements for the listing of corporate bonds;

 (3) Where the funds as raised through the issuance of corporate bonds fail to be used according to the purpose as verified; (4) Where the company fails to perform its obligations according to the measures for financing through the issuance of corporate bonds; or (5) Where the company has been operating at a loss for the latest 2 consecutive years.

Article 56 Where a listed company is in any of the

following circumstances, the stock exchange shall decide to terminate the listing of its stocks: (1) Where the total amount of capital stock or share distribution of the company changes and thus, fails to meet the requirements of listing, and where the company fails again to meet the requirements of listing within the period as prescribed by the stock exchange; (2) Where the company fails to publicize its financial status

according to the relevant provisions or has any false record in its financial statements, and refuses to make any correction; (3) Where the company has been operating at a loss for the latest 3 consecutive years and fails to gain profits in the year thereafter; (4) Where the company is dissolved or is announce bankruptcy; or (5) Under any other circumstance as prescribed in the listing rules of the stock exchange.

Article 61 Where a company is in any of the circumstan

ces as described in item (1) or (4) of the preceding Article herein and the consequences as incurred therefrom have been verified to be serious, or where a company is under any of the circumstances as described in any of item (2), (3), or (5) of the preceding Article herein and fails to eliminate the relevant consequence within a specified time limit, the stock exchange shall decide to terminate the listing of corporate bonds of the company. In case a company is dissolved or declared bankrupt, the stock exchange shall terminate the listing of corporate bonds thereof.

G. Listing abroad China and Second listing a. Listing abroad China b. Second Listing

Section 3: Continuing Disclosure of Information

Why? Who? Worthy? How?

Case SummaryHISTORICAL AND SOCIAL SETTING No court has ever held that every buyer or se

ller is entitled to all of the information relating to all of the circumstances in every stock transaction. But by the mid-1950s, significant understatement of the value of the assets of a company had been held to be materially misleading. In 1957, The Texas Gulf Sulphur Company began exploring for minerals in eastern Canada. In March 1959, aerial geophysical surveys were conducted

Over more than 15,000 square miles of the area. The operations revealed numerous and extraordinary variations in the conductivity of the rock, which indicated a remarkable concentration of commercially exploitable minerals. One site of such variations was near Timmins, Ontario. On October 29 and 30, 1963, a ground survey of the site near Timmins indicated a need to drill for further evaluation.

Background and Facts The Texas Gulf Sulphur Company (TGS) dr

illed a hole on November 12, 1963, that appeared to yield a core with an exceedingly high mineral content. TGS kept secret the results of the core sample. Officers and employees of the company made substantial purchases of TGS’s stock or accepted stock options after learning of the ore discovery, even though further

Drilling was necessary to establish whether there was enough ore to be mined commercially. On April 11, 1964, an unauthorized report of the mineral find appeared in the newspapers. On the following day, April 12, TGS issued a press release that played down the discovery and stated that it was too early to tell whether the ore finding would be a significant one. Later on, TGS announced a strike of at least 25 million tons of ore, substantially

Drilling up the price of TGS stock. The SEC brought suit against the officers and employees of TGS for violating the insider-trading prohibition of Rule 10b-5. The officers and employees argued that the prohibition did not apply because the information on which they had traded was not material as the mine had not been commercially proved. The trial court held that most of the defendants had not violated Rule 10b-5, and the SEC appealed.

Section 3. Continuing Disclosure of Information

Why we need the “Continuing Disclosure of information?

Who will need to disclose? Worthy of continuing disclosure of

information? How to achieve it?

Negative Regulation

Article 63 The information as disclosed by issuers and listed companies according to law shall be authentic, accurate and integrate and may not have any false record, misleading statement or major omission.

Positive Regulation Article 64 As for the stocks that have been

publicly issued upon the verification of the securities regulatory authority under the State Council or for the corporate bonds that have been publicly issued upon the verification of the department as authorized by the State Council according to law, the prospectus or the measures for financing through the issuance of corporate bonds shall be announced. In an IPO of stocks or corporate bonds, the relevant financial statements shall be announced as well.

Article 65 A company whose shares or bonds have been listed for trading shall, within two months as of the end of the first half of each accounting year, submit to the securities regulatory authority under the State Council and the stock exchange a midterm report indicating the following contents and announce it: (1) The financial statements and business situation of the company; (2) The major litigation involving the company; (3) The particulars of any change concerning the shares or corporate bonds thereof as already issued; (4) The important matters as submitted to the general assembly of shareholders for deliberation; and (5) Any other matter as prescribed by the securities regulatory authority under the State Council.

Article 66 A listed company whose shares or bonds have been listed for trading shall, within four months as of the end of each accounting year, submit to the securities regulatory authority under the State Council and the stock exchange an annual report indicating the following contents, and announce it: (1) A brief account of the company's general situation; (2) The financial statement and business situation of the company; (3) A brief introduction to the directors, supervisors, and senior managers of the company well as the information regarding their shareholdings; (4) The information on shares and corporate bonds as already issued, including the name list of the top 10 shareholders who hold the largest numbers of shares in the company as well as the amount of shares as held thereby;

 (5) The actual controller of the company; and (6) Any other matter as prescribed by the securities regulatory authority under the State Council.Article 67 In the event of a major event that may considerably affect the trading price of a listed company's shares and that is not yet known to the investors, the listed company shall immediately submit a temporary report regarding the said major event to the securities regulatory authority under the State Council and the stock exchange and make an announcement to the general public as well, in which the cause, present situation and possible legal consequence of

the event shall be indicated: The term "major event" as mentioned in the preceding paragraph herein refers to the following circumstances: (1) A major change in the business guidelines or business scope of the company; (2) A decision of the company on any major investment or major asset purchase; (3) An important contract as concluded by the company, which may have an important effect on the assets, liabilities, rights, interests or business achievements of the company; (4) Any incurrence of a major debt in the company or default on an overdue major debt;

 (5) Any incurrence of a major deficit or a major loss in the company; (6) A major change in the external conditions for the business operation of the company; (7) A change concerning directors, no less than one-third of supervisors or managers of the company; (8) A considerable change in the holdings of shareholders or actual controllers who each hold or control no less than 5% of the company's shares; (9) A decision of the company on capital decrease, merger, division, dissolution, or application for bankruptcy;

 (10) Any major litigation involving the company, or where the resolution of the general assembly of shareholders or the board of directors have been cancelled or announced invalid; (11) Where the company is involved in any crime, which has been filed as a case as well as investigated into by the judicial organ or where any director, supervisor or senior manager of the company is subject to compulsory measures as rendered by the judicial organ; or (12) Any other matter as prescribed by the securities regulatory authority under the State Council.

Procedures and Liabilities Article 68 The directors and senor managers

of a listed company shall subscribe their opinions for recognition in the periodic report of their company in written form. The board of supervisors of a listed company shall carry out an examination on the periodic report of its company as formulated by the board of directors and produce the relevant examination opinions in writing. The directors, supervisors and senior managers of a listed company shall guarantee the authenticity, accuracy and integrity of the information as disclosed by their listed company.

Article 70 The information as prescribed by law to be disclosed shall be publicized through the media as designated by the securities regulatory authority under the State Council and shall, at the same time, be made available for public reference at the company's domicile and a stock exchange. Article 71 The securities regulatory authority under the State Council shall carry out supervision over annual reports, midterm reports, temporary

reports of listed companies as well as their announcements, over the distribution or rationing of new shares of such listed companies and over the controlling shareholders and any other obligor of information disclosure of listed companies. The securities regulatory body, stock exchange, recommendation party or securities company involving in underwriting as well as the relevant personnel thereof shall, before an announcement is made by a company according to the provisions of the relevant laws and administrative regulations, divulge any content concerned before the announcement. 

Article 72 Where a stock exchange decides to suspend or terminate the listing of any securities, it shall announce the decision in a timely manner and report it to the securities regulatory authority under the State Council for archival purpose.

Article 69 Where the prospectus, measures for financing through issuance of corporate bonds, financial statement, listing report, annual report, midterm report, temporary report or any information as disclosed that has been announced by an issuer or a listed company has any false record, misleading statement or major omission, and thus incurs losses to investors in the process of securities trading, the issuer or the listed company shall be subject to the liabilities of compensation.

Any director, supervisor, senior manager or any other person of the issuer or the listed company directly responsible shall be subject to the joint and several liabilities of compensation, except for anyone who is able to prove his exemption of any fault. Where any shareholder or actual controller of an issuer or a listed company has any fault, he shall be subject to the joint and several liabilities of compensation together with the relevant issuer or listed company.

Section 4: Prohibited Trading Activities Insider Trading Market Manipulating False Statements Other Prohibited

Case Summary 1 Historical and social setting officers and directors own a fiduciary duty to

their corporation and its shareholders with respect to corporate business and property. Shares in the corporation are private property, however, and trading in those shares is not usually a corporate transaction. Thus, at common law a century ago, directors and officers were considered to owe no fiduciary duty when they traded

In the shares of their corporations. Directors or officers with inside information could trade with impunity without disclosing the information( as long as they avoided outright fraud). Although this rule is sometimes stated to be the “ majority rule”, it has been applied in only a few cases over the last ninety years. Instead, the courts have developed a number of “exceptions”. Some state courts have developed an agency law theory. Accordingly to agency law, an agent may not profit from using the

Inside information belonging to the corporation. In other words, under this reasoning, officers and directors owe a fiduciary duty to their corporation not to engage in the trading of shares in the corporation on the basis of inside information.

Background and Facts The defendants in this case were the chair

man of the board and president of MAI (Management Assistance, Inc.), a corporation that bought and leased computers, with maintenance services being provided by IBM. The defendants learned that IBM was going to increase its maintenance prices dramatically, to such an extent that it would cut MAI’s profits by

75 percent per month. Just before the IBM maintenance price increase was announced, the defendants sold their MAI stock for $28 per share. After IBM publicly announced its price increase, MAI stock fell to $11 per share. The plaintiff brought a derivative action on behalf of MAI to recover the difference in profits. The trial court granted the defendants’ motion to dismiss, and the plaintiff appealed.

CASE SUMMARY 2 Historical and Economic Setting Market analysts uncover and analyze

information concerning corporations, often by meeting with and questioning officers and other corporate insiders. The information that an analyst obtains may form the basis for judgments as to the market value of corporate securities. An analyst makes this judgment available in newsletters or otherwise to his or her clients. Because of the nature of the information and the nature of the market, the

the information cannot be made simultaneously available to all of a corporation’s shareholders or the general public. Nevertheless, the entire market benefits from analysts’ efforts, which are reflected in the prices of corporate securities. It is not always entirely clear, however, how analysts are to obtain information from corporate management to fill in the gaps in their analyses. When legal

requirements are imprecise, parties find it difficult to comply. Thus, without some guidance as to the line between permissible and impermissible disclosures and uses, neither corporate insiders nor market analysts could be sure when the line was crossed.

Background and Facts

Dirks was an officer of a New York broker-dealer firm. Dirks specialized in providing investment analyses of insurance company securities to institutional investors. In March 1973, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America, who alleged that the assets of Equity Funding were vastly overstated as a result of fraudulent

Corporate practices. Secrist urged Dirks to verify the fraud and to disclose it publicly. Dirks decided to investigate the allegations, and throughout his investigation he openly discussed the information he had obtained with a number of clients and investors. The Securities and Exchange Commission subsequently filed a complaint against Equity Funding. It also found that Dirks had aided and abetted violations of Section 17(a) of the Securities Act of 1933, Section

10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 by repeating the allegations of fraud to members of the investment community, who later sold their Equity stock. Dirk sought review in the court of appeals.