Securities: What You Need to Know
Many small companies, entrepreneurial startups and corporations across the country use securities as a way to increase their financial well-being. Although these investment tools can be profitable, companies must be cautious when purchasing, trading and selling securities to the public and/or other investors. Therefore, it is important for companies to have comprehensive knowledge of the rules and regulations surrounding securities in order to avoid making mistakes and facing charges relating to securities fraud.
What Are Securities?
When a business or corporation wants to make an investment, finance its money or obtain money from investors, it may choose to purchase and/or sell securities on the financial market. A security is a document indicating that the person, company or entity who holds it has an ownership interest in the business and that they are entitled to a portion of the issuers’ earnings. Rather than applying for a traditional loan through a financial institute, a company can use securities as an alternate way to raise capital and make a profit.
Types Of Securities
There are several forms of securities, and these include the following: bonds, stocks, options, warrants, certificates of interest and promissory notes. In general, securities can be broken down into two types, equities and debts.
People or businesses that have equities securities are given ownership in a business or corporation, much like a stockholder. As a result, the value of an equities security is susceptible to the performance of the business. For example, if the business does well, the security holder may receive profit from capital gains. If the business loses funds, however, the securities holder could potentially suffer a loss as well.
Debt securities, on the other hand, act as a sort of loan. These securities can be repaid in increments over a specific period of time. Once that time period is over, however, the holder of the security is able to receive full repayment of the debt, along with any interest that was earned. In some cases, additional terms may be made on the security depending on the specific situation.
Important Securities Laws
Federal Securities Laws regulate the purchase, trading and selling of securities at a federal level. These laws are designed to ensure that securities are handled in a fair manner and aim to minimize any fraudulent activity that goes on. Companies that issue securities must be extremely careful when providing investment information. Not only is it crucial that a company lists information regarding business dealings, it must also state what types of securities are available. A company may face fraudulent charges if there are inaccuracies found in its accounting practices and/or financial statements.
The Securities and Exchange Commission requires a company to file certain documents that state its assets and valuation before it is given the ability to handle securities. In addition, it is illegal for company associates to use inside knowledge when purchasing, trading or selling securities. When securities handlers have special information that gives them an advantage over other investors, it is referred to as ‘insider trading.’ For example, an employee learns in a board meeting that the company he or she works for is going to merge with another business and that stock prices are likely to go up substantially as a result. That worker then decides to use a family member’s name to purchase a large amount of stock so that he or she can profit on this insider information that has not yet been released to the public or has not been reported to the SEC.
Furthermore, a company that attempts to manipulate the market with the purpose of changing the way investors view securities may also be charged with fraud. Stock manipulation, embezzlement by stockbrokers and other illegal acts can lead to serious charges as well.
It is always important to investigate the terms of the securities before you invest in them or offer them to potential investors. Doing so is best for all parties involved.
There are many ways a company can benefit from using securities in its financial planning. By having a full understanding of securities and how they work, company investors can decide whether utilizing them would be an asset to their company. Investors should also make sure they are using these financial devices legally in order to avoid securities fraud charges. Companies and investors should keep in mind that it is important to investigate the terms of securities before buying into them or offering them to other potential investors.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.