The Securities Act: Does It Permit Companies To Cheat Investors?

New_York_Stock_Exchange_EntranceAuthor’s Note: This post is taking an economic and investor approach to The Securities Act of 1933. This is not to ignore the time and monetary cost of information. It is merely a critique of one portion of a larger regulatory scheme and its effects.

The purpose of the 1933 Securities Act was to protect investors by providing them with information in order to make a sound investment decision. Albeit not articulated at the time of The Securities Act’s inception, the modern application of the Securities Act reflects the Capital Asset Pricing Model and the Efficient Capital Market Hypothesis. Roughly, the efficient capital market hypothesis assumes that the market and the stock prices are a reflection of information available about that security.(1)  As the original standards for reporting requirements and disclosure requirements of the Securities Act have loosened in recent years, have we cheated investors? Are investors not being fairly compensated or informed for the risks they have assumed?

When a security becomes available to the public for the first time, the SEC requires certain disclosures through its registration statement. The registration statement provides basic information about the company and basic financial information. During this process, there are underwriters who analyze and then provide the first price for the security. They will consider the projections of the company, the segment in which it operates, as well as general global and national market conditions. Their ultimate goal, however, is to sell the securities. The underwriters receive a percentage of the final sales price, which incentivizes them to have a higher price than potential fair market value. The SEC helps to regulate this process and civil liabilities and administrative action can provide a disincentive to be overly optimistic about the security’s prospects.

Since 2005, there has been a movement towards reducing the information required from issuers prior to offering securities to the public.

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Big Games, Big Crowds: A Note on Occupancy Law

Last night, Wisconsin Badger fans and foes alike filled bars and restaurants to watch the final NCAA Men’s Basketball Championship game. ESPN Milwaukee reported that nearly five and a half hours prior to tip-off, one Madison bar was already turning people away because the bar was at maximum capacity. But what does that matter? Does “maximum occupancy” serve a purpose? As someone completely unfamiliar with owning or managing property, I went looking for information about occupancy.

A quick Google search led me to an article on eHow.com. The eHow article author noted that local fire marshals are the ultimate authority when it comes to occupancy permits. The fire marshal tip helped me find the Milwaukee’s Department of Neighborhood Service’s page about occupancy permits.

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Exploitative Businesses and the Perpetuation of Poverty

walker-thomas_furniture_signProf. David Papke has a new article in print, entitled “Perpetuating Poverty: Exploitative Businesses, the Urban Poor, and the Failure of Reform,” appearing in 16 St. Mary’s Law Review on Race & Social Justice 223 (2014). Here is the abstract:

While rent-to-own outlets, payday lenders, and title pawns operate in suburban and rural areas, these exploitative businesses are most concentrated in America’s inner cities. The businesses’ highly crafted, standardized contractual agreements are central in their business models and for the most part enforceable in the courts. What’s more, the contractual agreements and business models are so sophisticated and adjustable as to make them virtually impervious to regulation or legislative reform. The businesses as a result continue not only to exploit the urban poor but also to socioeconomically subjugate them by trapping them into a ceaseless debt cycle. Profits go up when the urban poor cannot pay up, and rent-to-own outlets, payday lenders, and title pawns take advantage of urban poverty while simultaneously increasing and perpetuating it.

An earlier draft of the paper appeared on SSRN.

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