Continued compliance with securities laws: Overview, definition, and example
What is continued compliance with securities laws?
Continued compliance with securities laws refers to the ongoing obligation of companies, particularly those that issue securities (like stocks or bonds), to adhere to the relevant securities regulations after the initial issuance. These laws are designed to ensure transparency, fairness, and protection for investors in the securities market. The term "continued compliance" means that the company must maintain regulatory standards, provide necessary disclosures, and follow reporting requirements throughout the life of the securities.
This includes compliance with:
- Periodic reporting: Such as filing annual reports (e.g., Form 10-K) and quarterly reports (e.g., Form 10-Q) with securities regulators (like the SEC in the U.S.).
- Disclosure requirements: Providing investors with information that may affect their investment decisions.
- Ongoing corporate governance: Ensuring that the company operates in a transparent and ethical manner, following any securities regulations that apply to the conduct of the company or its securities.
Why is continued compliance with securities laws important?
Continued compliance with securities laws is important because it helps maintain the integrity of the financial markets by ensuring that companies provide accurate, timely, and complete information to investors. It protects investors by allowing them to make informed decisions based on reliable and regulated data. For businesses, compliance with these laws is essential to avoid legal penalties, reputational damage, and potential lawsuits.
Failure to comply with securities laws can lead to severe consequences, including:
- Fines and penalties from regulatory authorities.
- Lawsuits from investors or stakeholders who feel misled or harmed by the lack of disclosure.
- Loss of investor confidence, leading to a drop in stock price or inability to raise future capital.
Understanding continued compliance with securities laws through an example
Imagine a publicly traded company that issued shares in an initial public offering (IPO). After the IPO, the company is required to file annual reports and quarterly updates with the Securities and Exchange Commission (SEC). These reports contain financial statements, executive compensation details, and other material information that investors need to make decisions about the company’s stock.
The company must also disclose any material events, such as a major lawsuit, a change in executive leadership, or a significant acquisition. If the company fails to file these reports on time or provides inaccurate or incomplete information, it may be in violation of continued compliance with securities laws.
In another example, a company may need to disclose to its investors if it plans to engage in a merger or acquisition. This disclosure, as required by securities laws, ensures that the investors have the information they need to decide whether to retain, buy, or sell their shares. Failure to comply with this requirement could lead to legal action or financial penalties.
An example of a continued compliance with securities laws clause
Here’s how a continued compliance with securities laws clause might look in a contract:
“The Company agrees to maintain compliance with all applicable securities laws, including but not limited to the timely filing of required reports with the Securities and Exchange Commission (SEC). The Company will ensure that all material information is disclosed to investors in accordance with federal and state securities regulations and will promptly notify investors of any material changes or events affecting the Company’s operations.”
Conclusion
Continued compliance with securities laws is a crucial aspect of operating in the financial markets, especially for publicly traded companies. It ensures that companies provide transparency and protect the interests of investors by adhering to legal and regulatory standards. For businesses, maintaining compliance with securities laws is not only a legal obligation but also a way to build trust with investors, avoid costly penalties, and enhance long-term success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.