Corporations and businesses issue shares to expand company operations, cover current operating costs, raise capital for construction and also to purchase other firms. Businesses must make a decision on the type of shares to issue to meet the company's fiscal needs. Issuing stock, either as initial or later offerings, also typically requires federal regulator approval after an examination of the firm's stock sales plan and an evaluation of the quantity of stocks included in the sale.
Stock Market Regulations
Stock market regulations help avoid fraud and irregular practices in issuing both common and preferred stock, and buying and selling stocks. The Securities Act of 1933 and the Securities Exchange Act of 1934 set the basic standards for company disclosures for stocks offered for sale. The federal criteria for both common and preferred stock offerings includes requiring public disclosure of corporate finances and general firm background information. This includes a description of the company and the type of corporate management at the time of the initial stock offering. Firms must then report on a regular basis, typically in quarterly and annual statements. The SEC also mandates publishing copies of certified accountant-reviewed corporate financial statements.
Firms issuing both types of stock must submit documents to the federal Division of Corporate Finance (DCF), including a formal registration, forms 10-K (annual) and 10-Q (quarterly), shareholders proxy notifications, an annual report, copies of any federal filings related to acquisitions and mergers and any stock offers for large numbers of the firm's stock shares. The DCF reviews the materials to determine the accuracy and also can mandate additional information be made public.
Common stock sold on the NASDAQ, NYSE or AMEX exchanges, must meet the standards set by each board. Over-the-counter stocks must meet federal regulations, including registration with the Securities and Exchange Commission. However, they need not follow additional guidelines mandated by the specific exchanges. Firms failing to meet the guidelines, including filing regular reports, must withdraw from the exchanges and face fines and other penalties assessed by the federal regulators when regulations overlap with federal rules.
Companies pay investors who hold preferred stock a predetermined dividend before paying dividends to common stock holders. Holders also has priority over common stock holders to collect funds if the firm fails or declares bankruptcy. Preferred shares issued in private offerings of a limited size, need not be registered or meet the federal guidelines under SEC rules. Preferred stock sales offer some advantages over common offerings for some firms. Utilities, gas and electric companies, for instance, frequently issue shares of preferred stock. This is because the dividends paid on this type of stock are treated by the utility regulators as a business expense, allowing the utility a greater range of rate increases. The dividends end up as a cost of doing business that can legally be passed on to the utility clients as rate increases.
- U.S. Securities and Exchange Commission: The Investor's Advocate -- How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation
- OTC Bulletin Board: Frequently Asked Questions (FAQs)
- U.S. Securities and Exchange Commission: Final Data Quality Assurance Guidelines
- U.S. Securities and Exchange Commission: The Laws That Govern the Securities Industry
- Financial Management Association International: Financing with Preferred Stock
- Public Utilities Fortnightly: Business and Money -- Changing Capital Structures for Changing Times
- VOX: Stock Market Wealth Effects in Emerging Market Countries
- Reuters: Dealtalk -- In Turnabout, U.S. Banks Issue Stock to Pay for Deals
- Securities Act of 1933, As Amended Through P.L. 111-229, Approved August 11, 2010
- Securities Exchange Act of 1934, As Amended Through P.L. 111-257, Approved October 5, 2010
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