Term and Definition of ‘Securities’ in a Legal Context
The term ‘Securities’ (German: Wertpapiere) refers in national and international legal transactions to a wide variety of financial instruments embodying certain membership or contractual claims. Central features include transferability, tradability, and their attachment to pecuniary claims or membership rights. The term ‘Securities’ is particularly established in the Anglo-American legal sphere and covers a broader spectrum than the classic term ‘Wertpapiere’ under German-speaking law.
Distinction and Significance in International Law
In international economic law, ‘Securities’ hold outstanding importance because they enable global trading on capital markets and are subject to regulatory and investor protection laws. The term is defined with varying breadths in different legal systems. For example, U.S. legal provisions define the term more broadly than German law, so that certain derivatives or shares in investment funds may also qualify as securities.
Legal Systematics and Categories of Securities
Basic Classification
The legal classification of securities comprises several subcategories, grouped according to the legal nature of the underlying claims:
- Equity-based Securities: This includes shares and comparable participations, which grant membership rights in a company as well as a share in profits and liquidation proceeds.
- Debt-based Securities: This covers bonds, debentures, mortgage bonds, and other instruments classified as debt-financed capital market products.
- Hybrid Securities: Instruments that feature both equity and debt elements, such as convertible and option bonds.
Specific Types of Securities in International Comparison
- Shares (Stocks, Shares)
- Debentures (Bonds, Debentures)
- Derivatives (Options, Futures, Swaps)
- Investment Units (Units, Shares in Investment Funds)
- Certificates and Structured Products
These categories may theoretically or practically differ depending on the legal system.
Legal Foundations and Regulatory Framework for Securities
European and German Law
In German law, the Securities Trading Act (WpHG) forms the central regulatory basis. In the European Union, regulation is primarily implemented through the Market Abuse Regulation (MAR), the Prospectus Regulation (ProspektVO), MiFID II, and supplementary directives and regulations. Here, the term ‘transferable securities’ is used synonymously with ‘securities’ but is sometimes interpreted more restrictively.
Anglo-American Law
United States of America
In the USA, the term ‘security’ is primarily defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. According to the so-called Howey Test decision of the Supreme Court, securities are treated as any type of investment contract that involves an investment in a common enterprise, where the profit is primarily derived from the efforts of others.
Supervision and oversight lie with the U.S. Securities and Exchange Commission (SEC).
United Kingdom
The British legal system distinguishes between ‘transferable securities’ and other financial instruments, with regulations such as the Financial Services and Markets Act 2000 (FSMA) playing a key role.
Typical Legal Issues and Transactions Involving Securities
Issuance (Offering) of Securities
The issuance of securities generally takes place in the primary market. It is subject to extensive regulatory requirements, especially regarding prospectus drafting, publicity, and investor protection measures. Issuers must fulfill transparency obligations to ensure proper information for potential buyers.
Trading and Transfer
The secondary market enables trading of already issued securities. Legally relevant are the requirements for transferability, acquisition of possession and ownership, as well as compliance with prohibitions on insider trading and market manipulation.
Investor Protection and Disclosure Obligations
Securities are subject to strict rules safeguarding market integrity. In the European Union, the USA, and many other jurisdictions, there are extensive reporting obligations, ad hoc disclosure requirements, transparency mandates, as well as provisions for the disclosure of substantial holdings.
International Developments and Current Trends
Digitalization and Tokenization of Securities
With ongoing digitalization, electronic securities and so-called security tokens (digital representations of securities based on blockchain) are becoming increasingly significant. Legislative initiatives regarding electronic securities (such as the German Electronic Securities Act, eWpG) or the EU MiCA Regulation are advancing the development of new forms of securities and defining the regulatory framework for their issuance and trading.
Cross-border Aspects
Cross-border transactions involving securities raise complex legal issues. These include applicability of international corporate, insolvency and securities law, recognition of ownership and security rights, as well as tax considerations.
Summary and Significance of ‘Securities’ in the Legal System
The term ‘securities’ is a central concept in international capital markets law, encompassing a wide range of financial instruments with their own legal foundations, regulations, and protective mechanisms. The legal treatment of securities is strongly influenced by the respective legal system and relevant supranational regulations, and is continually evolving due to technological innovation. The complexity and diversity of legal aspects require precise knowledge of the substantive and formal requirements for trading, issuance, and administration of securities. Due to their global importance, the harmonization and further development of international securities law is becoming increasingly relevant.
Frequently Asked Questions
What legal requirements apply to the public offering of securities?
The public offering of securities is subject to strict legal requirements, which are set out in particular in the Securities Act as well as in specific EU directives such as the Prospectus Regulation. A public offering generally occurs when securities are offered to an indeterminate number of persons. In such cases, there is usually an obligation to prepare and publish a prospectus, which must be approved by the competent regulatory authority (in Germany: BaFin). The prospectus must contain comprehensive information about the issuer, the offered securities, and the risks associated with the investment. In addition, various reporting, information, and publication duties must be observed. Violations of these regulations may lead to civil liability claims, administrative measures, and criminal penalties. Furthermore, it is necessary to observe any disclaimers or risk warnings for specific investor groups and further regulatory requirements, such as compliance with anti-money laundering and transparency regulations.
Who is legally considered the ‘issuer’ of securities and what are their obligations?
From a legal standpoint, the issuer is the natural or legal person who issues a security and thereby acts as debtor, guarantor, or other obligor. Key obligations of an issuer, in addition to preparing a prospectus, include ongoing transparency and publicity duties, such as the obligation to disclose insider information (ad hoc publicity), regular reports, and financial statements. In various jurisdictions, issuers are also required to announce significant changes in shareholdings or voting rights. Furthermore, issuers must comply with specific corporate governance regulations and, where applicable, insider trading prohibitions.
What legal regulations apply to the admission of securities to an organized market?
The admission of securities to an organized market (e.g., a stock exchange) requires compliance with extensive legal and exchange regulations. In addition to approval of a securities prospectus, requirements such as the minimum nominal amount, fungibility, adequate distribution, publicity, accounting, and corporate governance must be met. The respective exchange rules and applicable European legislation (such as MiFID II, MAR) set forth further detailed requirements. Admission to an organized market entails extended reporting, information, and conduct obligations for the issuer, particularly with regard to market integrity and investor protection.
How are legal violations involving securities sanctioned and what are the legal consequences?
Legal violations involving securities can result in various sanctions. These include regulatory measures such as prohibitions and fines imposed by supervisory authorities, civil liability such as investor claims for damages, and criminal consequences in the case of particularly serious breaches (e.g., fraud, market manipulation, or insider trading). The competent authorities (e.g., BaFin or the public prosecutor) can conduct investigations, require companies to make improvements, and, in extreme cases, impose trading bans or withdraw admission. Administrative measures such as exclusion from certain markets or exclusion of responsible individuals are also possible legal consequences.
What legal protection mechanisms exist for investors when acquiring securities?
Investor protection is a central concern of capital market law and is ensured by a wide range of regulations. This includes, for example, the prospectus requirement mentioned above, which is designed to ensure complete and transparent information for investors. In addition, there are special disclosure obligations, documentation, and advisory duties in the context of distribution and brokerage transactions, as well as numerous prohibitions against market manipulation and insider trading. Class actions and ombuds services supplement individual legal protection mechanisms. European and national regulatory authorities (e.g., BaFin, ESMA) continuously monitor compliance with these requirements and can intervene when necessary.
What legal requirements apply to cross-border offerings of securities?
Cross-border offerings of securities are subject not only to national provisions, but also (or primarily) to international and union law regulations, especially the EU Prospectus Regulation. Generally, the so-called ‘European Passport’ scheme is significant for distribution in multiple EU member states, under which a prospectus approved in one member state is also valid in other states once notification has occurred. In addition, country-specific particularities, regulatory options, and, in most cases, translation and adaptation obligations must be observed. There are also regulations on the permissibility of cross-border distribution channels, investor protection, and compliance with national supervisory law, as well as adherence to tax regulations. Anti-money laundering compliance also plays an important role in cross-border offerings.
What reporting obligations apply to issuers of securities during and after issuance?
Issuers of securities are subject to various reporting obligations both during issuance and in ongoing operations. Principal duties include regular publication of annual, interim, and quarterly reports, notification of significant events (ad hoc publicity), reporting of substantial changes in shareholdings, and prompt disclosure of insider information to investors. The relevant deadlines and requirements are set out in the Securities Trading Act, the Transparency Directive, and the respective exchange rules in detail. Violations may result in sanctions by the exchange authority and BaFin and may give rise to liability claims. Reports must meet minimum standards for truthfulness, completeness, and comprehensibility and are often made publicly available on the company’s website and in relevant registers.
