The Development of Securities Law in the United States
Given the existence of contract, property, fraud, and company law, what is the purpose of securities laws? Broadly speaking, they can serve either of two functions, or some mix of both. The first is to facilitate contracting among entrepreneurs, managers, shareholders, and financial intermediaries by providing a standardized set of rights and obligations (La Porta et al. 2005). Such laws are motivated by the desire to reduce transaction costs where contracting parties are widely dispersed and both writing complete contracts ex ante and renegotiating ex post are difficult. A second possible function is to restrict contracting by limiting the set of legally available terms. Such laws reflect the view that securities markets are beset by market failures stemming from externalities or investor irrationality (Coffee 1984; Fox 1999; Langevoort 2002). For the sake of simplicity, we can call the first a “contracting” paradigm and the second a “regulatory” paradigm.