Discussion - Chapter 23 - Securities Regulation - Do I Really Have To Disclose...That...?!

1 SectionBUSI-2301.000

Compliance with securities laws is an ongoing, involved and costly undertaking for businesses that wish to offer their securities to the general public. The sample public filings of Southwest Airlines posted in this module were prepared by a small army of corporate officers, accountants and lawyers, all of whom have considerable experience and expertise regarding financial reporting and securities compliance - and none of them work for free or cheaply. A great deal of time and effort is routinely invested in preparation of these filings, they don't happen overnight. Southwest Airlines originally "went public" in 1971 and they have been doing this sort of securities compliance continuously ever since.

Why are businesses like Southwest Airlines willing to do all of this work and incur all of the associated costs? Businesses "go public" in order to have direct access to capital available from investors through various marketplaces in the United States and internationally. When a business sells a security to the general public, it receives payment in exchange - many small payments that add up to enormous amounts of capital. For example, the Southwest Airlines prospectus posted from 2018 related to an offering of notes (debt securities) for approximately $1 billion dollars! The funds come to the business without passing through financial middlemen such as banks, meaning that no compensation (such as interest on a bank loan) is paid to those middlemen and the overall costs of obtaining the capital involved directly from investors are significantly reduced after all is considered.

The point of securities compliance is to allow capital formation for businesses on a large scale while providing protection for investors against fraud in the form of full, accurate and timely disclosure to the general public of all information that a reasonable investor might regard as material to his or her investment decision. The premise is that a fully informed investor can make his or her own investment decisions by assessing risk versus reward against personal circumstances. Obviously, a careful balance must be struck between these competing objectives!

Do you think that our system of securities regulation likely achieves these goals? Are investors protected adequately against fraud? Do businesses have the ability to attract capital efficiently? Who reviews all of those filings to make sure that they are compliant? Who reviews all of those filings to gather material information about the offered investment, and how then does that collected information reach investors? Feel free to draw on personal experience with investing or with raising capital for a business as you consider these questions.