Taming the Frontier?: An Evaluation of the SEC’s Regulation of Internet Securities Trading Systems

Friday, January 1st, 1999 at 12:00 am by CBLR Administration
, Taming the Frontier?: An Evaluation of the SEC’s Regulation of Internet Securities Trading Systems, 1999 Colum. Bus. L. Rev. 165

Despite the revolutionary potential of the Internet in changing the nature of securities offerings and trading, issuers and intermediaries have yet to fully seize upon the opportunities the Internet creates. Though a number of companies have utilized the Internet to make direct public offerings (“DPOs”) and several companies have set themselves up as intermediaries to facilitate DPOs, the results of the completed DPOs have been disappointing. The application of Internet technology to trading in existing securities has proceeded at an even slower pace than in the field of new offerings. Several reasons have been advanced to explain why the use of the Internet in the offering and trading of securities has developed at a slower than expected pace, including: (1) the securities offered and traded through the Internet have frequently involved a high degree of risk; (2) a lack of liquidity and established trading markets in many of the stocks involved; and 3) a lack of “intermediation.” Presently the question of what combination of these factors explains the slower than expected growth remains unresolved – more empirical evidence concerning the use of the Internet in connection with securities offerings is necessary to fully understand the impact of these factors on the use of the Internet in connection with the securities industry. Nevertheless, each of these factors is affected by the SEC’s approach to the regulation of securities trading over the Internet. Therefore, this Note will focus on explaining and analyzing the SEC’s regulation of the trading of securities over the Internet. Part II of this Note discusses the general approach of the SEC to the regulation of securities activity involving the Internet. Included within this Part is a discussion of the particular regulatory mechanisms employed to date and possible explanations for the mechanisms chosen. Parts III and IV detail the types of Internet trading sites established by issuers and intermediaries and the SEC’s regulatory responses to the various forms of trading systems. Part V evaluates the SEC’s current regulation of Internet trading sites and identifies two central problems that make further regulatory reform desirable. Finally, Part VI describes and evaluates two proposals for improving the regulatory framework governing Internet securities trading. Because of the potential for a significant increase in the use of the Internet for securities trading and the limitations of present regulation, the SEC should continue to improve regulation to ensure that investors and issuers alike enjoy the full benefits of technological innovation in the securities markets, without suffering unduly from the harms of fraud and deception.

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