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5 CommLaw Conspectus 305 (1997)
Who Needs Wall Street - The Dilemma of Regulating Securities Trading in Cyberspace

handle is hein.journals/cconsp5 and id is 315 raw text is: WHO NEEDS WALL STREET? THE DILEMMA OF REGULATING SECURITIES TRADING IN CYBERSPACE Christina K. McGlosson Does this scenario sound familiar? A friend tells you about a company that has a fantastic new product. You discover that this company is look- ing to expand, needs to raise capital and has de- cided to go public. Interested in cashing in on this new stock, you decide to call your broker to purchase shares of this company's initial public offering or IPO. You discuss your decision to purchase this stock with your broker, and he or she promises to put in an order to buy one-hun- dred shares as soon as it goes public. The advent of trading securities over the In- ternet could change this scenario. On-line trad- ing, which requires only a personal computer and an Internet connection, could spell the demise of the broker-client relationship as we know it. As the parties to an IPO become more comfortable and proficient with the Internet, the way in which Wall Street conducts business could undergo a major revolution.' This Comment discusses recent developments in securities trading on-line, evaluates the United States Securities and Exchange Commission's (SEC) response to these developments, and urges the SEC to act quickly in proposing uni- form, federal regulations to preempt state regula- tions governing on-line trading. Part I provides an overview of the Securities Act of 1933, the Securities Exchange Act of 1934 (hereinafter 1933 Act and 1934 Act respec- tively), and their relationship to an IPO, in addi- tion to outlining the reasons a company may se- 1 See generally Vanessa O'Connell & E.S. Browning, Stock Orders On Internet Poised to Soar, WALL ST. J., June 25, 1996, at Cl (explaining that the demand for trading stocks over the Internet may be increasing as a result of all of the stock chat on the Internet). Lycos, an Internet exploration tool, calcu- lated that stock trading is among the top 10 subjects people search for on the Internet, and that the most avid users are Generation Xers, or people in their twenties. Id. 2 See ROBERT W. HAMILTON, CORPORATIONS INCLUDING PARTNERSHIPs AND LIMITED PARTNERSHIPS 368 (5th ed. 1994) lect an IPO as its vehicle to raise capital. Part II examines current developments in trading and regulating securities transactions on-line. This section also alludes to future developments in cybertrading. Part III explains the SEC's initial re- action to cybertrading, and argues that despite the SEC's initial, positive reaction to electronic media, the agency has not addressed many regula- tory issues critical to the future of on-line securi- ties trading. This section also suggests a frame- work within which the SEC could provide regulatory guidance. Finally, Part IV of this Com- ment concludes that the SEC must act quickly to adopt uniform regulations governing securities trading in cyberspace, or risk losing the ability to effectively regulate securities traded via electronic media due to ever-changing technology and the Internet's increasing and global audience. I. RELATIONSHIP BETWEEN THE 1933 AND 1934 ACTS AND AN IPO A. The Securities Act of 1933 Federal regulation of securities began as a reac- tion to the inability of blue sky laws2 to control securities fraud; the large number of fraudulently floated securities contributed to the Wall Street crash of 1929.3 As a result, Congress enacted the 1933 Act to prevent and control fraudulent sales of securities on a federal level.4 The scope of the 1933 Act is limited; the Act regulates the distribu- (explaining that a blue sky law is a state regulation gov- erning securities. When the first blue sky law was enacted in 1911 in Kansas, it focused on regulating fraudulently valued securities). 3 Id. 4 Maria A. Volarich, Easing the Regulation of a Pan-Euro- pean Securities Market: Applying the Recommendations of the Rud- man Report to Easdaq, 19 FoRDHAM INT'L L.J. 2230, 2239 (1996); 15 U.S.C. § 77a (1994). The preamble of the 1933 Act states that the purpose of the statute is to provide full 305

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