The origins of securities regulation
| Author | Christopher Nicholls |
| Pages | 127-144 |
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CHA PTER 5
THE ORIGINSOF
SECUR ITIES REGUL ATION
A. INTRODUC TION1
There is nothing inevitable about the form, or even the exi stence, of
modern securities regulation. This can sometimes b e forgotten. We are
apt to regard familiar a nd long-lived institutions as somehow natural
and even indispensable owing to a phenomenon famously described
by legal positivist Georg Jellinek and usually rendered into English
as “the normative power of the actual.”2 Securities ma rkets have been
extensively regulated since before most readers of this book were born.
The mischiefs at which regulation is aimed seem all too prevalent and
loathsome; the goals of regulation — to protect innocent investors —
incontrovertibly important. But the specific form, density, and com-
plexity of regulation that sur rounds the sale of securitie s to the public
is unique. No similar reg ulatory apparatus is in place, for exa mple, to
protect purchasers of real est ate; yet, for most Canadians, it is their
home, not their securities portfolio, that represents, by far, their most
signific ant investment.
Of course, it is essential to have laws prohibiting secur ities fraud
and manipulation (accompanied by appropriate penalties to pun ish
violators, and to deter other potential law breakers). But securities
1 Some of the materi al in this chapter dr aws on Christopher C Nicholls, Corpor-
ate Finance and Cana dian Law, 2d ed (Toronto: Cars well, 2013) at 191–212.
2 See, for example, And reas Anter, ed, Die normat ive Kraft Des Fakti schen: das
Staatsverstä ndnis Georg Jellineks (Baden-Baden: Nomos, 2004).
SECU RITIE S LAW128
regulation goes far beyond the tr aditional prohibit/punish model. It
involves an extensive, and indeed expensive, battery of regulatory
machinery designed not merely to detect, punish and deter wrongful
behavior, but also to try actively to prevent har m to investors before it
ever happens.
How, and why, did the sale of securities attract a level of regulation
more extensive than any other t ype of commercial tran saction in our
economy, with the possible exception, as I have suggested elsewhere,
of the sale of materials that can be used to produce nuclear weapons?3
The answer is found in the pages of history. Legislators and regulators
were first prompted to regulate securitie s markets chiefly in response
to specific, notorious scandal s that have, or have been perceived to
have, far-reaching economic and social effect s. In the wake of financial
disasters, legi slative and regulatory measures of ever-increasing scale
and scope are defiantly imposed upon our markets under the sweeping
justificatory battle cr y that, “This must never happen again.”
B. GRE AT BRITAIN AND THE SOUTH SEA
BUBBL E
1) Introduction
One of the earliest and most infamous financial scand als to which
modern Canadia n securities regulation can trace its origin s was the so-
called “South Sea Bubble.” This incomparable phrase is ass ociated with
the rapid rise and subsequent fall of the price of shares in the South
Sea Company in 1720, one of the most notorious securities “pump and
dump” schemes in history.
2) The Rise of the South Sea Company
The South Sea Company (officially called the Governors and Company
of Merchants of Great-Britain, Trading to the South Se as and Other Parts
of America, and for Encouraging the Fishery) was created by an Act of
the British Parliament in 1711. The South Sea Company was established
to assist in the fin ancing (or refinanci ng) of the British government debt,
through the method of “engraftment” — an eighteent h-century public
financing technique that involved issuing equity secur ities in a trading
company to holders of government debt in exchange for those holders’
3 Nicholls, above note 1 at 191.
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