The Origins of Securities Regulation

AuthorChristopher C. Nicholls
ProfessionFaculty of Law, Western University
There is nothing inevitable about the form, or even the existence, of
modern securities regulation. This can sometimes b e forgotten. We are
apt to regard familiar and long-lived institutions as somehow natural
and even indispensable owing to a phenomenon famously described
by legal positivist Georg Jelli nek 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 regulat ion to protect innocent investors
incontrovertibly important. But the specif‌ic form, den sity, 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 example, 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 essenti al to have laws prohibiti ng securities fr aud and
manipulation (accompanied by appropriate penalties to pun ish violators,
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 normative Kraft De s Faktischen: das
Staatsverstä ndnis Georg Jellineks (Baden-Baden, Germany: Nomos, 20 04).
and to deter other potential law breaker s). But securities regulation goes
far beyond the traditional prohibit /punish model. It involves an exten-
sive, and indeed expensive, batter y of regulatory machiner y designed
not merely to detect, punish, and deter wrongful behav iour, but also to
try actively to prevent harm 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 eects. In t he wake of f‌inancial
disasters, legislative 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.”
1) Introduction
One of the earliest and most infamous f‌inancial scandals to which
modern Canadia n securities regulation can trace its origin s was the so-
called South Sea Bubble. This incomparable phra se is associated w ith
the rapid rise and subsequent fall of the price of shares in the South
Sea Company in 1720, one of the most infamous securities “pump and
dump” schemes in history.
2) The Rise of the South Sea Company
The South Sea Company (ocially called the Governors and Company
of Merchants of Great-Britain, Trading to the South S eas and Other Parts
of America, and for Encouraging the Fishery) was created by an Act of
the British Parliament i n 1711. The South Sea Compa ny was established
to assist in the f‌in ancing (or ref‌inanci ng) of the British government debt,
through the method of “engra ftment” an eighteenth-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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