Khóa luận tốt nghiệp: Law on stocks and bonds in the U.S and Vietnam: A comparative perspective

In Vietnam, a nation with a rich cultural and economic heritage, thejoumey of securities markets has been more recent but equally transformativeThe development of a formal stock market i

MINISTRY OF JUSTICE MINISTRY OF EDUCATION AND TRAINING

HANOI LAW UNIVERSITY

PHAM DUC VINH

453502

LAW ON STOCKS AND BONDS IN

THE U.S AND VIETNAM:

A COMPARATIVE PERSPECTIVE

BACHELOR’S THESIS

Hanoi - 2024

MINISTRY OF JUSTICE MINISTRY OF EDUCATION AND TRAINING

PHAM DUC VINH

453502

LAW ON STOCKS AND BONDS IN

THE U.S AND VIETNAM:

STATUTORY DECLARATIONTherewith formally deciare that I myself have writtenthe submitted Bachelor's Thesis independently, theconclusions and data in the Bachelor's Thesis aretruthful and reliable /

Confirmation of supervisor Author of Bachelor's Thesis

PhD Do Thi Anh Hong Pham Duc Vinh

Fr

ACKNOWLEDGEMENTSFst and foremost, Ievtend my deepest gratitude to my supervisor PhD.

Do Thi Anh Hong for providing me with the valuable opportunty to pursue mygraduation thesis on the topic “Law on stocks and bonds in the US andVietnam: A comparative perspective

Lam profoundly gratefil for her guidance and msightfil advice Herpatience, support and encouragement throughout the process of doing thethesis have been a source of great inspiration to me, making it an honor andprivilege to work wider her tutelage

1 imust also express my sincere apprectation to my parents for thetrunconditional love, care, amd the sacrifices they made to ensure my educationand future success My gratitude extends to my friends for thei moral supportand to my classmates, whose assistance was vital im the completion of thts

thesis,

Author of Bachelor's Thesis

Pham Duc Vinh

New York Stock Exchange NYSERetum on Equity ROESecurities Exchange Commission SECSelf Regulatory Organization SROState Securities Commission sscUnited Kingdom UKUnited States us

United States Dollars U§DVietnam Securities Depository and Clearing): VSDCCCorporetion

Vietnamese Dong VND

iv

TABLE OF CONTENT

PageSLIDE COVER i

STATUTORY DECLARATION ii ACKNOWLEDGEMENTS iit

LIST OF ABBREVIATIONS ivTABLE OF CONTENT v

PREFACE 1

1 Rationale ofthe Thesis 1

2 Review of previous researches related to the Thesis 2

2.1 Foreign literature 33.2 Domestic literature 3

3 Scientific and practical significance ofthe Thesis 5

3.1 Scientific significance 53.2 Practical significance 5

5 Research object and scope of research 6

5.1 Research object of the Thesis 6

6 Research methods and methodology i

6.1 Research methods of the Thesis 76.2 Methodology of the Thesis a

7 Structure of the Thesis 8

CHAPTER 1: THEORETICAL ISSUES REGARDING STOCKSAND BONDS 9

1.3.2 Concept of secunities fraud

1.3.3, Concept of investor protection

Conclusion of Chapter 1

CHAPTER 2: STOCKS AND BONDS UNDER VIETNAMESEAND U.S LAW

3.1 Stocks and bonds under Vietnamese law

2.1.1, Foundation for stacks and bonds

3.1.2 Offering, listing and information disclosure

2.1.3, Supervising entities

2.1.4, Offenses and punishments

3.2 Stocks and bonds under U.S law

3.2.1 Foundation for stacks and bonds

2.2.2 Offering, listing and information disclosure

2.3 Comparative overview of U.S and Vietnamese law on stocks and

‘bonds 45

2.31, Foundation for stacks and bonds 453.3.2 Offering, listing and information disclosure 462.3.3, Supervising entities 492.3.4, Offenses and punishments 502.35, Reason for the similanities and differences 52Conclusion of Chapter 2 54

CHAPTER 3: IMPLICATIONS TO IMPROVE VIETNAMESEREGULATORY SYSTEM FOR STOCKS AND BONDS 5543.1 Key principles for the proposals to improve Vietnamese regulatory systemfor stocks and bonds 553.2 Recommendations to improve Vietnamese regulatory system for stocksand bonds 56

3.2.1 Recommendations to improve Vietnamese regulation on offering,distribution, and information disclosure 563.2.2 Recommendations to improve Vietnamese supervising entities 573.2.3, Recommendations to improve Vietnamese regulation on offensesand punishments 58Conclusion of Chapter 3 59

CONCLUSION 60 REFERENCES 61

1 Rationale of the Thesis

The evolution of financial markets, marked by the intricate dance

‘between risk and opportunity, has witnessed the emergence and refinement ofsecurities such as stocks and bonds, shaping the very foundations of the globaleconomic landscape This comparative analysis delves not only into thecontemporary legal frameworks governing stocks and bonds in the UnitedStates and Vietnam but also unravels the historical threads that have woven theintricate tapestry of these securities

Stocks and bonds, as prevailing instruments of investment, have rootsthat extend deep into history, reflecting the economic aspirations andchallenges of different eras The United States, with its robust financial history,has seen the development ofa sophisticated market that traces its origins back

to the establishment of the New York Stock Exchange in 1792, From the iconic

‘Wall Street to the evolution of regulatory frameworks in response to economiccrises, the history of stocks in the U.S is a testament to resilience andadaptation

In Vietnam, a nation with a rich cultural and economic heritage, thejoumey of securities markets has been more recent but equally transformativeThe development of a formal stock market in the early 2000s and thesubsequent crafting of the Law on Secunities exemplify Vietnam's commitment

to economic reforms and integration into the global financial system Thenation's history, steeped in a trajectory of economic shifts and adaptations,provides a unique backdrop to the development of its securities markets

Conceming the legal frameworks governing stocks and bonds in these

‘two nations, it is crucial to recognize that the historical underpinnings haveplayed a pivotal role in shaping their current structures Compared to the U.S.,the globally leading economy, the regulations of Vietmam on theaforementioned objects still need further development and adjustments to be on

par with conventional standards Therefore, with the growth and prosperity ofthe Vietnamese financial scene in mind, the topic “Law on Stocks and Bonds

in the U.S and Vietnam: A comparative perspective” is chosen

2 Review of previous researches related to the Thesis

Regarding their exceedingly vital positions within the financial structureofthe world, securities like stocks and bonds have been the subject of research

in countless studies, both inside and outside of Vietnam

21 Poreign literature

As the global economic powerhouse, the United States has been afamiliar nation in numerous comparative researches regarding securities law.With its established markets and legal system, researchers, no matter theirnationalities, are always willing to explore and attain new knowiedge fromexamining and comparing their own financial policies with American securitiesregulations that date back to almost a century ago The most notable studies arefrom developed economies, specifically European nations, such as FinacialServices in the United States and United Kingdom: Comparative Approaches

to Securities Regulation and Dispute Resolution, Brigham Young UniversityInternational Law & Management Review, 2008 by Cory Alpert, whichillustrates the regulatory circumstances and dispute resolution schemes forfinancial services in the U.S and the UK., with emphasis on proceduraldissimilarities and allocation of forum choice between investors and firms

Furthermore, there are also researches done by academics from lessProsperous environments, namely 4 Review and Comparative Study ofSecurities Regulation and the Scope of Antifraud Provisions which ProtectInvestors in Developing and Developed Securities Markets: A Case Study ofthe Tancantan and US Securities Markets, Tilburg University, 2017 byMichaela Herack Marandu, a Tanzanian scholar This study reviews andcompares the strength and standard of securities regulation in Tanzania, a third-world country with limited financial standards, with the U.S, including

relevant investor-friendly antifraud provisions under the Tanzanian CMS Actsand U.S Federal Securities Acts It only focuses on the provisions in Part IX

of the Tanzanian 1994 CMS Act and certain provisions of the U § FederalSecurities Acts, no other laws were considered In his paper, Marandu was able

to present key similarities and differences of antiffaud protocols between thetwo countries by meticulously citing and analyzing these statutes Onenoticeable example is the breakdown of Section 10(b) of the U.S SecuritiesExchange Act of 1934 in Chapter 3 of the paper, where he discussed insidertrading under U.S law and jurisdiction of this section through the case ofMorrison v Nat'l Aust, Bank Limited 130 S Ct 2869 (2010) All inall, eventhough it only covers anti-fraud provisions, the knowledge from Marandu's

‘work is exceedingly beneficial, not only to the Tanzanian economic scene butalso similarly emerging markets such as Vietnam

2.2 Domestic literature

Vietnam, on the other hand, still has a very modest amount of

comparative legal literature, especially in the case of comparing Vietnamesesecurities regulations with the United States’ At the moment, there is only ahandful of academic researches regarding this matter One of which is

“Protection of Minority Stockholders in Vietnam: A Comparative AnalysisUniversity of Economics Ho Chỉ Minh City, 2018 by Nguyen Van Tri Hisresearch focuses on an important aspect of every security, which is theprotection of the investors, specifically the protection of stockholders withlimited ownership in the case of this research This work compares theprotective mechanisms for minority stockholders within the Law on Enterprises

2014 with relevant Legal statutes from Thailand and the U.S, thus providesvaluable insights on how to implement better regulations regarding this matter

Or “Comparison of la on public offering of stocks ím Vietnam and theUS.”, Law School - Vietnam National University, 2023 by Le Thi Diep Thisresearch analyzes and clarifies general and specific issues regarding the law on

public offering of stocks, including participants, requirements, and procedurefor this activity, through comparison between Vietnamese regulations and U.Sregulations Through this analysis, the author points out current setbacks ofVietnamese regulatory system that are not in accordance with internationalstandards, and provides several recommendations to fumish and improveVietnamese law on public offering of stocks

Apart from the abovementioned theses, there are other several studiesthat although may not conduct direct comparison of Vietnam and the U.S, butstill contain valuable information on this topic, namely “Vietnam corporatebond market: Current status and Development solutions”, University ofEconomics and Business - Vietnam National University, 2023 by Pham NguyetAnh This thesis analyzes and evaluates the development situation of thecorporate bond market in Vietnam, identifies ongoing problems and proposessolutions to further develop the Vietnamese corporate bond market.Additionally, it has a section that provides information on foreign experiences

in developing corporate bond markets, including big economies like the U.S,China, and Japan

There is also a research named “Law on Requirements for PublicOffering of Securities in Vietnam”, Law School - Hanoi National University,

2021 by Do Thao Quyen This thesis studies current Vietnamese regulations onpublic offering of securities, as well as their application in practice It focuses

on assessing standards, regulations, and other relevant requirements regardingpublic offering of securities, and comparing them with their counterparts fromother Southeast Asian countries

Furthermore, there is a so-called “International Experience on Law onSecurities and Securities Markets Research Report” conducted in 2019 by theMinistry of Finance as part of the Law on Securities Project documents Thispaper does not actually compare any existing regulations on securities ofVietnam with other nations’, but provides the collected information on

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securities law of ch country, including the US, Japan, transitionaleconomies such as Russia and Poland, and several other Asian nations

3 Scientific and practical significance of the Thesis,

3.1 Scientific significance

‘The comparative analysis of the law on stocks and bonds in Vietnam andthe U.S offers Vietnamese scholars and researchers a unique opportunity todelve into the intricacies of global financial governance By scrutinizing thelegal frameworks of both countries, academics in Vietnam can identify gaps,strengths, and areas for enhancement within their domestic regulatory structureThis thorough understanding contributes to the development ofa nuanced bodyoflmowledge within the academic community, fostering expertise in securitieslaw and intemational business regulations Furthermore, the scientificsignificance extends to the generation of insights that can shape future researchendeavors, paving the way for scholarly offerings that resonate not only within

‘Vietnam but also in the broader international legal discourse

3.2 Practical significance

From a practical standpoint, comparatively analyzing securities lawsholds immense importance for Vietnam's economic development and globalintegration Investors, both domestic and international, stand to benefitsignificantly from a nuanced comprehension of the legal safeguards in placewithin Vietnam's securities market This understanding not only enhancesinvestor confidence but also contributes to the attraction of capital, fosteringeconomic growth and development For policymakers in Vietnam, the practicalsignificance lies in the actionable insights derived from intemetional bestpractices Financial institutions operating within Vietnam can leverage theseinsights to tailor risk management strategies, optimizing their operations andcontributing to the stability of the local financial market Overall, the practicalsignificance of this comparative Thesis extends to creating an environmentconducive to investment, economic prosperity, and increased participation in

the global financial community, positioning Vietnam as a robust competitor inthe international economic arena

4 Objectives of the Thesis

‘Through a comparative analysis between Vietnam and the United States,the Thesis aims to identify best practices and adapt them to address uniquechallenges within the Vietnamese stock and bond markets Prioritizing theenhancement of investor confidence, the Thesis seeks to explore and assessexisting regulations from both countries and propose better measures forincreased protection and transparency Additionally, the researcher wishes tocontribute to the academic community in Vietnam, fostering cross-bordercollaboration and supporting sustainable economic growth by aligningsecurities regulations with national competitiveness and global integrationgoals

5 Research object and scope of research

5.1, Research object of the Thesis

The Thesis focuses on researching relevant regulations of the Law on.Securities 2019, the Law on Enterprises 2020 (amended in 2022), Decree no155/2020/ND-CP on the elaboration of some articles of the Law on Securities,Decree no 156/2020/ND-CP prescribing penalties for administrative violationsagainst regulations on securities and securities market, and other relateddocuments

Additionally, the Thesis also examines legal statutes from the US,including the Securities Act of 1933 and the Securities Exchange Act of 1934

5.2 Scope ofresearch of the Thesis

‘The Thesis centers around the regulations and policies governing stocksand bonds (specifically corporate bonds) Stocks and bonds are the two mostprominent types of securities (tradable financial instruments), among othersecurities such as mutual funds, exchange-traded funds, options, and futuresThe conventional economic purpose of acquiring securities is for investment,

aiming to generate income or realize capital appreciation Therefore, most ofthe regulations on securities, specifically stocks and bonds, are created with theprotection of investors in mind,

After years of refining through trial and error, the U.S now has one ofthe largest and most influential financial markets globally It also places astrong emphasis on investor protection, evidenced by robust regulatorymechanisms, while the U.S Securities and Exchange Commission (SEC) is arenowned regulatory authority with a sophisticated legal framework Therefore,aside from the contemporary legal statutes of Vietnam on stocks and bonds, theThesis also covers important regulations of the U.S on these matters in order

to provide a thorough comparison The Thesis, however, does not includeanalysis of securities other than stocks and bonds (specifically corporate

‘bonds), as they are not as economically significant and some would requiredeeper research due to their complexity

6 Research methods and methodology

6.1, Research methods of the Thesis

Specific research methods in use include analysis, synthesis,comparison, statistics, jurisprudence comparison, historical research, proof,practical research, and scientific prediction These methods are present in allchapters of the Thesis Among these methods, the analysis and comparisonmethods are more frequently employed to develop scientific arguments for theThesis

6.2 Methodology ofthe Thesis

Conceming the methodology to carry out the abovementionedobjectives, the Thesis resorts to Marxism Leninism research methodology,dialectical materialism, and the policies of the Communist Party of Vietnamand the State on socialist-oriented market economy, democracy promotion, andlaw-governed socialist state

7 Structure of the Thesis

Aside from the Preface, Conclusion, Bibliography, and Annexes, thecontent of this Thesis includes:

Chapter I: Theoretical issues regarding stocks and bonds

Chapter 2: Stocks and bonds wider Vietnamese and US law

Chapter 3: Implications to mprove Vietnamese regulatory system forstocks and bonds

CHAPTER 1THEORETICAL ISSUES REGARDING STOCKS AND BONDS

claims such as secured and unsecured debt),! or voting power, often dividing

these up in proportion to the amount of money each stockholder has invested.Not all stock is necessarily equal, as certain classes of stock may be issued, forinstance, without voting rights, with enhanced voting rights, or with a certainpriority to receive profits or liquidation proceeds before or after other classes

of shareholders,

Stocks can be traded either privately or on stock exchanges, which arepublic organized markets where securities like stocks are bought and sold Suchtransactions undergo close scrutiny from governmental and regulatory bodies

to prevent fraud, safeguard investors, and promote overall economic

well-‘being The electronic format, known asa dematerialized account, is commonlyused to deposit stocks with depositories When companies issue new shares, itcan lead to the dilution of ownership and rights for existing shareholders, asthey trade a portion of their ownership for cash, crucial for sustaining orexpanding business operations Additionally, companies may engage in stack

‘buybacks, enabling investors to recover their initial investment and capitalize

on subsequent increases in stock prices

‘Adam Hayes (2023), Socks: What they ae, mean pes, ow thy difer from bond, accessed on

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1.12 Characteristics of stocks

1.1.2.1 Stocks are equity instruments

Equity securities represent owmership interest held by shareholders inacompany In other words, it is an investment in an organization's equity stock

to become a shareholder of the organization

Owning a majority of the shares of a company also equals to highervoting power, thus providing the owner indirect control over the direction ofthat company by the ability to appoint its board of directors This becomes mostapparent when one company buys another, when the acquiring company buysall the outstanding shares

1.1.2.2 Stocks have definite values

From a legal perspective, stocks represent ownership of a company,therefore they hold certain values, which can be realized into monetary profitwhen stockholders decide to sell their stocks Moreover, stocks can be utilized

as collateral for many types of transaction, proving that their values are widelyrecognized

However, most of the time, the stocks from companies that declarebankruptcy would become worthless and eventually get removed from themarket

1.1.2.3, Stocks provide dividends for stockholders

Dividend is the part of a company's profit which is distributed to the

‘members or stockholders of the company in accordance with the rights set out

in shares, or in every type and class of shares 2 The current year profit as well

as the retained eamings of previous years are available for distribution; acomporation is usually prohibited from paying a dividend out of its capitalDistribution to stockholders may be in cash (usually by bank transfer) or, ifthecorporation has a dividend reinvestment plan, the amount can be paid by the

ojo Below 2017), “Concept of Job£ stock campany” Zvanal of Process Management New Tecinetoges, buernationa, Vol S,Ne 1,9 35

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issue of additional stocks or by stock buyback In some cases, the distributionmay be of assets All in all, dividends are a form of incentive that attractinvestments, especially long-term investors who do not exchange stocksfrequently and consider dividends as their main source of regular income from.

investing

1.1.2.4 Investing in stocks holds certain risks

Apart from the potential of profit, there are also risk factors that come

‘with investing in stocks

First ofall, the risk of losing capital This is the possibility of not beingable to recollect the initial capital as the price of a stock declines from the

‘ought position Among all types of securities, stocks are considered theriskiest due to the constant fluctuation of the stock market, as stocks are traded

on exchanges almost every day Investors may tale a considerable loss whenthe stock market goes through a major event, for example the 2008 finamctalcrisis, or The Great Recession, causing investors to lose billions of dollarsduring that period Additionally, in the case of bankruptcy, stockholders are thelast to collect their claims after all obligations to creditors have been fulfilledThis implies that stockholders have to face the chance of receiving nothing inthe end, thus losing the initial capital used to purchase the stocks

Secondly, the risk of inflation This occurs when inflation causes thecurrency to lose value, thus rendering the profit from selling stocksinsignificant However, companies can combat this via annual (or morefrequent) distribution of dividends

Thirdly, the risk of liquidity Liquidity refers to the efficiency or easewith which an asset or security can be converted into ready cash without

affecting its market price The most liquid asset ofall is cash itself? Owning a

stock with low liquidity, meaning low demand and/or low supply, would make

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it difficult for the owmer to sell the stock for cash when needed or buy more forfurther investment

Lastly, the risk of change in regulation This can be understood as thepossibility of future regulatory development that may negatively impactinvestors, such as an increase in income tax on dividends and the sale of stocks

As owners, common stockholders are entitled to various forms offinancial returns, including dividends from the company’s eamings, proceedsfrom a potential sale of the company, and distributions of remaining funds inthe event of liquidation Typically, common stockholders have the lowestpriority in receiving payouts from the company They may only receivedividends after the company fulfills obligations to shareholders with preferredstocks, and in the event of liquidation, they receive distributions only afterbondholders, creditors (including employees), and preference shareholdershave been satisfied

Conversely, preferred stocks (also called preferred shares or preferencestocks) distinguishes itself from common stock by typically lacking votingprivileges, however, it holds a legal right to receive predetermined dividendpayments before other shareholders receive dividends Preferred stocks hold asuperior position compared to common stock but are subordinate to bondsconceming their claim on the company's assets They also have precedenceover common stocks during the liquidation process

2

However, ¡fa company were only allowed to issue one type of stocks,common stocks would be chosen for issuance Furthermore, since commonstocks are more exposed to the risks of the business than bonds or preferredstocks, it offers a greater potential for capital appreciation Over the long term,common stocks tend to outperform more secure investments, despite their

amount of time)‘ The timing and magnitude of cash flow vary, reflecting

different economic priorities, leading to the emergence of various bond typesInterest payments are typically made at regular intervals, commonly semi-annually, annually, or sometimes at other frequencies,

Although from the above definition, bonds seem very similar to loans,there exist notable distinctions between the two The basic difference between

a loan and a bond is that in the case of loan, only one loan is being granted andthe total value of the debt equals the total value of the loan Also, a loanestablishes a loan relationship between two identified parties, most often

‘between a bank and its client However, in the case of debt security financialinstruments (bonds), the debt structure is a bit different Namely, the value ofthe total debt is divided into smaller parts, each becoming an individualtransferrable security In this debtor-creditor relationship, the initial issuer ofthe bonds remains unchanged However, with respect to debt structure, thepossibility of changing the lender (investor) opens up

ˆ Ngg Yok thươnsty Sam School of Bushs 104), Hitz Renans Socks, Bonds a

it: 1920-2028

ˆ DEalrke N Charfas C009), Me management of Boned imestuents ud trang of đt, Ehntie

‘Bueno Easuonum pp 48-50,

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12.2 Characteristics of bonds

1.2.2.1, Bonds are debt instruments

Debt securities, also known as fixed-income securities, representborrowed funds that must be repaid according to predefined terms, includingthe borrowed amount, interest rate, and maturity date Essentially, they are debtinstruments like bonds (such as government or municipal bonds) or certificates

of deposit (CDs) that can be exchanged between parties

Typically, debt securities suchas bonds and CDs require holders to makeregular interest payments and repay the principal amount, along with any othercontractual obligations These securities are usually issued for a fixed period,

‘with the issuer redeeming them upon maturity

The interest rate on a debt security is determined based on factors such

as the borrower's credit history, track record, and solvency—the ability to repaythe loan in the future Higher default risk prompts lenders to demand a higherinterest rate to offset the increased risk

1.2.2.2 Bonds have maturity dates

The issuer of a bond is obligated to repay the principal amount on thematurity date Once all required payments have been fulfilled, the issuer nolonger holds any obligations to bondholders beyond the maturity date Theperiod until the maturity date is commonly known as the term, tenor, ormaturity ofa bond This duration can vary widely, though debt securities withterms of less than one year are typically categorized as money marketinstruments rather than bonds, The majority of bonds have terms shorter than

30 years, although there are instances of bonds with terms extending to 50 years

or more Historically, there have even been issues without a specified maturitydate, referred to as irredeemable bonds

1.2.2.3 Bondholders receive payment from coupons

Unlike stockholders, the owners of bonds have no right to participate incompany's ownership, thus they are not entitled to payments from net profit

14

expressed through dividends Namely, since bonds represent a debtor-creditorrelationship, the bondholders are only entitled to redeem the invested principal

‘amount increased by the interest and within the term agreed upon in advance

The interest rate that has to be paid the holder of a bond is receivedthrough a coupon In the past, coupons were tangible additions to the paper

‘bond certificates, with each coupon denoting an interest payment Upon theinterest payment date, bondholders would submit the coupon to a bank toreceive the interest payment In the present, interest payments are mostlyconducted electronically Interest may be disbursed at varying intervals,typically every six months or annually

1.2.2.4 Bonds are safer for investors

Firstly, as mentioned before, bonds typically provide a fixed incomestream in the form of periodic interest payments, offering investors apredictable source of income This stability can be particularly appealing forinvestors seeking steady cash flows

Nest, the reason why bonds are often considered safe investments lies inthe priority of repayment in the event ofa company's liquidation or bankruptcy.When a company faces financial distress and is forced to liquidate its assets torepay creditors, bondholders are typically prioritized over stockholders in therepayment hierarchy Therefore, this mitigates the risk of losing one’s investedcapital towards a bond,

Bonds also tend to exhibit lower volatility compared to stocks, makingthem less susceptible to drastic price fluctuations This stability can reduceoverall portfolio risk and provide an edge against market crashes Havingbonds

in one’s investment portfolio can help moderate risk by balancing the potentialvolatility of stacks with bonds’ stability Bonds often display negativecorrelation with stocks, meaning they may perform well when stocks areunderperforming, further enhancing portfolio flexibility

15

Lastly, unlike stocks, bonds are contractual obligations between theissuer and the bondholder, with specific terms such as interest and maturitydates, During a bond's maturity period, the issuer has the legal obligation topay the contracted interest, whereas dividends are not considered to be a legal

obligation as long as they are not confirmed by the assembly of the company ®

This means that in some cases, stockholders may not collect any dividends atall during their entire ownership of stocks, while most of the time bondholdersshould receive their money back, along with the interest from coupons as

payment.

123 Classifications of bonds

Bonds can be categorized ina number of ways, such as the type ofissuer,the currency, the term of the bond (length of time to maturity) and interest ratecharacteristics of the bond Based on the type of issuer, which is the mostcommon way, bonds are classified into three types: government bonds,mimieipal bonds, and corporate bonds

Government bonds, often also called treasury bonds, are issued by asovereign national government Government bonds can be denominated in aforeign currency or the government's domestic currency Countries with lessstable economies tend to denominate their bonds in the currency ofa countrywith a more stable economy (for instance, U.S dollar or euro), There aredifferent types of long-term government bonds, suchas: bonds, debentures and.notes They are all long-term debt securities issued with the purpose to raisestate capital

Manicipal bonds are issued by local authorities, ie by cities, districts(regions), municipalities or other local goverment units, depending on theorganization of each country The capital funds raised by the issuance ofmunicipal bonds are intended primarily to build local infrastructure such as

“ Andis Sesar & Boj Tamié (2016), "Basic dracerisics of bands end thei dmamsics onthe

Crowtim secondary make", FIP Fone tpmad 4(D),p 17

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schools, hospitals, roads, sewage systems, but also to finance other projectscharacterized as public assets and/or services Since through their issuancelocal infrastructure development project are being financed - which bears socialsignificance, the income generated from interest and capital gain of municipalbonds can be declared for tax relief

Corporate bonds, as the name suggests, are issued by companies.” As

opposed to government bonds, ie municipal bonds that have their liabilitiesfinanced from various state and local government income sources, therepayment of funds received from the issuance of comporate bonds is guaranteedonly from the core business of the company issuing the bonds It is thereforeclear that corporate bonds represent long-term liabilities ofa company and forthis reason they are often insured by part of or by the entire assets ofthe issuing

company * Corporates bonds are also the most prevalent among the three types

ofbonds, and are chosen for analysis in the Thesis

1.3 Concept of securities law

18.1 Definttion

Stocks and bonds are both securities, therefore they are generally subject

to securities law, or securities regulation

Inthe context ofthe U.S, George Lee Flint Jr, professor of commerciallaw in Texas, states that securities regulation deals primarily with the laws

preventing and providing remedies for fraud in the sale of stacks and bonds ®

In Handbook of Short Selling Edward Pekarec and Christopher Lufrano arguethat securities regulation in the U.S is a mosaic of federal and state statutesenforced by numerous agencies that function to protect the interests ofa diversegroup of issuers and stakeholders, with an aim toward ensuring fair, efficient,

and transparent capital markets."

Boum Nghựạt Anh (2023), Plenum corporate bond market: Clove sang cud Development obions, Bachwlar’s These, Unsverey of Beoamice and Basnes- Vieuiza Netional Unvesay p10.

"andrew Sesto Bojan Tel: 2016) siprap 120,

"George Lee iet X (2009), "Secures Regultion, SMU Law Review, 63G),p, 135,

GeegN Gegurioa (2012), Houbook of Short Setnig Acadanic ro, p 16

17

Inthe context of Vietnam, scholars discuss that securities law contains aset of basic rules and principles guiding securities activities and securitiesexchange that has been institutionalized Securities law is also defined to be acollection of legal regulations regulating social relations arising during the

process of offering, listing and trading securities TM

From these perspectives, it can be concluded that securities law refers to

a body of legal principles, regulations, and statutes that govem the issuance(offering & listing), trading, and exchange of securities within a particularjurisdiction Itis designed to regulate financial instruments knownas securities,which represent ownership interests (stocks) or debt obligations (bonds) incompanies or other entities Key aspects of securities law often includeprovisions related to

i, Registration: Issuers of securities may be required to register theirofferings with regulatory authorities, providing detailed information about thesecurities and the issuing entity This helps ensure that investors have access torelevant information to make informed investment decisions,

ii, Disclosure: Securities laws typically mandate the disclosure ofmaterial information to investors, including financial statements, business

operations, risks, and other relevant details.” Disclosure requirements aim to

promote transparency and protect investors from fraudulent or deceptive

practices;

iii, Market Regulation: Securities regulators oversee the operation ofsecurities exchanges, trading platforms, and market participants to ensure fairand orderly trading Market regulation may involve setting trading rules,

‘monitoring for market abuse, and enforcing compliance with securities laws,

iv Antifraud Provisions: Securities laws include provisions prohibitingfraudulent activities such as misrepresentation, insider trading, market

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`Ngo Xem Thang (2013) plicaonf regulations onifermationicloseettstedcompernes

on Pieoumeseeciiies exchenge, hasten’ Thesis, Hanoi Law Unesay, 18

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manipulation, and other deceptive practices These provisions help maintainmarket integrity and protect investors from financial harm,

v Enforcement and Remedies: Securities regulators have authority toinvestigate potential violations of securities laws, impose sanctions onwrongdoers, and seek remedies for harmed investors Enforcement actions mayinclude fines, injunctions, disgorgement of profits, and criminal prosecution incases of serious misconduct

Overall, regulatory system of securities law is typically in place tocombat securities fraud and enhance invesfor protection

13.2 Concept of securities frand

Securities fraud refers to deceptive or fraudulent practices in thesecurities markets, involving the manipulation or misrepresentation ofinformation related to stocks, bonds, or other financial instruments This type

of fraud can take various forms, including insider trading, accounting fraud,market manipulation, etc

In stock markets, securities fraud manifests through the manipulation ofstock prices and deffauding investors Insider trading, a prevalent form ofsecurities fraud, involves trading stocks based on non-public, materialinformation, providing unfair advantages to individuals with privileged access,suchas an employee or director of the company itself, hence the title “insider”Additionally, pump-and-dump schemes, a novel form of fraudulent behavior,artificially inflate stock prices by spreading false or misleading informationonline, enticing investors to purchase shares before orchestrators sell their own.holdings at inflated prices, leaving unsuspecting investors with substantiallosses

Similarly, bond markets are also susceptible to fraud, although withdifferent challenges and implications Fraudulent activities in bond marketsmay include misrepresentation of bond issuer financials, issuance of false or

19

misleading bond ratings, and Ponzi schemes" disguised as high-yield (high

interest) bond investments These fraudulent schemes exploit investors’ trustand reliance on the perceived safety and stability of bond investments, leading

to financial losses and erosion of confidence in fixed-income securities

13.3 Concept of tavestor protection

Investor protection refers to measures and mechanisms that areimplemented to safeguard the rights, interests, and assets of investors infinancial markets It encompasses a range of regulatory, legal, and educationalinitiatives aimed at promoting transparency, faimess, and integrity in theinvestment process, as well as ensuring that investors are adequately informed

and empowered to make sound investment decisions 1*

Across various jurisdictions, investor protection rules originate fromdiverse sources, spanning company, securities, bankruptcy, takeover, andcompetition laws, as well as stock exchange regulations and accounting

standards.

Investors’ rights are typically safeguarded through the enforcement oflaws Critical regulations established by govemment agencies or stockexchanges include disclosure and accounting rules, which equip investors withessential information necessary to exercise their rights These protectedstockholder rights encompass receiving dividends on a pro-rata basis, votingfor directors, participating in stockholders’ meetings, subscribing to newsecurities issuances under the same terms as insiders, pursuing legal actionagainst directors or majority stockholders for suspected wrongdoing, callingextraordinary shareholders! meetings, among others

"Pana sdhmes erful awestnent shames tat premise highretumsto awestars barely on

fonds from naw nwestas to poy Tetum to ewer awestas, rather than gmt legis pafts When

"new ttsphsnts yop, được schemes usual callapst

“Hie Th GOL), Legal condinons ocrutoe nenspereey of he sects market, Master's Thesis, Hanoi Law Uasreety, p16

* afte La Para etal, 2000, Setar rotecti and corperte governance”, Jonni of Foxmiiat Feonomic, 580-2),9.7.

20

Punishments are also a common method to preserve investors’ rights,specifically from fraudulent behaviors They often come in the form of

‘monetary penalties or a permanent ban from the secunities industry However,for more serious cases that involve significant damage to public interest, theauthority may resort to imprisonment to contain such wrongdoings, as well asset an example

Conclusion of Chapter 1

In Chapter | ofthe Thesis, the concept of stocks and bonds are provided,including the definition, characteristics, and classifications of each type ofsecurity This Chapter also covers other important matters regarding stocks and

‘bonds, ie the concept of securities fraud and investor protection

The theoretical issues in Chapter 1 of the Thesis form the basis for theanalysis of current regulations in Vietnam and the U.S in Chapter 2 and theproposal of new regulations on stacks and bonds in Chapter 3

CHAPTER 2STOCKS AND BONDS UNDER VIETNAMESE AND U.S LAW2.1 Stocks and bonds under Vietnamese law

2.1.1 Foundation for stocks and bonds

In general, enterprises in Vietnam fall into the following three categories

i, limited liability companies with one member,

ii limited liability companies with two members or more (limited to 50);

or

iii joint-stock companies or shareholding companies

Limited liability companies comprise of members, while joint-stockcompanies comprise of stockholders (shareholders) as their owners

A joint-stock company’s stockholders or a limited liability company’smembers can be organizations and individuals However, under Article 111.3ofthe LOE, a joint-stock company can issue both stocks and bonds for capitalraising, while under Articles 46.3 & 743, a limited liability company,regardless of the number of members, can only issue bonds and not stocks,

“except for equitacation” 16

‘The basic function of regulating securities and the securities market falls

to the Law on Securities 2019 This is the highest regulatory documentgoverning the offering, listing, and trading of secuities, specifically stocks andcomporate bonds The scope of this law covers offerings of securities, andcontains provisions for listing and trading securities, conducting businessrelated to and investing in securities, providing securities services, and thesecurities market a large

The LOS is applicable to all organizations and individuals, bothVietnamese and foreign, participating in investment in securities and activities

‘Bgutiotion ia Venues Bagh tư ạt denotes the conversion of «ted ly company

sn Veta nto « public ont sto) company ar «cerpratin by diving ovmurshp neo hares,

3

on the Vietnamese securities market, state regulators on securities andsecurities markets, and other entities that are related to securities and securitiesmarket activities

Article 4 of this legal instrument defines stocks and bonds as follows

"2 Stocks ave securities that certifs thetr holders’ iavfil rights andinterests to a portion of share capital of the issuer

3 Bonds are securities that certify their holders’ lawful rights andinterests to part of the debt of the tssuer

2.1.2 Offering listing and information disclosure

2.1.2.1, Offering

Under the LOS, there are two types of offering, public offermg andprivate placement (non-public offing) Article 6 defines them as follows:

Pubite offerig means the offering of securities through mass media, to

at least 100 investors (not including professional investors), or to unidentified

investors

Private placement means the offering of securities in cases that do notfall under public offering, with the addition of securities that are offered tofewer than 100 investors (not including professional investors), or to onlyprofessional investors (institutions, banks, etc.)

Before making a public offering of stocks, a joint-stock company (theissuer) has to satisfy the requirements of Article 15.1, namely

“a) The contributed charter capital is at least 30 billion YND on theoffering date according to the accounting books:

Ð) The company has profit over the last 02 years and has no accuomulatedloss on the offering date,

¢) There is a plan for issuance and use of capital generated by theoffering ratified by the General Meeting of Shareholders,

4) At least 15% of its voting shares have been sold to at least 100

non-‘major shareholders If the issuer's charter capital is 1.000 billion VND orabove, the ratio shall be 10%

dd) Before the offering date, the major shareholders have made acommitment to hold at least 20% of the issuer's charter capital for at least 01Year fiom the end of the offering:

@) The issuer is not undergoing criminal prosecution and does not haveany unspent conviction for economic crimes;

§) The offering ts consulted by a securities company, unless the issuer tsalready a securities company

1h) The tssuer has a commitment to have its shares listed or registered onthe securities trading system after the end ofthe offering:

1) The issuer has an escrow account to receive payments jor the offredshares

Each requirement serves as a component to ensure that investors areprovided with transparency and accountability of the issuer before and afterinvesting For example, point a and point b mean that a company needs toalready possess a considerable amount of capital (at least 30 billion VND) and.profitability prior to the offering This helps mitigate the risk of insolvency andprovides assurance to potential investors about the company's ability to sustainits operations and support growth initiatives Furthermore, point e is made toensure that the company is not undergoing criminal prosecution or has anyunspent convictions for economic crimes, thus helps maintain trust andconfidence in the company's integrity

Ifa joint-stock company wishes to make a public offering of stocks, itmust prepare an application that consists of documented proofs that thecompany is qualified in accordance with Article 15.1, the company's charter,and a prospectus, which is a physical or electronic document that containsaccurate and objective information about the company itself, the offering, and

4

the offered securities, ie stocks” The prospectus also contains the audited

financial statements of the two preceding years of the issuer for a detailedinsight of its economic status, along with information about the offering andthe offered securities, including: offering conditions, risk factors, estimatedprofitand dividends ofthe nearest year after the issuance, the issuance plan and.the plan for use of capital generated by the offering All of these will besubmitted to the SSC, who has the authority to review and issue the certificate

of registration of public offering for the applicant if the application issatisfactory All in all, this registration process acts as the first safeguard forinvestors, even before the stocks are available to the public

For the public offering of bonds, an enterprise (the issuer) must satisfythe following requirements of Article 15 3

“a) The contributed charter capital is at least 30 billion YND on theoffering date accordmg to the accounting books,

Ð) The issuer has profit in the preceding year and has no accamulatedoss on the offering date: there ts no debt that is overdue for more thar 01 year:

¢) There ts a plan for issuance, use and repayment of the capitalgenerated by the offering ratified by the General Meeting of Shareholders,Board of Directors, the Board of members or the company president,

4) The issuer has a commatment to fulfill ts obligations to the investorsinterms ofconditions for tssuarice, payment, assurance of the lawful rights andinterests of tavestors and other conditions

dd) The offering is consulted by a securities company, unless the issuer1s already a securities company

@) All ofthe requirements specified tn Potnt e Clause 1 of this Article aresatisfied

g) The issuer has a credit rating if required by the Government,

‘ticle 16 of he Law on Seri.

25

1h) The issuer has an escrow account to receive payments for the offered

bonds,

1) The tssuer has a committment to have its bonds Iisted on the securities

trading system after the end of the offering’

This list of requirements bears some resemblance to its counterpart ofstocks However, due to the nature of bonds (i.e debt securities), the issuermust also not have any overdue debt for more than 01 year and must commit

to fulfill its obligations ofissuance, payment, assurance of the lawful rights andinterests, and other conditions to the investors Furthermore, the issuer mayhave to attain a credit rating if required by the Government, thus limiting

companies with low credit rating from issuing bonds to the public.

Information on the credit rating of the company may also help investors assessthe risk of the bonds being issued and make the right investing choice

Just like in the case of stocks, if enterprises wish to conduct a publicoffering of bonds, they must register with the SSC for a certificate ofregistration of public offering The application for bonds issuer is also verysimilar to that of stocks, including proofs of qualification in accordance with

Article 15.3, along with a prospectus and a credit rating report 1°

While the application is being considered, the SSC is entitled to requestthe issuer to revise it in order to make sure the published information is accurateand adequate, and the lawful rights and interests of investors are protectedWithin 30 days from the receipt of the satisfactory public offering application,SSC shall decide whether to issue the certificate of registration of publicoffering, or reject the application and provide explanation

Article 25 of the LOS requires that within 07 working days from theissuance date of the certificate of registration of public offering, the issuingcompany shall announce the issuance on 01 online newspaper or 03 issues of

° Hmoi Lew Univeasiy (2021), Lav on Secuwines teubook People's Public Security Peblisher, Hioi.p_76

‘Article 183 of he Lavon Serie.

26

physical newspaper Securities may only be publicly offered after an

‘announcement is made via these methods and the prospectus is available to thepublic

During the public offering, it is the issuer's responsibility to distributesecurities ((.e stocks and bonds) fairly and open Investors have a minimumperiod of 20 days to subscribe, while issuers shall complete the distribution ofits securities within 90 days from the effective date of the certificate ofregistration of public offering In case the issuer is not able to complete thedistribution of within this time limit, SSC wall consider extending the time limitfor up to 30 more days

3.122 Listing

After the IPO has ended, the successful issuer must register for listing onsecurities exchanges and shall complete the application for this within 30 days.This is the prerequisite for newly issued stocks and bonds to be available for

trading between investors.» Furthermore, in the case of joint-stock companies

offering stocks, they become public companies after issuing stocks to the publicand therefore are subject to law regarding public companies

The applications for listing of stocks and bonds is regulated by Decree

no, 155/2020/ND-CP dated 31/12/2020 on elaboration of some Articles of theLaw on Securities They are very similar to that of public offering, with theaddition of the certificate issued by VSDCC that the stocks or bonds of theapplying company have been collectively registered, These applications aresubmitted to the Vietnam Exchange, which is the national securities exchange

of Vietnam and the parent company of HNX and HOSE, the actual exchangesthat directly maintain and organize the centralized securities market

Table 2.1 indicates the summary of major listing criteria for HOSE andHINX It is recognizable that the two exchanges contain different benchmarks

Le Thi Digp (2023), Comparison of law on pic fering of stocks ð 7n ene the US,

Master's Miss, Law School- Van Netonal Unsvesay,p $3

+

on managing the listing criteria with respect to the potential listing company'scapital size, operation history and core indexes of profitability-making as maincriteria of market listing While HOSE maintains stricter criteria by targetingmore financially confident companies of market listing in relation to capitalsize, HNX emphasizes medium-to-large enterprises with lower capital size and

listing criteria”

Requirement HOSE HNX

Capital size = 120 billion VND > 30 billion VND

‘Yearsin El yearsasa >Iyearasa

operation joint-stock company joint-stock company

‘Minimum 5% ROE in the previous year

No overdue debt for more than T year

No accumulated loss as of the year 0F

Profitability listing registration

Complies with the provision oflaw onaccounting and financial statements

“All financial obligations to the state must

have been dischargedRegistered for depository at Vietnam Securities Depository

CenterTable 2.1 Summary of major listing criterta for stocks of HOSE & HNX

° Somaviay Chantuveng (2020), Secreties Commission Orgescation ened Sock Fucherge

Developmentin Pim coud Ls, yo Unersay, 13.

28

Aside from stocks, bonds were also listed and traded on these twoexchanges However, according to Circular no 69/2023/TT-BTC dated15/11/2023 onamendments to Circular no 57/2021/TT-B TC dated 12/07/2021

of Minister of Finance of Vietnam introducing roadmap for reorganization ofmarkets for shares, bonds, derivatives and other securities, from 01/07/2025,HINX shall stop receiving new listing applications of stocks from organizations,and by 31/12/2025 shall complete the transfer of stacks of listed organizationsfrom HNX to HOSE On the other hand, Circular no 57/2021/TT-BTC dated12/07/2021 introducing roadmap for reorganization of markets for shares,

‘bonds, derivatives and other securities stipulates that HSX shall complete thetransfer of listed corporate bonds from HSX to HNX by the end of 31/12/2021and shall stop receiving new bond listing applications Only municipal bondsthat had been listed before this circular came into effect but yet to reach their

‘maturity date may remain on HOSE Currently, in order to list corporate bonds

on HNX, companies only need to satisfy the requirements of charter capital (atleast 10 billion VND) and profit (preceding year must be profitable),

It can be indicated that the Ministry of Finance was putting effort individing the role of HOSE and HNX HOSE will eventually become thenational exchange for stocks, and HNX has already been serving its duties asthe national exchange for bonds while still is performing as a platform forstocks at the moment