Securities Act of 1933

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United States Congress enacted the Securities Act of 1933 (the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, or the '33 Act, Pub. L. 73-22, 48 Stat. 74, enacted 1933-05-27, codified at 15 U.S.C. § 77a et seq.), in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression. [1] Legislated pursuant to the interstate commerce clause of the Constitution, it requires that any offer or sale of securities using the means and instrumentalities of interstate commerce be registered with the SEC pursuant to the 1933 Act, unless an exemption from registration exists under the law. "Means and instrumentalities of interstate commerce" is extremely broad, and it is virtually impossible to avoid the operation of this statute by attempting to offer or sell a security without using an "instrumentality" of interstate commerce. Any use of a telephone, for example, or the mails, would probably be enough to subject the transaction to the statute.

The 1933 Act was the first major federal legislation to regulate the offer and sale of securities. Prior to the Act, regulation of securities was chiefly governed by state laws, commonly referred to as blue sky laws. When Congress enacted the 1933 Act, it left existing state securities laws ("blue sky laws") in place. The '33 Act is based upon a philosophy of disclosure, meaning that the goal of the law is to require issuers to fully disclose all material information that a reasonable shareholder would require in order to make up his or her mind about the potential investment. This is very different from the philosophy of the blue sky laws, which generally impose so-called "merit reviews." Blue sky laws often impose very specific, qualitative requirements on offerings, and if a company does not meet the requirements in that state then it simply will not be allowed to do a registered offering there, no matter how fully its faults are disclosed in the prospectus. Recently, however, NSMIA[clarification needed] added a new Section 18 to the '33 Act which preempts blue sky law merit review of certain kinds of offerings.

Part of the New Deal, the Act was drafted by Benjamin V. Cohen, Thomas Corcoran, and James M. Landis and signed into law by President Franklin D. Roosevelt.

Purpose[edit]

The primary purpose of the '33 Act is to ensure that buyers of securities receive complete and accurate information before they invest. Unlike state blue sky laws, which impose merit reviews, the '33 Act embraces a disclosure philosophy, meaning that in theory, it is not illegal to sell a bad investment, as long as all the facts are accurately disclosed. A company that is required to register under the '33 act must create a registration statement, which includes a prospectus, with copious information about the security, the company, the business, including audited financial statements. The company, the underwriter and other individuals signing the registration statement are strictly liable for any inaccurate statements in the document. This extremely high level of liability exposure drives an enormous effort, known as "due diligence,"[citation needed] to ensure that the document is complete and accurate. The law is intended to in this way help bolster and maintain investor confidence in order to support the market.[citation needed]

Registration process[edit]

Unless they qualify for an exemption, securities offered or sold to the public in the U.S. must be registered by filing a registration statement with the SEC. Although the law is written to require registration of securities, it is more useful as a practical matter to consider the requirement to be that of registering offers and sales. If person A registers a sale of securities to person B, and then person B seeks to resell those securities, person B must still either file a registration statement or find an available exemption.

The prospectus, which is the document through which an issuer's securities are marketed to a potential investor, is included as part of the registration statement. The SEC prescribes the relevant forms on which an issuer's securities must be registered. Among other things, registration forms call for:

  • a description of the securities to be offered for sale;
  • information about the management of the issuer;
  • information about the securities (if other than common stock); and
  • financial statements certified by independent accountants.

Registration statements and the incorporated prospectuses become public shortly after they are filed with the SEC. The statements can be obtained from the SEC's website using EDGAR. Registration statements are subject to SEC examination for compliance with disclosure requirements. It is illegal for an issuer to lie in, or to omit material facts from, a registration statement or prospectus.

Not all offerings of securities must be registered with the SEC. Some exemptions from the registration requirements include:

  • private offerings to a specific type or limited number of persons or institutions;
  • offerings of limited size;
  • intrastate offerings; and
  • securities of municipal, state, and federal governments.

One of the key exceptions to the registration requirement, Rule 144, is discussed in greater detail below.

Regardless of whether securities must be registered, the 1933 Act makes it illegal to commit fraud in conjunction with the offer or sale of securities. A defrauded investor can sue for recovery under the 1933 Act.

Rule 144[edit]

Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the public resale of restricted and controlled securities without registration. In addition to restrictions on the minimum length of time for which such securities must be held and the maximum volume permitted to be sold, the issuer must agree to the sale. If certain requirements are met, Form 144 must be filed with the SEC. Often, the issuer requires that a legal opinion be given indicating that the resale complies with the rule. The amount of securities sold during any subsequent 3-month period generally does not exceed any of the following limitations:

  • 1% of the stock outstanding
  • the average weekly reported volume of trading in the securities on all national securities exchanges for the preceding 4 weeks
  • the average weekly volume of trading of the securities reported through the consolidated transactions reporting system (NASDAQ)

Notice of resale is provided to the SEC if the amount of securities sold in reliance on Rule 144 in any 3-month period exceeds 5,000 shares or if they have an aggregate sales price in excess of $50,000. After one year, Rule 144(k) allows for the permanent removal of the restriction except as to 'insiders'.[2]

In cases of mergers, buyouts or takeovers, owners of securities who had previously filed Form 144 and still wish to sell restricted and controlled securities must refile Form 144 once the merger, buyout, or takeover has been completed.

Rule 144 is not to be confused with Rule 144A which provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private (as opposed to public) resales of restricted securities to qualified institutional buyers. Rule 144A has become the principal safe harbor on which non-U.S. companies rely when accessing the U.S. capital markets.

Regulation S[edit]

Regulation S is a "safe harbor" that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act. The regulation includes two safe harbor provisions: an issuer safe harbor and a resale safe harbor. In each case, the regulation demands that offers and sales of the securities be made outside the United States and that no offering participant (which includes the issuer, the banks assisting with the offer and their respective affiliates) engage in "directed selling efforts". In the case of issuers for whose securities there is substantial U.S. market interest, the regulation also requires that no offers and sales be made to U.S. persons (including U.S. persons physically located outside the United States).

Section 5 of the 1933 Act is meant primarily as protection for United States investors. As such, the U.S. Securities and Exchange Commission had only weakly enforced regulation of foreign transactions, and had only limited constitutional authority to regulate foreign transactions.

Civil liability[edit]

Violation of the registration requirements can lead to civil liability for the issuer and underwriters sections under §§ 11, 12(a)(1) or 12(a)(2) of the Act. Additional liability may be imposed under the Securities Exchange Act of 1934 (Rule 10b-5).

See also[edit]

References[edit]

  1. ^ Lin, Tom C. W., A Behavioral Framework for Securities Risk. 34 Seattle University Law Review 325 (2011) . Available at SSRN: http://ssrn.com/abstract=2040946
  2. ^ United States Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities. October 10, 2003. Accessed Dec. 9, 2006.

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