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Securities Act of 1933

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Securities Act of 1933
Great Seal of the United States
Long titleAn act to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.
NicknamesSecurities Act
1933 Act
'33 Act
Enacted bythe 73rd United States Congress
EffectiveMay 27, 1933
Citations
Public lawPub. L. 73–22
Statutes at Large48 Stat. 74
Codification
U.S.C. sections created15 U.S.C. § 77a et seq.
Legislative history

The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression, after the stock market crash of 1929. Legislated pursuant to the Interstate Commerce Clause of the Constitution, it requires every offer or sale of securities that uses the means and instrumentalities of interstate commerce to be registered with the SEC pursuant to the 1933 Act, unless an exemption from registration exists under the law. The term "means and instrumentalities of interstate commerce" is extremely broad and it is virtually impossible to avoid the operation of the 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.

History

The 1933 Act was the first major federal legislation to regulate the offer and sale of securities.[1] 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 blue sky securities 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. The National Securities Markets Improvement Act of 1996 added a new Section 18 to the '33 Act which preempts blue sky law merit review of certain kinds of offerings.[further explanation needed]

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.[2][3]

Purpose

The primary purpose of the '33 Act is to ensure that buyers of securities receive complete and accurate information before they invest in securities. 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", to ensure that the document is complete and accurate. The law bolsters and helps to maintain investor confidence which in turn supports the stock market.[4]

Registration process

Unless they qualify for an exemption, securities offered or sold to a United States Person 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.

A prospectus from the US

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. Furthermore, when some true fact is disclosed, even if disclosing the fact would not have been required, it is illegal to not provide all other information required to make the fact not misleading.

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

Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the public resale of restricted and controlled securities without registration.[5] 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'.[6]

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.

SIFMA, the Securities Industry and Financial Markets Association, issued "SIFMA Guidance: Procedures, Covenants, and Remedies in Light of Revised Rule 144" after revisions were made to Rule 144.[7]

Rule 144A

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.[8] Rule 144A has become the principal safe harbor on which non-U.S. companies rely when accessing the U.S. capital markets.

Regulation S

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.[9] 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.

This law applies to its own unique definition of United States person.

Civil liability

Violation of the registration requirements can lead to near-strict civil liability for the issuer, underwriters, directors, officers, and accountants under §§ 11, 12(a)(1), or 12(a)(2) of the 1933 Act.[10]

To have "standing" to sue under Section 11 of the 1933 Act, such as in a class action, a plaintiff must be able to prove that he can "trace" his shares to the registration statement and offering in question, as to which there is alleged a material misstatement or omission.[11][12] In the absence of an ability to actually trace his shares, such as when securities issued at multiple times are held by the Depository Trust Company in a fungible bulk and physical tracing of particular shares may be impossible, the plaintiff may be barred from pursuing his claim for lack of standing.[13][14][15][11]

Additional liability may be imposed under the Securities Exchange Act of 1934 (Rule 10b-5) against the "maker" of the alleged misrepresentation in certain circumstances.[16]

See also

Related legislation

References

  1. ^ A Behavioral Framework for Securities Risk, available at: http://ssrn.com/abstract=2040946
  2. ^ 431 Days: Joseph P. Kennedy and the Creation of the SEC (1934-35) (Progressive Reform and the Securities Act) | Galleries | Virtual Museum and Archive of the History of Financ...
  3. ^ FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression - Jim Powell - Google Books
  4. ^ The Global Financial Crisis: Triggers, Responses and Aftermath - Tony Ciro - Google Books
  5. ^ SEC.gov | Rule 144: Selling Restricted and Control Securities
  6. ^ United States Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities. October 10, 2003. Accessed Dec. 9, 2006.
  7. ^ "SIFMA Guidance: Procedures, Covenants, and Remedies in Light of Revised Rule 144"
  8. ^ SEC.gov | Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
  9. ^ Regulation S: The Safe Harbor for Offshore Securities Transactions - Sara Hanks - Google Books
  10. ^ The Due Diligence Defense under Section 11 of the Securities Act of 1933 44 Brandeis Law Journal 2005-2006
  11. ^ a b Seven on 11: Seven Avenues to Early Dismissal of Claims Under Section 11 of the Securities Act | Bloomberg Law
  12. ^ Securities Fraud Plaintiff Need Not Show Reliance
  13. ^ "Pleading Section 11 Liability for Secondary Offerings"
  14. ^ CITIC Trust_FIC_Order_PACER.pdf
  15. ^ "Morrison, the Restricted Scope of Securities Act Section 11 Liability, and Prospects for Regulatory Reform"
  16. ^ Congress, the Supreme Court, and the Rise of Securities-Fraud Class Actions - Harvard Law Review

Further reading

  • Douglas, William O.; Bates, George E. (1933). "The Federal Securities Act of 1933". Yale Law Journal. 43 (2). The Yale Law Journal Company, Inc.: 171–217. doi:10.2307/791346. JSTOR 791346.
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