Congress enacted the
Securities Act of 1933 (the "1933 Act," the "Truth in Securities Act" or the "Federal Securities Act", , enacted 1933-05-27,
codified at et seq.), in the aftermath of the stock market crash of 1929 and during the ensuing
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. It is often referred to as the 1933 Act, the '33 Act, or the Securities Act. 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 pursuant to the 1933 Act, unless an exemption from registration exists under the law.
Congress enacted the
Securities Act of 1933 (the "1933 Act," the "Truth in Securities Act" or the "Federal Securities Act", , enacted 1933-05-27,
codified at et seq.), in the aftermath of the stock market crash of 1929 and during the ensuing
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. It is often referred to as the 1933 Act, the '33 Act, or the Securities Act. 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 pursuant to the 1933 Act, unless an exemption from registration exists under the law. It was the first major federal legislation to regulate the offer and sale of securities. Prior to that time, regulation of securities was chiefly governed by state laws (commonly referred to as
blue sky lawA blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stock...
s). When Congress enacted the 1933 Act, it left in place the patchwork of existing state securities laws to supplement federal laws in part because there were questions as to the constitutionality of federal legislation.
Part of the
New DealThe New Deal was the name that United States President Franklin D. Roosevelt gave to his complex package of economic programs 1933-36 with the goals of what historians call the 3 Rs, of giving Relief to the unemployed and badly hurt farmers, Reform of business and financial practices, and promoting...
, it was drafted by
Benjamin V. CohenBenjamin V. Cohen , a member of the administrations of Franklin D. Roosevelt and Harry S. Truman, had a public service career that spanned from the early New Deal through and beyond the Vietnam War era.- Early Years :...
,
Thomas CorcoranThomas Gardiner Corcoran was one of several Irish American advisors in Franklin D. Roosevelt's brain trust during the New Deal, and later, a close friend and advisor to Lyndon B. Johnson....
, and
James M. LandisJames McCauley Landis was an American academic, government official and legal adviser.-Biography:Landis was born in Tokyo, Japan, where his parents were teachers at a missionary school...
; and signed into law by President Franklin D. Roosevelt.
Purpose
The 1933 Act has two basic objectives:
- to require that investors receive significant (or “material”) information concerning securities being offered for public sale; and
- to prohibit deceit, misrepresentations, and other fraud in the sale of securities to the public.
Underlying the 1933 Act is the idea that a company (i.e., an “issuer”) offering securities should provide potential investors with sufficient information about both the issuer and the securities to make an informed investment decision. To assist in achieving its objectives of informing potential investors and fostering fair dealing in the securities markets, the 1933 Act requires issuers to publicly disclose significant information about themselves and the terms of the securities. Disclosure also has the added benefit of discouraging bad behavior. Supreme Court Justice
Louis BrandeisLouis D. Brandeis was a United States Supreme Court Justice from 1916 to 1939. He was born in Louisville, Kentucky to Jewish parents who had immigrated from Europe...
coined the phrase “sunlight is the best disinfectant,” which also is part of the philosophy underlying the 1933 Act.
Disclosure of material information is accomplished through the registration of securities with the Securities and Exchange Commission (the “SEC” or the “Commission”). The SEC is the principal federal agency responsible for oversight of the securities markets and enforcement of the federal securities laws. The SEC was created pursuant to the
Securities Exchange Act of 1934The Securities Exchange Act of 1934 is a law governing the secondary trading of securities in the United States of America. The Act, , codified at et seq., was a sweeping piece of legislation. The Act and related statutes form the basis of regulation of the financial markets and their...
(the "1934 Act"). Prior to the passage of the 1934 Act, securities were registered with the Federal Trade Commission.
The Registration Process
In general, securities offered or sold to the public in the U.S. must be registered by filing a registration statement with the SEC. The
prospectusA prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the...
, which is the document through which an issuer’s securities are marketed to a potential investor, is generally filed in conjunction with 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
SECThe U.S. Securities and Exchange Commission is an independent agency of the United States government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets...
's website using
EDGAREDGAR, the Electronic Data-Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission...
. 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
Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the sale 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 144On December 6, 2007, the SEC published final rules revising Rule 144 under the Securities Act of 1933, which regulates the resale of restricted securities and securities held by affiliates...
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 avg weekly reported volume of trading in the securities on all national securities exchanges for the preceding 4 weeks, and
- The avg 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 amt of securities sold in reliance on Rule 144 in any 3-month period exceeds 5000 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'.
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.
Regulation S
Regulation S is a "
safe harborThe term safe harbor has several special usages, in an analogy with its literal meaning, that of a harbor or haven which provides safety from weather or attack.-Legal definition:...
" that defines when an offering of
securitiesA security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities ; equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security...
will be deemed to come to rest abroad and therefore not be subject to the registration obligations imposed under Section 5 of the 1933 Act. The
regulationRegulation is "controlling human or societal behaviour by rules or restrictions." Regulation can take many forms: legal restrictions promulgated by a government authority, self-regulation, social regulation , co-regulation and market regulation. One can consider regulation as actions of conduct...
includes two safe harbour provisions: an issuer safe harbour and a resale safe harbour. 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 StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
investorAn investor is any party that makes an investment.The term has taken on a specific meaning in finance to describe the particular types of people and companies that regularly purchase equity or debt securities for financial gain in exchange for funding an expanding company...
s. As such, the U.S. Securities and Exchange Commission had only previously, weakly enforced registration of foreign transactions, and only had limited constitutional authority to do so.
Civil Liability Under the 1933 Securities Act
Violation of the registration requirements can lead to civil liability for the issuer and underwriters Sections 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).
External links