- Securities Act of 1933
Congress enacted the Securities Act of 1933 (the "1933 Act," the "Truth in Securities Act" or the "Federal Securities Act", USStat|48|74, enacted
1933-05-27, "codified at usc|15|77a et seq."), in the aftermath of the stock market crash of 1929and during the ensuing Great Depression. 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 laws). 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.
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 Brandeiscoined 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 1934(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 prospectus, 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 issuer's properties and business;
* 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 prospectuses become public shortly after they are filed with the SEC. If filed by U.S. domestic issuers, the statements are available 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 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.
Exemptions from Registration
Despite the stringent registration requirements imposed by the 1933 Act, most US securities are not sold through public, registered offerings. Instead, one or more exemptions are used. The exemptions are non-exclusive, meaning more than one may apply to any given offering. Under Section 4(2),
private placements may be made to institutions or other "accredited investors" deemed to be able to "fend for themselves" without a full registration. Regulation D codifies this statutory principal and offers more clearly defined safe harbor rules for those seeking a private placement exemption. Section 3(a)(11) offers the little used exemption allowing issues made only within one state to avoid registration. Rule 147 creates a clearly defined safe harbor for intrastate offerings.
Of greater importance, Section 4(1) allows for secondary market transactions to take place without registration - an essential provision allowing for market liquidity. Rule 144 allows company affiliates (insiders and control persons) and other owners of restricted securities to sell in some circumstances, and is discussed in detail below.
Rule 144A exempts resales of restricted securities between "Qualified Institutional Buyers," or "QIBs." This creates a secondary market in restricted securities among the biggest players on Wall Street. Note that Rules 144 and 144A accomplish different objectives.
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 144must 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'. [ [http://www.sec.gov/investor/pubs/rule144.htm United States Securities and Exchange Commission. "Rule 144: Selling Restricted and Control Securities." October 10, 2003. Accessed Dec. 9, 2006.] ]
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 is a "
safe harbour" that defines when an offering of securities will be deemed to come to rest abroad and therefore not subject to the registration obligations imposed under Section 5 of the 1933 Act. The regulationincludes two safe harbour provisions: an issuer safe harbour and a resale safe harbour.
Section 5 of the 1933 Act is meant primarily as protection for
United States investors. As such, the U.S. Securities and Exchange Commissionhad only previously, weakly enforced registration of foreign transactions, and only had limited constitutionalauthority 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 through Rule 10b-5, or Sections 11, 12(a)(1) or 12(a)(2) of the Act.
Securities regulation in the United States
Securities Exchange Act of 1934
*cite journal |last=Douglas |first=William O. |authorlink=William O. Douglas |coauthors=Bates, George E. |year=1933 |month= |title=The Federal Securities Act of 1933 |journal=
Yale Law Journal|volume=43 |issue=2 |pages=171–217 |doi=10.2307/791346 |url= |accessdate= |quote=
* [http://www.seclaw.com/seclaw.htm Introduction to the Federal Securities Laws]
* [http://www.law.uc.edu/CCL/xyz/sldtoc.html Full text of this Act]
* [http://www.sec.gov/rules/proposed.shtml#secondq Proposed changes to Rule 144]
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