Securities Act of 1933
Congress enacted the Securities Act of 1933 (“1933 Act”) in the aftermath of the stock market crash of 1929 and the ensuing economic depression. It was the first major federal legislation to regulate the sale of securities. Prior to that time, regulation of securities were chiefly governed by state laws (which are 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 because, in part, there were questions as to the constitutionality of federal legislation.
Purpose
The 1933 Act has two basic objectives:
- require that investors receive significant (or “material”) information concerning securities being offered for public sale; and
- prohibit deceit, misrepresentations, and other fraud in the sale of securities.
Underlying the 1933 Act is the idea that a company (i.e., an “issuer”) offering securities should provide potential investors with sufficient information about the issuer to make an informed decision. Congress intended the law to empower investors, and not the government, to make informed investment decisions. To assist with its objectives of informing potential investors and fair dealing in the market place, the 1933 Act requires issuers to disclose significant information about themselves. Disclosure also has the added benefit of discouraging bad behavior. Supreme Court Justice Louis Brandeis coined the phrase “sunlight is the best disinfectant,” which also is part of the philosophy underlying the 1933 Act.
Disclosure of relevant information is accomplished through the registration of securities with the Securities and Exchange Commission (“SEC” or the “Commission”). The SEC is the principle federal agency responsible for oversight of the securities market and enforcement of the federal securities laws. The SEC was created pursuant to the Securities Exchange Act of 1934, discussed below.
The Registration Process
In general, securities 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 a company’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 a company’s securities must be registered. In general, registration forms call for:
- a description of the company's properties and business;
- a description of the security to be offered for sale;
- information about the management of the company; and
- financial statements certified by independent accountants.
Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available from the SEC’s website at http://www.sec.gov. Registration statements are subject to SEC examination for compliance with disclosure requirements. It is illegal for an issuer to lie 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.
Regardless of whether securities must be registered, the 1933 Act makes it illegal to commit fraud in conjunction with the sale of securities. A defrauded investor can sue for recovery under the 1933 Act.