Securities Act of 1933

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Securities Act of 1933
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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 law Pub. L. Tooltip Public Law (United States)  73–22
Statutes at Large 48  Stat.   74
Codification
U.S.C. sections created 15 U.S.C.   § 77a et seq.
Legislative history
United States Supreme Court cases

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 and after the stock market crash of 1929. It is an integral part of United States securities regulation. It is legislated pursuant to the Interstate Commerce Clause of the Constitution.

Contents

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

Philadelphia, Germantown & Norristown Railroad stock certificate, 1852 Philadelphia, Germantown & Norristown Railroad stock certificate 1852.jpg
Philadelphia, Germantown & Norristown Railroad stock certificate, 1852

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. It was originally enforced by the FTC, until the SEC was created by the Securities Exchange Act of 1934. [2]

The original law was separated into two titles. Title I is formally entitled the Securities Act of 1933, while title 2 is the Corporation of Foreign Bondholders Act, 1933. [3] In 1939, the Trust Indenture Act of 1939 was added as Title 3. [4] The original Title I contained 26 sections. [5] In 1980, the Small Business Issuers' Simplification Act of 1980 amended section 4. [6] : 76  In 1995, section 27 was added by the Private Securities Litigation Reform Act. [7]

The 1933 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 need 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 1933 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. [8] [9]

Purpose

The floor of the New York Stock Exchange in 1908 Stockexchange.jpg
The floor of the New York Stock Exchange in 1908

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. [10]

Registration process

A prospectus in the US AmericanProspectusSample.jpg
A prospectus in the US

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.

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. The law describes required disclosures in Schedule A and Schedule B; however, in 1982, the SEC created Regulation S-K to consolidate duplicate information into an "integrated disclosure system". [11] Among other things, registration forms call for:

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.

Exemptions

US Securities and Exchange Commission Office in Washington, D.C. US Security and Exchange Commission Office photo Don Ramey Logan.jpg
US Securities and Exchange Commission Office in Washington, D.C.

Not all offerings of securities must be registered with the SEC. Section 3(a) outlines various classes of exempt securities, [12] and Section 3(b) allows the SEC to write rules exempting securities if the agency determines that registration is not needed due to "the small amount involved or the limited character of the public offering". [13] : 398  Section (4)(a)(2) exempts "transactions by an issuer not involving any public offering" [14] which has historically created confusion due to the lack of a specific definition of "public offering"; the Supreme Court provided clarification in SEC v. Ralston Purina Co. [13] : 357 

Some exemptions from the registration requirements include:

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

NASDAQ MarketSite TV studio NASDAQ studio.jpg
NASDAQ MarketSite TV studio

Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the public resale of restricted and controlled securities without registration. [15] 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 three-month period generally does not exceed any of the following limitations:

Notice of resale is provided to the SEC if the amount of securities sold in reliance on Rule 144 in any three-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'. [15] 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. [16]

Rule 144A

Rule 144 is not to be confused with Rule 144A . Rule 144A, adopted in April 1990, 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. [17] Rule 144A has become the principal safe harbor on which non-U.S. companies rely when accessing the U.S. capital markets. [18]

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. [19] 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; Sections 11 and 12

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. [20] However, in practice the liability is typically covered by directors and officers liability insurance or indemnification clauses. [21] : 4 

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 in question, as to which there is an alleged material misstatement or omission. [22] [23] [24] In the absence of the plaintiff having an ability to actually trace his shares to the allegedly defective registration statement, such as when securities issued at multiple times -- and not all under the same registration statement which contains the alleged defect -- are held together by the Depository Trust Company in its nominee name in a fungible bulk, the plaintiff may be barred from pursuing his claim for lack of standing. [22] [25] [26] [27] [23]

Class action complaints involving federal Section 11 claims and state claims under the '33 Act rose 43% in 2022. [28] Over a fifth of all core federal filings included Section 11 allegations. [28]

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. [29]

See also

Related legislation

Related Research Articles

Shelf registration, shelf offering, or shelf prospectus is a type of public offering where certain issuers are allowed to offer and sell securities to the public without a separate prospectus for each act of offering and without the issue of further prospectus. Instead, there is a single prospectus for multiple, undefined future offerings. The prospectus may be used to offer securities for up to several years after its publication. A shelf registration statement is a filing with the SEC to register a public offering, usually where there is no present intention to immediately sell all the securities being registered. A shelf registration statement permits multiple offerings based on the same registration. Shelf registration is mostly used for sales of new securities by the issuer, although it might possibly be used for resales of outstanding securities or a combination of both.

<span class="mw-page-title-main">Securities Exchange Act of 1934</span> 1934 U.S. legislation establishing rules and regulatory bodies for financial markets

The Securities Exchange Act of 1934 is a law governing the secondary trading of securities in the United States of America. A landmark of wide-ranging legislation, the Act of '34 and related statutes form the basis of regulation of the financial markets and their participants in the United States. The 1934 Act also established the Securities and Exchange Commission (SEC), the agency primarily responsible for enforcement of United States federal securities law.

The Investment Company Act of 1940 is an act of Congress which regulates investment funds. It was passed as a United States Public Law on August 22, 1940, and is codified at 15 U.S.C. §§ 80a-1–80a-64. Along with the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and extensive rules issued by the U.S. Securities and Exchange Commission; it is central to financial regulation in the United States. It has been updated by the Dodd-Frank Act of 2010. It is the primary source of regulation for mutual funds and closed-end funds, now a multi-trillion dollar investment industry. The 1940 Act also impacts the operations of hedge funds, private equity funds and even holding companies.

The Investment Advisers Act of 1940, codified at 15 U.S.C. § 80b-1 through 15 U.S.C. § 80b-21, is a United States federal law that was created to monitor and regulate the activities of investment advisers as defined by the law. Passing unanimously in both the House and Senate, it is the primary source of regulation of investment advisers and is administered by the U.S. Securities and Exchange Commission.

In the United States under the Securities Act of 1933, any offer to sell securities must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration. Regulation D contains the rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. A Regulation D offering is intended to make access to the capital markets possible for small companies that could not otherwise bear the costs of a normal SEC registration. Reg D may also refer to an investment strategy, mostly associated with hedge funds, based upon the same regulation. The regulation is found under Title 17 of the Code of Federal Regulations, part 230, Sections 501 through 508. The legal citation is 17 C.F.R. §230.501 et seq.

Private placement is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include friends and family, accredited investors, and institutional investors.

<span class="mw-page-title-main">United States securities regulation</span> Law and regulations that relate to Securities

Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, but sometimes may also encompass listing requirements of exchanges like the New York Stock Exchange and rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company (issuer) as part of a public offering of securities. Most frequently associated with an initial public offering (IPO), this document, like the previously submitted Form S-1 registration statement, must be filed with the Securities and Exchange Commission (SEC).

<span class="mw-page-title-main">Prospectus (finance)</span>

A prospectus, in finance, is a disclosure document that describes a financial security for potential buyers. It commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors. Today, prospectuses are most widely distributed through websites such as EDGAR and its equivalents in other countries.

Rule 144A. Securities Act of 1933, as amended provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private resales of minimum $500,000 units of restricted securities to qualified institutional buyers (QIBs), which generally are large institutional investors that own at least $100 million in investable assets. When a broker or dealer is selling securities in reliance on Rule 144A, it may make offers to non-QIBs through general solicitations following an amendment to the Rule in 2012.

Form 144, required under Rule 144, is filed by a person who intends to sell either restricted securities or control securities. Form 144 is notification to the SEC of this intention to sell and must take place at the time the sell order is placed with the broker-dealer. The securities may be sold within the 90-day period after Form 144 is filed.

A direct public offering (DPO) or direct listing is a method by which a company can offer an investment opportunity directly to the public.

Securities and Exchange Commission v. Ralston Purina Co., 346 U.S. 119 (1953), was a case in which the United States Supreme Court held that a corporation offering "key employees" equity stock shares is eligible for a transaction-based exemption from securities registration under Section 4(1) [Now Section 4(a)(2)] of the Securities Act of 1933. This exemption would generally not apply when offered to all employees, including rank-and-file employees, as the investors should be "sophisticated investors."

Qualified institutional placement (QIP) is a capital-raising tool, primarily used in India and other parts of southern Asia, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a qualified institutional buyer (QIB).

Regulation S-K is a prescribed regulation under the US Securities Act of 1933 that lays out reporting requirements for various SEC filings used by public companies. Companies are also often called issuers, filers or registrants.

Securities regulation in Canada is conducted by the various provincial securities commissions and self-regulating organizations (“SRO”) such as the MFDA and IIROC. Securities are issued under the authority and oversight of these bodies with the result that a broad range of rules apply to companies seeking to raise capital and to the parties acting as their agents in such transactions. However, there is a useful simplification that can be applied in Canada to provide some clarity for issuers - based on the criteria below securities issuers fall into two broad categories:

<span class="mw-page-title-main">Investor Protection and Securities Reform Act of 2010</span>

The Investor Protections and Improvements to the Regulation of Securities is a United States Act of Congress, which forms Title IX, sections 901 to 991 of the much broader and larger Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Its main purpose is to revise the powers and structure of the Securities and Exchange Commission, credit rating organizations, and the relationships between customers and broker-dealers or investment advisers. This title calls for various studies and reports from the SEC and Government Accountability Office (GAO). This title contains nine subtitles.

<span class="mw-page-title-main">Jumpstart Our Business Startups Act</span> United States federal law

The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012. Title III, also known as the CROWDFUND Act, has drawn the most public attention because it creates a way for companies to use crowdfunding to issue securities, something that was not previously permitted. Title II went into effect on September 23, 2013. On October 30, 2015, the SEC adopted final rules allowing Title III equity crowdfunding. These rules went into effect on May 16, 2016; this section of the law is known as Regulation CF. Other titles of the Act had previously become effective in the years since the Act's passage.

Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also referred to as crowdinvesting, investment crowdfunding, or crowd equity.

In the United States under the Securities Act of 1933, any offer to sell securities must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt it from such registration. Regulation A contains rules providing exemptions from the registration requirements, allowing some companies to use equity crowdfunding to offer and sell their securities without having to register the securities with the SEC. Regulation A offerings are intended to make access to capital possible for small and medium-sized companies that could not otherwise bear the costs of a normal SEC registration and to allow nonaccredited investors to participate in the offering. The regulation is found under Title 17 of the Code of Federal Regulations, chapter 2, part 230. The legal citation is 17 C.F.R. §230.251 et seq.

References

  1. ↑ Tom C. W. Lin, "A Behavioral Framework for Securities Risk", 34 Seattle University Law Review 325 (2011)
  2. ↑ "1933-1953; THE FTC DURING THE ADMINISTRATIONS OF FRANKLIN D. ROOSEVELT (1933-45) AND HARRY S. TRUMAN (1945-53)". Federal Trade Commission. September 24, 2014. Retrieved February 27, 2013.
  3. ↑ "15 U.S. Code § 77mm - Corporation of Foreign Bondholders Act, 1933". Legal Information Institute. Retrieved October 12, 2020.
  4. ↑ "15 U.S. Code § 77aaa - Trust Indenture Act of 1939". Legal Information Institute. Retrieved October 12, 2020.
  5. ↑ "Pub. L. 73-22 - Securities Act of 1933". uslaw.link. Retrieved October 12, 2020.
  6. ↑ Satkowski, Susan E. (1981–1982). "Rule 242 and Section 4(6) Securities Registration Exemptions: Recent Attempts to Aid Small Businesses". William and Mary Law Review. 23: 73.
  7. ↑ "Public Law 104-67 - To reform Federal securities litigation, and for other purposes". govinfo.gov. Retrieved October 12, 2020.
  8. ↑ "Insider Trading: A Program Commemorating the 40th Anniversary of Chiarella v. United States". Securities and Exchange Commission Historical Society. November 5, 2020.
  9. ↑ Powell, Jim (2007). FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression. Crown. ISBN   9780307420718 – via Google Books.
  10. ↑ Ciro, Tony (2016). The Global Financial Crisis: Triggers, Responses and Aftermath. Routledge. ISBN   9781317030256 – via Google Books.
  11. ↑ "Report on Review of Disclosure Requirements in Regulation S-K" (PDF). Securities and Exchange Commission. Archived (PDF) from the original on September 10, 2019. Retrieved February 28, 2020.
  12. ↑ "15 U.S. Code § 77c - Classes of securities under this subchapter". Legal Information Institute. Retrieved October 13, 2020.
  13. 1 2 Cheek, James H. III (1977). "Exemptions Under the Proposed Federal Securities Code". Vanderbilt Law Review. 30: 355.
  14. ↑ "15 U.S. Code § 77d - Exempted transactions". Legal Information Institute. Retrieved October 13, 2020.
  15. 1 2 "Rule 144: Selling Restricted and Control Securities". SEC.gov.
  16. ↑ "SIFMA Guidance: Procedures, Covenants, and Remedies in Light of Revised Rule 144" (PDF).
  17. ↑ "Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings". SEC.gov.
  18. ↑ "144A Private Placement Services". isin.net.
  19. ↑ Hanks, Sara (December 4, 2006). Regulation S: The Safe Harbor for Offshore Securities Transactions. Bureau of National Affairs. ISBN   9781558715271 – via Google Books.
  20. ↑ The Due Diligence Defense under Section 11 of the Securities Act of 1933 44 Brandeis Law Journal 2005-2006
  21. ↑ Drury, Lloyd L. (June 25, 2007). "What's the Cost of a Free Pass? A Call for the Re-Assessment of Statutes that Allow for the Elimination of Personal Liability for Directors". Rochester, NY. SSRN   996423.{{cite journal}}: Cite journal requires |journal= (help)
  22. 1 2 Slack v. Prani, Supreme Court of the United States (2023).
  23. 1 2 "Bloomberg Industry Group". Bloomberg Industry.
  24. ↑ "Securities Fraud Plaintiff Need Not Show Reliance". American Bar Association.
  25. ↑ "Pleading Section 11 Liability for Secondary Offerings". American Bar Association. January 4, 2017.
  26. ↑ "CITIC Trust_FIC_Order_PACER.pdf" (PDF).
  27. ↑ Grundfest, Joseph A. (September 22, 2015). "Morrison, the Restricted Scope of Securities Act Section 11 Liability, and Prospects for Regulatory Reform". Journal of Corporation Law. 41 (1): 38. Archived from the original on August 6, 2020. Retrieved February 5, 2019.
  28. 1 2 "Securities Class Action Filing Activity Fell for Third Straight Year as Volume of M&A Class Actions Declined," National Law Review, February 2, 2023.
  29. ↑ "Congress, the Supreme Court, and the Rise of Securities-Fraud Class Actions". Harvard Law Review. January 10, 2019.

Further reading

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