The Securities Act of 1933, sometimes referred to as the truth-in securities act, is primarily concerned with the initial issuance of securities from enterprises to the investing public in the United States. The intention of the 1933 act is to ensure that all relevant information about the security be disclosed to potential investors. This information must be registered with the Securities and Exchange Commission (SEC) prior to issuance of the securities. In fact, it is unlawful to offer securities unless a registration statement is filed and in effect with the SEC. Some securities are exempt from this registration, such as government securities, nonpublic offerings, intrastate offerings, and certain public offerings not exceeding $1.5 million. In the event that a securities registration statement contains erroneous information, the statement's effectiveness may be refused or suspended, based on a public hearing.
The key to the registration statement is that it provides the investor with information necessary to make an "informed and realistic evaluation of the worth of the securities." Registration of the securities, however, does not imply approval of the issue by the SEC, or that the SEC has found the registration disclosures to be accurate. Those individuals found guilty of intentionally filing false securities with the SEC are at risk for fines, prison terms, or both. Additionally, those who are found to be connected with the securities, such as directors, accountants, and any other experts, may also be held liable and subject to discipline as well. Secondary parties involved in the issuance of fraudulent securities, such as brokerage firms and other financial institutions, cannot be sued for conspiracy or aiding and abetting under a Supreme Court ruling issued in the case of Central Bank of Denver v. First Interstate Bank of Denver in 1994.
SEC regulations also limit the amount of publicity issuers of new securities are able to provide. This provision was adopted to curb speculation such as that seen prior to the stock market crash of 1929, and to prevent use of securities issues to influence future market conditions. While succeeding in its initial goals, changes in the marketplace have rendered the act's publicity regulations difficult to enforce. For instance, companies fulfilling the disclosure portions of the act may at the same time be violating its publicity regulations. Furthermore, the increased globalization of securities markets makes the publicity regulations of the act unenforceable, as legal publicity overseas is rapidly communicated to the U.S. market, where it may be in violation of SEC regulations. In response to this and other problems, the SEC established a team of experts in the summer of 1998 to revamp the act and make it more responsive to modern business practices and technological advancement.
Securities registration requires, but does not guarantee, accuracy in the registration statement and prospectus. Investors who ultimately suffer economic losses after the purchase of securities do have important recovery rights under the law, if they can prove either incomplete or inaccurate disclosure of material facts in the registration statement or prospectus. In the event that investors wish to exercise these rights, they must be handled through the appropriate federal or state court, as the SEC has no power to award damages.
The only standard that must be met when registering securities is adequate and accurate disclosure of required material facts concerning the company and the securities it is proposing to offer. The issue of fairness of terms, the issuing company's potential success, and other factors that affect the merits of investing in the securities (regardless of price, potential profits, or other factors) has no bearing on the question of whether or not securities may be registered.
Registration forms to be filed with the SEC must contain specific information such as: description of the registrant's properties and business; description of the significant provisions of the security to be offered for sale and its relationship to the registrant's other capital securities; information about the management of the registration; and financial statements certified by independent public accountants.
Registration statements and prospectuses on securities become public immediately upon filing with the SEC. Following the filing of the registration statement, securities may be offered orally or by certain summaries of the information in the registration statements as permitted by SEC rules. It is unlawful, however, to sell the securities until the effective date.
Most registration statements become effective on the 20th day after the filing. The SEC, however, may move ahead a security's effective date if it is deemed appropriate given the "interests of investors and the public, the adequacy of publicly available information, and the ease with which the facts about the new offering can be disseminated and understood."
As a general rule, registration requirements apply to securities of both foreign and domestic issuers, and to securities of foreign governments sold in domestic securities markets. Exemptions include private offerings to a limited number of persons or institutions who have access to the kind of information that registrations would disclose and who do not propose to redistribute the securities; offerings restricted to residents of the state in which the issuing company is organized and doing business; securities of municipal, state, federal, and other governmental instrumentalities as well as charitable institutions, banks, and carriers subject to the Interstate Commerce Act; and offerings of small business investment companies made in accordance with rules and regulations of the commission.
Exemptions are available when certain specified conditions are met. These conditions include the prior filing of a notification with the appropriate SEC regional office and the use of an offering circular containing certain basic information in the sale of the securities. Supplementary reporting rules adopted by the SEC in November 1998 require even exempt equities offerings to file reports with the SEC within the quarter following their issuance.
SEC standards developed in 1997 and put in force in 1998 also relieve certain responsibilities formerly faced by large securities issuers under the original provisions of the act. These new regulations require large securities issuers to register with the SEC as always, but no longer require the mailing of a prospectus to potential investors. Instead, securities issuers may mail a greatly abbreviated prospectus to potential investors, while merely exhibiting the more exhaustive information online at the website of the SEC.
Regardless of whether the securities are exempt from registration, antifraud provisions apply to all sales of securities involving interstate commerce or the U.S. postal system.
SEE ALSO : Securities Exchange Act of 1934
[ Arthur DuRivage ,
updated by Grant Eldridge ]
Illiano, Gary. "SEC Announces New Reporting Rules for Unregistered Equity Sales." CPA Journal 67, no. 2 (February 1997): 71.
Lee, Peter. "SEC Rules Not OK." Euromoney, July 1997, 64.
McTague, Jim. "D.C. Current: A Stealth Bill for Freddie." Barron's, 19 October 1998, 36.
Picker, Ida. "Mending the Rules." Institutional Investor 32, no. 9 (September 1998): 41.