United States Congress enacted the Securities
Act of 1933, in the aftermath of the stock
market crash of 1929 and during the ensuing
Great Depression. 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 with the SEC pursuant
to the 1933 Act, unless an exemption from
registration exists under the law. "Means
and instrumentalities of interstate commerce"
is extremely broad, and it is virtually impossible
to avoid the operation of this 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.
The 1933 Act was the first major federal legislation
to regulate the offer and sale of securities.
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
securities laws in place. The '33 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 require
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. Recently, however, NSMIA added
a new Section 18 to the '33 Act which preempts
blue sky law merit review of certain kinds
of offerings.
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.
Purpose
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 is intended to in this way
help bolster and maintain investor confidence
in order to support the market.
Registration process
Unless they qualify for an exemption, securities
offered or sold to the public in the U.S.
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. 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; 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 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 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 public resale 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 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 3-month
period generally does not exceed any of the
following limitations:
1% of the stock outstanding
the average weekly reported volume of trading
in the securities on all national securities
exchanges for the preceding 4 weeks
the average weekly volume of trading of the
securities reported through the consolidated
transactions reporting system
Notice of resale is provided to the SEC if
the amount of securities sold in reliance
on Rule 144 in any 3-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'.
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.
Rule 144 is not to be confused with Rule 144A
which provides a safe harbor from the registration
requirements of the Securities Act of 1933
for certain private resales of restricted
securities to qualified institutional buyers.
Rule 144A has become the principal safe harbor
on which non-U.S. companies rely when accessing
the U.S. capital markets.
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. 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
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.
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.
Civil liability
Violation of the registration requirements
can lead to civil liability for the issuer
and underwriters sections under §§ 11, 12(a)(1)
or 12(a)(2) of the Act. Additional liability
may be imposed under the Securities Exchange
Act of 1934.
See also
References
Further reading
Douglas, William O.; Bates, George E.. "The
Federal Securities Act of 1933". Yale Law
Journal 43: 171–217. doi:10.2307/791346.
JSTOR 791346. 
External links
Introduction to the Federal Securities Laws
by seclaw.com Copyright 2010. VGIS Communications
LLC accessed March 13, 2014
sec.gov SEC Proposed changes
