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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 The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...
on May 27, 1933, during the
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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. It requires every offer or sale of securities that uses the means and instrumentalities of
interstate commerce The Commerce Clause describes an enumerated power listed in the United States Constitution ( Article I, Section 8, Clause 3). The clause states that the United States Congress shall have power "to regulate Commerce with foreign Nations, and amo ...
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

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 A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of ...
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 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities ( stocks, bonds, and debentures) in the United States of America. A land ...
. 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. In 1939, the Trust Indenture Act of 1939 was added as Title 3. The original Title I contained 26 sections. In 1980, the Small Business Issuers' Simplification Act of 1980 amended section 4. In 1995, section 27 was added by the Private Securities Litigation Reform Act. 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 A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal o ...
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 '33 Act which preempts blue sky law merit review of certain kinds of offerings. Part of the
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Con ...
, the Act was drafted by Benjamin V. Cohen, Thomas Corcoran, and James M. Landis, and signed into law by
President President most commonly refers to: *President (corporate title) * President (education), a leader of a college or university * President (government title) President may also refer to: Automobiles * Nissan President, a 1966–2010 Japanese ...
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 bolsters and helps to maintain investor confidence which in turn supports the
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
.


Registration process

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". 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 (if other than common stock); 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
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. 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

Not all offerings of securities must be registered with the SEC. Section 3(a) outlines various classes of exempt securities, 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". Section (4)(a)(2) exempts "transactions by an issuer not involving any public offering" 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.'' 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. 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 three-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 (
NASDAQ The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
) 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'. 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.


Rule 144A

Rule 144 is not to be confused with
Rule 144A Rule 144A. Securities Act of 1933, as amended (the "Securities Act") 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 qual ...
. 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. 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 A safe harbor or harbour is literally a "place of shelter and safety, esp. for ships". It is used in many contexts: Film and television * Safe harbor (broadcasting), established in 1978 in the US, the time period in a television schedule during wh ...
" 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 Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...
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 In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines given by government agenc ...
for the issuer, underwriters, directors, officers, and accountants under §§ 11, 12(a)(1), or 12(a)(2) of the 1933 Act. However, in practice the liability is typically covered by directors and officers liability insurance or indemnification clauses. To have " standing" to sue under Section 11 of the 1933 Act, such as in a
class action A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class actio ...
, a plaintiff must be able to prove that he can "trace" his shares to the registration statement and offering in question, as to which there is alleged a material misstatement or omission. In the absence of an ability to actually trace his shares, such as when securities issued at multiple times are held by the Depository Trust Company in a fungible bulk and physical tracing of particular shares may be impossible, the plaintiff may be barred from pursuing his claim for lack of standing. Additional liability may be imposed under the
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities ( stocks, bonds, and debentures) in the United States of America. A land ...
(
Rule 10b-5 SEC Rule 10b-5, codified at , is one of the most important rules targeting securities fraud promulgated by the U.S. Securities and Exchange Commission, pursuant to its authority granted under § 10(b) of the Securities Exchange Act of 1934. The ru ...
) against the "maker" of the alleged misrepresentation in certain circumstances.


See also

*
Chicago Stock Exchange NYSE Chicago, formerly known as the Chicago Stock Exchange (CHX), is a stock exchange in Chicago, Illinois, US. The exchange is a national securities exchange and self-regulatory organization, which operates under the oversight of the U.S. ...
*
Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange Act ...
*
Financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handle ...
*
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its liste ...
*
Regulation D (SEC) 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. ...
* Securities commission * Securities regulation in the United States * Stock exchange ;Related legislation * 1934 –
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities ( stocks, bonds, and debentures) in the United States of America. A land ...
* 1939 – Trust Indenture Act of 1939 * 1940 – Investment Advisers Act of 1940 * 1940 –
Investment Company Act of 1940 The Investment Company Act of 1940 (commonly referred to as the '40 Act) 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 . Along with the Securities Ex ...
* 1968 – Williams Act (Securities Disclosure Act) of 1968 * 1975 –
Securities Acts Amendments of 1975 The Securities Acts Amendments of 1975 is an act of Congress. It was passed as a United States Public Law () on June 4, 1975, and amended the Securities Act of 1933 ( ''et seq.'') and the Securities Exchange Act of 1934 ( ''et seq.''). The Secu ...
* 1982 –
Garn–St. Germain Depository Institutions Act The Garn–St Germain Depository Institutions Act of 1982 (, , enacted October 15, 1982) is an Act of Congress that deregulated savings and loan associations and allowed banks to provide adjustable-rate mortgage loans. It is disputed whether the a ...
of 1982 * 1999 – Gramm-Leach-Bliley Act of 1999 * 2000 – Commodity Futures Modernization Act of 2000 * 2002 –
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, (), also known as the "Public Company Accounting Reform and Investor Protect ...
of 2002 * 2006 – Credit Rating Agency Reform Act of 2006 * 2010 –
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Rece ...
of 2010


References


Further reading

*


External links


Securities Act of 1933 from SECpdf

Introduction to the Federal Securities Laws by seclaw.com Copyright 2010. VGIS Communications LLC
accessed March 13, 2014
sec.gov SEC Proposed changes
{{Authority control 1933 in law New Deal legislation U.S. Securities and Exchange Commission United States federal securities legislation 73rd United States Congress 1933 in economics