Congress enacted the Securities Act of 1933 (the “1933 Act”, “Truth in Securities Act” or the “Federal Securities Act”) 48 Stat. 74 (May 27, 1933), codified at 15 U.S.C. 77a et seq., 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 pursuant to the 1933 Act, unless an exemption from registration exists under the law.
It was the first major federal legislation to regulate the offer and sale of securities. Prior to that time, regulation of securities was chiefly governed by state laws (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 in part because there were questions as to the constitutionality of federal legislation.
The 1933 Act has two basic objectives:
Requirement 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 both the issuer and the securities to make an informed investment decision. To assist in achieving its objectives of informing potential investors and fostering fair dealing in the securities markets, the 1933 Act requires issuers to disclose significant information about themselves and the terms of the securities. 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). (Prior to the passage of the Securities Exchange Act of 1934, securities were registered with the Federal Trade Commission.) The SEC is the principal federal agency responsible for oversight of the securities markets and enforcement of the federal securities laws. The SEC was created pursuant to the Securities Exchange Act of 1934.
The Registration Process – In general, securities offered or 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 an issuer’s securities must be registered. In general, registration forms call for:
a description of the issuer’s properties and business;
a description of the security to be offered for sale;
information about the management of the issuer;
if not registering common stock, information about the securities
financial statements certified by independent accountants
One of the exceptions to registration, 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, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the sale 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.
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 re-file Form 144 once the merger, buyout or takeover has been completed.