Securities Act of 1933
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. 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 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.
HistoryThe 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 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 '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. 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 Act was drafted by Benjamin V. Cohen, Thomas Corcoran, and James M. Landis, and signed into law by President Franklin D. Roosevelt.
PurposeThe 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.
Registration processUnless 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 ; and
- financial statements certified by independent accountants.
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.
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 144Rule 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
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.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 SRegulation 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.
This law applies to its own unique definition of United States person.
Civil liabilityViolation of the registration requirements can lead to near-strict civil liability for the issuer, underwriters, directors, officers, and accountants under §§ 11, 12, or 12 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 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 against the "maker" of the alleged misrepresentation in certain circumstances.