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Securities Act of 1933: Stock Market Regulation after the Great Crash

Following the stock market crash of 1929, Congress passed the Securities Act of 1933. The Securities Act of 1933 is often called:

  • The "Truth in Securities" law
  • The 1933 Act
  • The Federal Securities Act

The disclosure requirements of this statute seek to ensure potential shareholders make informed investment decisions about offerings of securities sold publicly. It was Congress' initial effort to regulate securities and the first major federal securities law.

Though enacted almost a century ago, its provisions protect investors against fraud today. The act is, in essence, a disclosure statute. The 1933 act has two basic objectives:

  • Require that investors receive relevant information about securities offered for public sale
  • Prohibit deceit, misrepresentations, and other fraud in the sale of securities

The Securities Act ensures that issuers selling securities to the public disclose material information. Material information in the sale of securities is likely to change a reasonable investor's evaluation of a company's stock. It's information that a potential buyer can review as a part of their due diligence. This helps ensure securities transactions aren't based on fraudulent information or practices.

Below is a more detailed explanation of the Securities Act of 1933. See FindLaw's Securities Law section for more articles and resources about securities.

History of the 1933 Act

The Securities and Exchange Commission (SEC) governs the Securities Act of 1933. (The Securities Exchange Act of 1934 created the SEC.) Congress has passed several amendments to the Securities Act of 1933 to update the rules.

Before the act, the securities industry was only subject to state laws and regulations. Those offering securities could promise extravagant returns while disclosing little relevant information. Securities fraud was not uncommon.

Purpose of Registration

The goal of the law is to give investors accurate financial information. The Securities Act of 1933 was the first federal securities law governing the sales of securities. The required registration process for securities ensures companies give potential investors relevant information.

Disclosure of relevant information lets investors decide about purchasing a particular security. But, the SEC does not guarantee the accuracy of the information.

Registered Security

Before a company's securities can trade on a national securities exchange, such as the New York Stock Exchange or Nasdaq Stock Market, a company must register that class of securities with the SEC.

Registration Requirements

Companies and people in capital markets must follow specific rules and regulations, such as complying with reporting and registration requirements. Congress, regulatory agencies, and self-regulatory organizations oversee securities markets.

Compliance requires companies to provide registration statements. These statements allow potential investors to learn about the company. Today, the SEC requires a prospectus to be available on the SEC website.

Registration statements describe the company's properties, businesses, and financial conditions. U.S. public companies must follow Generally Accepted Accounting Principles (GAAP) in financial statements.

Failure to follow these rules can result in criminal and civil actions. For example, the Securities Act of 1933 mandates disclosures for securities for sale as a public offering. Exemptions to this rule include private offerings made to a limited number of people or entities.

Mandatory Registration

In general, registration of securities is a requirement for securities sold in the U.S. The act describes the procedures for registration and outlines the disclosure requirements.

In general, the registration forms companies file provide:

  • A description of the company's properties and business
  • A description of the security offered for sale
  • Information about the management of the company
  • Financial statements certified by independent accountants

Registration statements and prospectuses become public soon after filing with the SEC. Full disclosure includes the following:

  • The company's goals
  • The number of shares available for sale
  • What the issuer intends to do with the money
  • The company's tax status
  • Pending lawsuits involving the company
  • The company's risks

Statements, if filed by U.S. domestic companies, are available through the SEC. Also, registration statements are subject to examination for compliance with disclosure requirements.

Registration Exemptions

Some securities offerings are exempt from registration requirements. Such securities are often called exempt offerings. Securities exempt from the registration requirement include:

  • Private offerings to a limited number of people or institutions
  • Offerings of limited size
  • Intrastate offerings
  • Securities of municipal, state, and federal governments

Offering or selling securities is prohibited unless the issuer registers the offering with the SEC or it falls within an exemption.

EDGAR Database

The SEC's EDGAR database offers free access to corporate information for public companies. In EDGAR, you can research a public company's financial information and operations. You can review filings the company makes with the SEC through EDGAR.

SEC Actions

The SEC enforces federal securities laws through SEC actions. The SEC can prosecute issuers and sellers who sell unregistered securities. They can seek injunctions if a company violates the law or if a violation is imminent.

The SEC can order issuers to stop certain activities. The SEC can also seek civil penalties if a party has violated the law, an SEC rule, or a cease-and-desist order. But the SEC can't take action on behalf of individual investors.

Individual Investor Actions

The SEC can't take action on behalf of individual investors. But, the Securities Act allows individual investors to file civil actions. Below are provisions of the act allowing individuals to bring suit:

Section 5 and Section 12(a)(1): Purchasers can sue sellers for offering or selling a non-exempt security without registering the security. There must be a direct link between the buyer and the seller. As with all lawsuits, the purchaser must file the suit within the statute of limitations.

Section 11: Issuers are liable for registration statements containing "an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." Under Section 11, a security buyer can bring suit even if they bought the security after the initial offering on a secondary market. The purchase must be traced back to the initial offering and within the statute of limitations.

Section 12(a)(2): Any person who offers or sells a security through a prospectus or an oral communication containing a material misstatement or omission is liable to the purchaser. The buyer must not have known about the misstatement or omission at the time of the purchase.

Section 17(a): This section provides liability for fraudulent sales of securities. It makes it unlawful "to employ any device, scheme, or artifice to defraud," "to obtain money or property by means of any untrue statement of material fact or any omission to state a material fact," and "to engage in any transaction, practice, or course of business by which operates or would operate as a fraud or deceit upon the purchaser."

Get Help With Securities Law

Securities law is complex. The Securities Act of 1933 is one of the federal laws that applies to securities and protects investors. Other federal securities laws include the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

FindLaw's Securities Law Basics section offers additional information related to the issue of securities. You should contact an attorney for help with a potential securities litigation matter. An experienced securities law attorney can answer any questions and advise you.

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