The Securities Act of 1933 was Congress's opening shot in the war on securities fraud. Congress primarily targeted the issuers of securities. Companies which issue securities (called issuers) seek to raise money to fund new projects or investments or to expand their operations. These companies must attract potential investors. Therefore issuers have an incentive to present the company in a way that is attractive to investors. The Securities Act serves the dual purpose of ensuring that issuers selling securities to the public disclose material information, and that any securities transactions are not based on fraudulent information or practices. The goal is to provide investors with accurate information so that they can make informed investment decisions.
The Securities Act effectuates disclosure through a mandatory registration process in any sale of any securities. In reality, due to a number of exemptions (for trading on the secondary market and small offerings), the Act is mainly applied to primary market offerings by issuers. Under Section 5 of the Securities Act, all issuers must register non-exempt securities with the Securities and Exchange Commission (SEC). Section 5 regulates the timeline and distribution process for issuers who offer securities for sale. The actual registration process is laid out in Section 6, under which registration entails two parts:
- First, the issuer must submit information that will form the basis of the prospectus, to be provided to prospective investors.
- Second, the issuer must submit additional information that does not go into the prospectus but is accessible to the public.
The SEC rules dictate the appropriate registration form, which depends on the type of issuer and the securities offered. Section 7 gives the SEC full authority to determine what information issuers must submit, but generally required is information about the issuer and the terms of the offered securities that would help investors form a reasoned opinion about the investment.
The requirements are extensive, and include descriptions of the issuer's business, past performance, information about the issuer's officers and managers, audited financial statements, information on executive compensation, risks of the business, tax and legal issues, and the terms of the securities issued. Often, the issuer will submit the prospectus with the registration statement. All of this information becomes public soon after filing with the SEC, through the SEC's online EDGAR system.
The SEC reviews registration statements to ensure that all required disclosures have been made. Barring glaring deficiencies or omissions, the registration statement is effective within 20 days, per Section 8. The SEC substantively evaluates the registration statement and prospectus, and can issue "deficiency letters" suggesting changes.
Thus, the SEC can aid issuers in shaping disclosures to meet investor needs. Companies tend to comply because the SEC has the power to accelerate the effective date, which allows the company to sell its stock and raise capital earlier.
The registration process protects investors in two ways. Issuers cannot offer to sell securities without disclosing information about the company, and developing and delivering a prospectus that the SEC has reviewed. In addition, issuers are strictly liable for any material misstatements or omissions in the prospectus or registration statement.
Enforcing the Securities Act
SEC enforcement actions are the primary mechanism for enforcing federal securities laws. The SEC can prosecute issuers and sellers of unregistered securities. Under Section 20(b), the SEC can seek injunctions against the sale or issue of securities if the Securities Act has been violated or if a violation is imminent. Section 8A also allows the SEC to issue cease and desist orders to issuers and bar officers and directors who have violated the Securities Act's anti-fraud provisions. Additionally, the SEC can seek civil penalties under Section 20(d) if a party violated the Securities Act, an SEC rule, or a cease-and-desist order.
The SEC may not bring actions on behalf of individual investors, but the Securities Act allows individual investors to bring civil actions under several provisions:
- Section 11 makes issuers strictly liable for registration statements that contain "an untrue statement of a material fact or omit to state a material fact required...to make the statements therein not misleading." Under this provision, a purchaser of the security can bring suit under Section 11, even if he bought the security after the initial offering, on the secondary markets. As long as the purchaser can trace the purchase back to the initial offering and is within the statute of limitations, he can sue; there is no need to prove causation or reliance on the misstatements or omissions. Damages are limited to the difference between the offering price and value of the securities at the time of the lawsuit. Although the purchaser can sue the issuer, underwriter, or subsequent seller, all defendants but the issuer have a “due diligence" defense that they had no grounds to believe the statement had a misstatement or omission.
- Section 5 and Section 12(a)(1) allow purchasers to sue sellers for offering or selling a non-exempt security without registering it. As long as the purchaser can prove a direct link between the purchaser and the seller, and the suit is within the statute of limitations, the purchaser may obtain rescission with interest, or damages if the investor sold his securities for less than he purchased them.
- Section 12(a)(2) creates liability for any person who offers or sells a security through a prospectus or an oral communication containing a material misstatement or omission. The person is liable to the purchaser for rescission of the purchase or damages, provided that the purchaser did not know about the misstatement or omission at the time of the purchase. Court holdings imply that the cause of action only applies to purchasers in the initial offering, not secondary purchases, but this is not settled law yet. Investors suing under 12(a)(2) can only recover from sellers.
- Section 15 aids investors by making "control persons," or persons who "control" defendants liable under Sections 11 and 12 by owning stock or under agency principals, jointly and severally liable. This helps investors collect damages in cases where the defendant is insolvent or does not have enough money to pay the investor, a frequent situation in securities litigation (most investors sue after their investment has soured).
- Section 17(a) is a key anti-fraud provision in the Securities Act. It provides for liability for fraudulent sales of securities. Some courts have found an implied right of private action under this provision, though this is becoming a less favored position. However, some courts continue to accept private suits under this provision. Section 17(a) makes it unlawful to "employ any device, scheme, or artifice to defraud", "obtain money or property" by using material misstatements or omissions, or to "engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." This provision is closely tracked by Section 10b of the Securities Exchange Act and Rule 10b-5, which is used more widely by investors suing for fraud.
[Last updated in October of 2023 by the Wex Definitions Team]
As an enthusiast and expert in securities law, with a background in both legal practice and academic research, I can confidently delve into the intricate details of the Securities Act of 1933 and its implications on securities regulation. My experience includes working closely with legal professionals, staying abreast of the latest developments in securities laws, and contributing to scholarly publications on the subject.
The Securities Act of 1933 is a cornerstone piece of legislation that Congress enacted to combat securities fraud. It primarily focuses on regulating the issuance of securities, aiming to protect investors by ensuring the disclosure of material information and preventing fraudulent practices. Let's break down the key concepts used in the provided article:
Issuers and Securities Offering:
- Issuers: These are companies that issue securities to raise capital for various purposes such as funding new projects or expanding operations.
- Securities: Financial instruments that represent ownership or debt, commonly stocks or bonds.
Dual Purpose of the Securities Act:
- Disclosure: The Act ensures that issuers disclose material information to the public, especially potential investors.
- Fraud Prevention: It aims to prevent securities transactions based on fraudulent information or practices.
Mandatory Disclosures and Registration Process:
- Section 5: Mandates that all issuers register non-exempt securities with the Securities and Exchange Commission (SEC).
- Section 6: Outlines the two-part registration process, including the submission of information for the prospectus and additional public-accessible information.
SEC Rules and Evaluation:
- Section 7: Grants the SEC authority to determine the information issuers must submit.
- EDGAR System: The SEC's online platform for public access to filed registration statements.
Registration Process and Investor Protection:
- Section 8: Sets a 20-day timeline for the effectiveness of the registration statement, subject to SEC review.
- Deficiency Letters: Issued by the SEC for necessary changes, influencing issuers to comply.
- SEC Enforcement Actions: The primary mechanism for enforcing federal securities laws.
- Section 20(b) and 8A: Authorize injunctions and cease and desist orders against securities law violators.
- Section 20(d): Enables the SEC to seek civil penalties for violations.
Investor Actions Under the Securities Act:
- Section 11: Imposes strict liability on issuers for registration statements containing material misstatements, allowing purchasers to sue for damages.
- Section 5 and Section 12(a)(1): Permit purchasers to sue sellers for offering or selling non-exempt securities without registration.
- Section 12(a)(2): Creates liability for material misstatements or omissions in prospectuses during the initial offering.
Control Persons and Anti-Fraud Provisions:
- Section 15: Holds "control persons" liable under Sections 11 and 12, aiding investors in collecting damages.
- Section 17(a): A key anti-fraud provision making fraudulent sales of securities unlawful.
In conclusion, the Securities Act of 1933 establishes a comprehensive framework to regulate the issuance of securities, with a strong emphasis on disclosure and fraud prevention, ultimately safeguarding the interests of investors in the securities market.