Prior to 1933, the only federal regulation of securities was under the jurisdiction of the Federal Trade Commission. To restore public confidence in the capital markets following the Great Crash of 1929 and the continuing Great Depression, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934.
These laws were passed on the following premises:
1. Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
2. People who sell and trade securities—brokers, dealers, and exchanges— must treat investors fairly and honestly, putting investors’ interests first.
The Securities and Exchange Commission (SEC) was established in 1934 to “promote stability in the markets and, most importantly, to protect investors.” The SEC’s primary mission is to protect investors and maintain the integrity of the securities market. The SEC is headed by five presidentially appointed commissioners, each appointed for five years. Each year, one commissioner’s term expires, and one new commissioner is appointed.
The SEC has the power to enforce the Securities Act of 1933, which relates to the initial registration and issuance of securities through means of interstate commerce, and the Securities Exchange Act of 1934, which relates to ongoing public disclosures by public corporations and requires registration of all over-the-counter brokers and dealers of securities and stock exchanges.
The SEC has broad rulemaking powers under the statutes it administers. For example, the Securities Act of 1933 provides the SEC with authority to allow certain exemptions from registration under that act. Under that authority, the SEC has issued several rules that provide specific exemption requirements.
The SEC has civil enforcement authority—the authority to bring civil suits for the violation of securities laws. Each year the SEC brings between 400 and 500 civil enforcement actions against individuals and corporations for violations of securities laws. The SEC also works closely with various criminal law enforcement agencies to bring criminal cases where warranted.
The Securities Act of 1933 (the Securities Act) was the first significant federal legislation to be passed to protect the investor through the imposition of disclosure and antifraud requirements on corporations issuing securities through means of interstate commerce.
The SEC may prevent the distribution of securities if the disclosure requirements of the Securities Act are not complied with. Further, material misstatements in the disclosure documents or noncompliance with the antifraud provisions of the Securities Act may subject the issuer of the securities to civil liabilities or even criminal sanctions.
The most significant provisions of the Securities Act for the corporation that is going public are the requirements for registering the securities to be offered to the public and for using prospectuses for the sale of all registered securities.
Securities Registration
The application of the Securities Act of 1933 extends beyond stocks and bonds traded in the stock exchange and over-the-counter markets. Any “securities” as that term is defined in the Securities Act must be registered under the Securities Act or offered and sold pursuant to an exemption from registration under the act.
Generally, prior to the issuance of any securities through interstate commerce, the issuer must file a registration statement with the SEC. The intended purpose of the registration statement is to disclose the information necessary to allow investors to make an informed decision.
Section 5 of the Securities Act contains the major provisions regarding the registration of securities. Section 5(a) prohibits the sale and delivery of unregistered securities.
Section 5
(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
1. to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
2. to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
The registration statement is filed electronically via EDGAR in the form prescribed by the SEC. Form S-1 is commonly used. However, several other forms are prescribed for certain types of registrations.
The registration statement consists of two parts. Part I is the prospectus, which must be furnished to all purchasers of the corporation’s securities. Part II consists of additional information required by the SEC, including very detailed information with respect to the securities being offered for sale and the corporation’s operation, financial status, management, and current ownership. The information required by the registration statement is set forth in Schedule A of the Securities Act.
The registration statement is filed with the SEC and must be accompanied by a filing fee that is based on the maximum aggregate price at which the securities are to be offered. The registration statement is considered to be filed, but not effective, on the date it is received by the SEC with the proper fee.
The registration statement is effective 20 days from the date of filing with the SEC. However, the SEC often requires material amendments to the registration statement that delay the effective date beyond 20 days. Pre effective amendments may be made in response to comments from the SEC staff, and also to reflect a change in the offering price range based on the reaction to initial marketing efforts by the underwriters.
If any amendment to the registration statement is filed prior to its effective date, the date of filing is deemed to be the date on which the amendment was filed, unless the amendment was ordered or approved by the SEC. The SEC has the power to accelerate the effective date and generally will do so if requested by the issuer, provided that the issuer has submitted all necessary information and has acted quickly to furnish the SEC with any different or additional information requested.
The SEC also has the power to delay the effective date of any registration statement that is “on its face incomplete or inaccurate in any material respect,” by refusing to permit the registration statement to become effective until after it has been amended in accordance with a notice served upon the issuer not later than 10 days after the filing of the registration statement.
If after the effective date of the registration statement, it appears to the SEC that the registration statement includes any untrue statements of material fact, or omits stating any material fact required to be stated therein, the SEC may issue a stop order suspending the effectiveness of the registration statement until such time as the registration statement has been amended in accordance with the stop order.
After the registration statement has been filed, a waiting period begins and lasts until the registration statement is effective. During this waiting period, securities may be offered for sale, but they may not actually be sold until the registration statement becomes effective.
During the waiting period, preliminary prospectuses may be used to offer for sale securities that will be sold after the effective date of the registration statement. After the registration statement becomes effective, the securities may be sold through use of a prospectus.
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