Overview of the Securities Act of 1933

The Securities Act of 1933 (the “Securities Act”) is the cornerstone to the regulation of securities in the United States. The most important feature of the act is the requirement that all securities be registered or fall within an exemption from registration.  This overview will detail the important provisions of the Securities Act.

Section 2 – Definitions

In addition to important definitions which are used throught the securities acts such as “person,” “issuer,” “underwrite” and “sale,” the act also defines the term “security.”  Section 2(a)(1) provides the following:

The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Section 5 – Registration of Securities

Section 5 requires securities to be registered prior to any sale or distribution.  It also requires any sale of a security to be accompanied by a prospectus meeting the requirements of Section 10.

Section 4 – Exemptions from Registration Requirement

Section 4 provides various exemptions from the registration provisions of Section 5.  With regard to hedge funds, the most importnat of these provisions is Section 4(2) which provides: “The provisions of section 5 shall not apply to transactions by an issuer not involving any public offering.”  Because this is so broad, the SEC promulgated a safeharbor under (in part) this Section.  The safeharbor is provided under the Regulation D rules.

Section 3 – Classes of Securities

Section 3 defines certain classes of securities.  Section 3(b) provides statutory authority for Rules 504 and 505 in Regulation D.

Section 17 – Anti-Fraud Authority

Section 17(a) provides one of the central sources of anti-fraud authority for law enforcement.  In most secrutiies actions you will see Section 17(a) used as a basis for jurisdiction (along with Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder).

It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

The SEC’s description of the Securities Exchange Act of 1933 can be found here; I’ve also included their description below.

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Securities Act of 1933

Often referred to as the “truth in securities” law, the Securities Act of 1933 has two basic objectives:

  • require that investors receive financial and other significant information concerning securities being offered for public sale; and
  • prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The full text of this Act is available at: http://uscode.house.gov/download/pls/15C2A.txt. (Please check the Classification Tables maintained by the US House of Representatives Office of the Law Revision Counsel for updates to any of the laws.)

Purpose of Registration

A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company’s securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.

The Registration Process

In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:

  • a description of the company’s properties and business;
  • a description of the security to be offered for sale;
  • information about the management of the company; and
  • financial statements certified by independent accountants.

Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available on the EDGAR database accessible at www.sec.gov. Registration statements are subject to examination for compliance with disclosure requirements.
Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

  • private offerings to a limited number of persons or institutions;
  • offerings of limited size;
  • intrastate offerings; and
  • securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.

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