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The 1933 Securities Act

"The Truth in Securities Act"

What is the 1933 Securities Act?

The 1933 Securities Act was the first federal law that was passed following the stock market crash of 1933. The law is also referred to as the Truth in Securities Act, Federal Securities Act or the 1933 Act. It was enacted on May 27, 1933 during the Great Depression. When signing the law, US President Franklin Roosevelt stated that the law was aimed at correcting some of the wrongdoings that led to the exploitation of the public’s money. The wrongdoings included insider trading, the sale of fraudulent securities, secretive trading to drive up share prices, and other acts that stock traders engaged in at the disadvantage of investors.

 

1933 Securities Act

 

Before the enactment of the Securities Act, the offer and sale of securities were governed by state laws. However, the enactment of the new law left the state laws intact, but it required more disclosure among companies than as prescribed by state laws. The primary goal of the 1933 Securities Act was to require securities issuers to disclose all the material information that investors would need when making a decision on whether to invest in certain stocks.

 

Objectives of the 1933 Securities Act

 

Transparency

One of these reasons why the 1933 Securities Act was enacted was to ensure transparency in stock trading so that investors can make informed decisions based on real data. The act made transparency possible by requiring public companies to register with the Securities and Exchange Commission (SEC) and submit annual financial statements. Information that companies are required to provide to the SEC includes a description of the company’s business, securities being offered to the public, and its management structure, as well as its recent and audited financial statements.

 

Misrepresentation and Fraudulent Activities

The second reason for the enactment of the legislation was to establish laws that would protect investors from misrepresentation and fraudulent activities in the stock market. After the stock market crash, companies that engaged in the sale of securities were blamed for engaging in fraudulent trading activities that led to the loss of investors’ funds. Under the Securities Act, the underwriter of the securities is liable for any misrepresentations in the documents. The law helps maintain investor confidence because they invest knowing that the documents provided are accurate. If an investor is defrauded in the securities market, the Securities Act of 1933 allows them to file a lawsuit for recovery.

 

Registration Process of the 1933 Securities Act

The Securities Act requires that all securities sold in the United States must be registered with the SEC. The act outlines the procedures that underwriters and issuers of securities in the stock market must follow when registering their securities. Generally, the securities registration form entails the following details:

  • Description of the company’s areas of operation
  • Description of the securities offered for sale
  • Information about the securities if different from common stock
  • Information about the management of the issuing company
  • Annual financial statements certified by independent external auditors

 

Prospectus

One of the documents that the issuers are required to file is the prospectus. It is a document that issuers use to market their securities to potential investors. The prospectus is included as part of the registration statement. The documents become public immediately they are filed with the SEC and investors can view them on the SEC’s website through the EDGAR system. The SEC can examine the documents to make sure that they comply with the disclosure requirements.

 

Disclosure Requirements

When registering with the SEC, the issuers must declare certain information that will help potential investors in conducting due diligence. Examples of this information include the number of shares floated in the market, company objectives, significant changes in the management structure, and tax status of the company. Other information includes active legal suits against the company and any potential risks that may affect the company’s ability to pay investors.

 

Exemption from Registration Requirements

The 1933 Securities Act exempts some offerings of securities from the registration requirements. These exemptions include the following:

  • Intrastate offerings
  • Offerings of limited sizes
  • Securities issued by municipal, state and federal governments
  • Offerings to a specific number of persons or institutions

However, regardless of whether the offerings of securities are registered or not, the Securities Act makes it illegal for issuers to engage in fraud in the sale of securities.

 

Other exemptions from registration include:

Rule 144

Rule 144 of the Securities Act of 1933 allows the public resale of restricted or controlled securities without registering with the SEC under certain circumstances. The issuers must agree to the sale and restrictions on holding time for securities, as well as the maximum amount of securities that should be sold. For example, the number of securities sold during a three-month period should not exceed the following: 1% of the outstanding stock; the average weekly volume of trading of securities in all national security exchanges in the preceding four weeks; and the average weekly volume of trading of the securities reported through NASDAQ. If some of these requirements are met, then the offerings of securities must be filed with the SEC.

 

Regulation S

Under the Securities Act of 1933, Regulation S defines when the offering of securities is carried out outside the United States and, therefore, exempted from the registration requirement. It provides a safe harbor in two ways, i.e., issuer safe harbor and a resale safe harbor. In both cases, the Act requires that any transaction related to the offering be made outside the US and that the issuers or underwriters of the security should be not be involved in direct selling. Even when the offering of security has attracted considerable interest among US investors, the Securities Act limits the issuers from selling to American citizens, including those living outside the US.

 

Securities Exchange Act of 1934

President Franklin Roosevelt signed into law the Securities Exchange Act of 1934 to govern the Securities Act of 1933. The new law created the Securities and Exchange Commission and gave it the power to regulate and oversee brokerage firms, self-regulatory organizations, transfer agents and clearing agents. The SEC was also given the authority to discipline rogue companies engaged in stock trading.

The 1933 Securities Act underwent several amendments over the years to improve clauses that the government felt were inadequate or that needed to adapt to the changing financial system. These amendments were made in 1934, 1954, 1960, 1964, 1970, 1975, 1980, 1982, 1987, 1996, 1998, 2000, 2010 and 2012.

 

Other resources

For more knowledge, CFI offers a wide range of courses, including the Financial Modeling & Valuation Analyst (FMVA)™ certification program. To keep learning and advancing your career, the following resources will be helpful:

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