Securities Act Of 1933

Posted in Markets Compliance on May 1, 2024
Securities Act Of 1933

The Securities Act of 1933 was the first federal legislation used to regulate the stock market. The act took power away from the states and put it into the hands of the federal government. The act also created a uniform set of rules to protect investors against fraud.

The Securities Act Of 1933

The US Securities Act of 1933, provides full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mail. The Act prevents fraud in the sale of securities and is used for similar purposes. The Securities Act of 1933 has two basic objectives that are to require that investors receive financial and other significant information concerning securities being offered for public sale, and to prohibit deceit, misrepresentations, and other fraud in the sale of securities.

According to the Securities Act of 1933, the term ‘‘security’’ is defined as any note, stock, future, swap arrangement, debenture, bond, indebtedness, certificate of interest, collateral certificate, investment contract, certificate of deposit for security, fractional undivided interest in oil, gas, put, call, option, certificate of deposit, or index of securities. 

When the new administration came into power it faced economic depreciation and the depths that the Government felt it obligatory to take positive steps to pull out, but it faced these difficulties and abuses to be able to apportion in a way of responding to counter ordinary market trends. 

The Securities Act Of 1933 is directed at enforcing disclosure to the investor about the necessary elements to insure an informed decision is taken to purchase a security. It has been constantly reiterated by the President, by Congress, and by the Federal Trade Commission that the Federal Government does not guarantee the soundness of the business activities of the persons responsible for any share or security, its success, or the truth of their statements. The Commission required that every prospectus shall contain a statement that neither registration nor the use of the prospectus indicates that the Commission has approved the issue.

Securities Act Of 1933

The Act And Sanctions

The Act covers different sanctions, and the authority is given to the Federal Trade Commission to prevent the sale of securities because of false or untrue material statements or failure to furnish required material information to the clients. The civil obligation of responsible persons such as those involved in the flotation of the issue for false, or untrue representations. The criminal obligation is also there where the obligation of a fraudulent scheme the willful misstatement of a material fact or the willful omission to state a material fact lies on the relevant person.

The SEC requires companies to disclose financial information through the registration of instruments or securities. It enables investors, to make informed judgments about whether to invest in a company’s securities.

Registration Process

Here’s an overview of how the registration process works. All securities offered in the US must be registered with the SEC. The registration with the SEC provides significant information, including:

  • A description of the company’s properties and business;
  • A description of the instrument or security to be offered for sale;
  • Information about the principals or management; and
  • Certified financial statements from independent accountants.

The SEC seeks to substitute capital formation by lowering the cost of offering to investors. The SEC may examine a company’s registration statement to determine its compliance with disclosure requirements. The SEC shall not evaluate the merits of offerings, nor shall determine if the securities offered are good for investments.

The SEC rules require companies to provide accurate and truthful information, the SEC cannot guarantee the accuracy of the information in a company’s filings. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of critical information, necessary to take an investment decision. 

Securities Act Of 1933 Purpose

The primary goal of the ’33 Act is to ensure that prospective investors receive complete and accurate information before investing in securities. Unlike state blue sky laws, which impose merit reviews, the ’33 Act embraces a disclosure philosophy, which means that, in theory, selling a bad investment is not illegal as long as all facts are accurately disclosed.

A company required to register under the ’33 act must prepare a registration statement, which includes a prospectus, containing extensive information about the security, the company, and the business, including audited financial statements. The company, the underwriter, and any other individuals who sign the registration statement are solely responsible for any errors in the document.

Final Thoughts

The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the ’33 Act, was passed by the United States Congress on May 27, 1933, at the height of the Great Depression and following the 1929 stock market crash. It is an essential component of securities regulation in the United States. It is enacted in accordance with the Constitution’s Interstate Commerce Clause.