It was established as a means of improving investor confidence in the U.S. financial markets.
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Last Updated: December 31, 2023 In This ArticleThe Securities Act of 1933 was established to improve investor confidence in the U.S. financial markets.
In 1929, the American stock market experienced one of its biggest crashes. Panic selling riddled Wall Street, and investors found themselves in the middle of a large bear market.
That's when the Securities Act of 1933, also known as the Truth in Securities Act or Federal Securities Act, was established to protect investors from the reoccurrence of such an event.
The primary goal of passing this legislation was to improve transparency in companies' financial statements, allowing investors to make informed decisions when purchasing shares.
It also aimed to rid the stock market of misrepresentation, fraudulent activity, or deceit.
It was the first key piece of legislation regarding the sale of U.S. securities. Before its passing, state laws were largely responsible for overseeing the sale of securities.
This led to inadequate disclosure requirements, and laws were not efficiently enforced.
With the Act's implementation, companies were required to register with the Securities and Exchange Commission (SEC) and provide the market with standard documentation.
The primary purpose of the documentation submitted during registration is to disclose important information regarding the company's finances.
These include detailed and certified financial statements, information about the company's management, future business plans, and an overview of the securities being sold.
Before a company can list its shares on a stock exchange, it must receive the SEC's approval which is subject to the submission and efficiency of these documents.
The underwriter is held responsible for any inaccuracies or misrepresentations in the documents.
Although the SEC requires that all information provided by companies wishing to go public be accurate, it does not guarantee that this is the case.
However, investors who buy securities and suffer losses can receive compensation if they are able to prove that the company withheld important information or reported inaccurate information to the public.
If an investor believes they are being defrauded, the Act allows them to file a lawsuit against the company and get compensation for the misrepresentation.
The Act was signed into law by then-president Franklin D. Roosevelt as part of his 'New Deal' during the Great Depression (1929 - 1939).
The initial legislation was divided into two titles:
1939 saw the Trust Indenture Act of 1939 added to the legislation as Title 3.
The Act has been amended on multiple occasions since it was first implemented in 1933. The latest of these amendments was introduced in 2018.
Congress left in place the state blue sky laws that were already in effect when it passed the Act.
The Act was initially enforced by the FTC until the Securities Exchange Act of 1934 came into effect and the SEC was established.
Unlike blue sky laws, which focus on companies meeting specific, qualitative requirements, the 1933 Securities Act is concerned with transparency.
The premise of the Act is to ensure all investors have easy access to complete and accurate information about a company before they follow through with an investment.
In this way, the law helps to boost investor confidence in the stock market, thus helping companies gather more funds while also helping investors make more knowledgeable decisions.
This allows the stock market to help companies with a strong prospectus flourish. Additionally, companies not contributing to the economy as much or engaging in fraudulent activity may see their shares plummet or, eventually, go out of business.
It is important to note that even if the SEC approves a company's registration, it does not determine whether they are "good" investment.
The SEC does not evaluate the merits of investing in a company. Instead, it only ensures that all necessary information is disclosed and the disclosed information is correct.
Some publicly traded securities are exempted from the Act such that they do not need to submit documents to meet the registration requirements.
These securities include:
Rule 144 and Regulation S are two other special exemptions from registration under the 1933 Act.
Rule 144 is a part of the Securities Act that, under certain conditions, permits the public resale of regulated securities without registering them with the SEC.
The issuers must adhere to limitations on the number of securities sold by the company and the holding time for these securities.
For example, the total quantity of securities sold during the span of a given three months should not be greater than one percent of the shares in issue or the average weekly volume of shares traded during the four weeks preceding the trading period.
Regulation S governs security offerings outside of the U.S. and is, therefore, free from the registration requirement.
It offers a safe harbor for both the issuer and reseller. Direct sales by the security's issuers and underwriters are forbidden under the Act.
Additionally, it prevents the issuers from offering security to U.S. citizens, including those who reside abroad.
Like any other legislation, the Act is not perfect. It, too, has some faults and drawbacks. This section discusses a few of these shortcomings.
The Act was established to bolster investor confidence in the free market system following the dismal outcome of the 1929 crash.
However, evidence from further stock market failures, such as the 2007-08 financial crisis , suggests that the Act could not preserve investor confidence.
The SEC has undergone some budgetary problems, and arguably, its fragmented regulatory system has not kept up with the financial markets as well as expected.
While the Act was being drafted, lawmakers understood that there were several types of securities and distributions for which a system of centralized governmental oversight would either be superfluous or improper.
For this reason, the exemptions discussed in the previous section were explicitly noted.
The primary goal of Section 5 of the 1933 Act is to safeguard American investors. As a result, the U.S. SEC has little constitutional authority to regulate overseas transactions and can only weakly enforce laws governing them.
Further, when a stockholder sells some of their holdings through a brokerage, a question may arise as to whether these deals are subject to the Act's registration requirements. Would the broker then be considered an "underwriter"?
Such limitations are important to note. However, overall, the Act has succeeded in increasing transparency within the U.S. financial markets, allowing more investors to purchase securities to grow capital confidently.
