The Securities Act of 1933, enacted in response to the stock market crash of 1929, has been referred to as the “truth in securities” law. The Securities Act generally requires that companies selling their stock to the public must provide investors with full disclosure of material facts. Before offering their stock to the public, companies must file a registration statement with the Securities and Exchange Commission. The registration statement must include:
- A description of the property and business of the company;
- A description of the security being offered by the company;
- Disclosure concerning the company’s management; and
- Company financial statements certified by independent auditors.
The registration statements are examined by Commission staff for compliance with Commission regulations and are made public. While the Commission does not provide an evaluation of the stock being offered by the company, it does declare the registration statement effective if there has been compliance with Commission disclosure rules.
Exemptions
Various categories of stock offerings by companies are exempt from requirements of the Securities Act. Such exemptions include:
- Private offerings to a limited number of buyers;
- Offerings of limited size;
- Intrastate offerings; and
- Securities of federal, state, or local governments.
However, if the transaction involves a security that is being offered or sold and no exemption from registration is available, then that security cannot be offered or sold before a registration statement becomes effective. A broad view is given to the definition of “security” and even such items as time shares in a condominium have been considered securities. Any transaction which includes investment of money in a common enterprise designed to achieve profits through the efforts of others may be considered a security.
Willful violation of the Securities Act or of Securities and Exchange Commission regulations issued pursuant to the Securities Act can result in a prison term of up to five years and a fine. Such penalties have been imposed for the unlawful sale of unregistered securities and for the sale of securities through fraud. The Securities Act also provides purchasers with civil remedies for materially false or misleading registration statements or sales of securities without meeting registration or prospectus delivery requirements.