Securities Act of 1933

The Securities Act of 1933 is the federal statute that regulates the offer and sale of securities in the United States. Enacted in the aftermath of the 1929 crash, it requires a company offering securities for public sale to file a registration statement with the SEC containing prescribed information about its business, the security, its management and its audited finances, and to deliver a prospectus to buyers, unless the offering fits an exemption. The SEC describes its two objectives as requiring "that investors receive financial and other significant information concerning securities being offered for public sale" and prohibiting "deceit, misrepresentations, and other fraud in the sale of securities". Its practical force comes less from the filing than from the liability attached to it: sections 11 and 12 give buyers a private right to sue over an untrue or incomplete registration statement or prospectus.

The naming is worth settling because two statutes share a word. This Act is commonly called the 1933 Act or the '33 Act, and registering under it means registering an offering, a particular sale of securities at a particular time. Registering under the Securities Exchange Act of 1934 means something different: registering a class of securities and taking on the ongoing reporting obligations that follow. A company can be through the first and not the second, or subject to the second long after the first is finished.

What a registration statement contains, and why the contents are the point. Section 7 requires the statement to "contain the information, and be accompanied by the documents, specified in Schedule A", the schedule Congress wrote into the statute itself, with a separate schedule for foreign governments. The SEC's summary of what the forms call for is shorter: a description of the company's properties and business, a description of the security being offered, information about management, and financial statements certified by independent accountants. Registration statements and prospectuses "become public shortly after filing" and, for domestic companies, are on the EDGAR database. Section 7 also requires the written consent of any accountant, engineer, appraiser or similar professional who is named as having prepared or certified any part of the statement, which is the hook that later makes those professionals answerable for what they certified.

Registration is examined for disclosure compliance, not for merit. The SEC states the division plainly: the filings are "subject to examination for compliance with disclosure requirements", and the resulting 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." Nothing in the process is a view about whether the investment is any good. A page, a salesperson or an advertisement that treats an effective registration as a federal endorsement has the statute backwards.

Sections 11 and 12 are the enforcement engine, and they are unusually friendly to the buyer. Section 11 applies where any part of the registration statement, when it became effective, "contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading". Any person who acquired the security may sue, unless it is proved they knew of the problem when they bought, and the statute names the defendants: everyone who signed the statement, the issuer's directors and partners at the time of filing, people named with their consent as about-to-become directors, named experts such as accountants, engineers and appraisers as to the parts they certified, and every underwriter of the security. Section 12 reaches the sale itself. Under section 12(a)(1) a person who offers or sells a security in violation of the registration requirement is liable to the buyer; under section 12(a)(2) so is a person who sells by means of a prospectus or oral communication containing a material untruth or omission, unless that seller sustains "the burden of proof that he did not know, and in the exercise of reasonable care could not have known" of it. The remedy in both cases is rescission: the buyer tenders the security back and recovers "the consideration paid for such security with interest thereon, less the amount of any income received thereon", or sues for damages if the security is gone. Section 12(b) then lets a defendant reduce that recovery by proving that some or all of the loss came from something other than the misstatement.

The architecture is two words wide: register or exempt. The requirement that an offer or sale be registered lives in section 5, and the consequences of an offering that is neither registered nor exempt are a separate subject. What belongs here is the shape. The SEC's own list of exemption categories runs to "private offerings to a limited number of persons or institutions; offerings of limited size; intrastate offerings; and securities of municipal, state, and federal governments", each of which is a body of rules in its own right. Most capital raised in the United States is raised under one of them rather than through a registered public offering, so for a reader evaluating a specific deal the useful question is rarely "is it registered?" but "if it is not, which exemption is it relying on?".

Where the Act stops. It reaches the offer and the sale. Once a security is outstanding and trading between investors, the statute doing the work is the Securities Exchange Act of 1934: exchange and broker-dealer regulation, the issuer's continuing reports, and the general antifraud provision that reaches any purchase or sale. The 1933 Act keeps one lever over the states, section 18, which strips them of the power to require registration or apply merit review to a defined set of covered securities while preserving their antifraud authority. That provision is the whole subject of the state securities laws usually called blue sky laws.

For a registered public offering, the sequence is:

1. The issuer files a registration statement with the SEC containing the Schedule A information and the required consents from any professionals it names.

2. The SEC reviews it for compliance with the disclosure requirements, and the filing becomes public on EDGAR.

3. The offering may be sold once the registration statement is effective, and buyers receive a prospectus drawn from it.

4. If the statement or the prospectus turns out to have been materially untrue or incomplete, sections 11 and 12 give buyers a route to sue.

A hypothetical, to show what the section 12 remedy actually returns. Assume Dahlia paid $25,000 for securities in an offering that should have been registered and was not, and that she received $900 of distributions before the problem surfaced. Section 12(a)(1) lets her tender the securities back and recover the consideration she paid with interest, less the income she received: $25,000 minus $900, or $24,100, plus interest. If she no longer owns them, she sues for damages instead. (Numbers hypothetical, for illustration. The statute does not set the interest rate, and a defendant may reduce the recovery under section 12(b) by proving that part of the loss came from something other than the violation.)

The structure of that remedy is worth noticing. It is not a damages claim requiring proof that the misstatement caused the loss, which is the ordinary burden in a fraud case. It undoes the purchase. That is why registration and the exemptions are taken as seriously as they are by the people on the selling side.

Pros

• Mandatory disclosure gives a buyer a standardized, audited, publicly filed document rather than whatever the seller chooses to volunteer, and it stays available on EDGAR long after the sale.
• The private rights of action in sections 11 and 12 do not require proving that anyone intended to deceive, which makes them far easier for an ordinary buyer to use than a fraud claim.
• Naming experts and underwriters as potential defendants gives people outside the issuer a financial reason to check the document before it goes out.
• The exemptions let small and private companies raise money without the cost of a full registration, which is what keeps the requirement from freezing early-stage financing.

Cons

• Registration says nothing about whether the investment is sound, and the gap between what it means and what people assume it means is one of the most durable misunderstandings in retail investing.
• Most capital raised in the United States is raised under an exemption, so for a great many offerings the Act's disclosure regime simply does not apply.
• The Act's protections attach to the offering. It imposes no continuing duty to keep telling investors anything, which is why the 1934 Act had to exist.
• Suing is a real remedy but a slow and expensive one, and section 12(b) lets a defendant shrink the recovery by attributing part of the loss to the market.