The Securities Act of 1933 regulates new issues of corporate securities sold to the public. The act is also referred to as the Full Disclosure Act, the New Issues Act, the Truth in Securities Act and the Prospectus Act. It requires the registration of new issues (debt and equity) before they may be sold to the public. The main purpose of the act is to ensure that the investing public is fully informed about a security and its issuing company when the security is first sold to the public. This act requires registration of new issues of nonexempt securities with the Securities and Exchange Commission (SEC). The SEC was actually created by the Securities Act of 1934. It also requires that a prospectus (which contains information derived from the registration statement) be given to buyers.
When a corporation needs capital, it contacts an investment banker (underwriter) for help in raising the money. The underwriter (which can also be a broker-dealer firm) advises the corporation as to the type of security to issue. An agreement is signed between the issuer (the corporation) and the underwriter, and the process begins.
The issuer of a security registers with the SEC by filing a registration statement. This document describes the issuer’s business and tells how the proceeds of the offering will be used. Technically, the issuer is the entity that files the registration statement with the SEC, but the underwriter, the expert at primary issues, generally does the actual writing of the registration statement and files the paperwork.
The filing of the registration statement starts the cooling-off period. For at least 20 days after filing, the issuer cannot sell the security to the public. During this time, the SEC reviews the statement. If there are questions about its content, the SEC interrupts the cooling-off period by sending a deficiency letter to the underwriter. Because of delays caused by deficiency letters, the 20-day minimum cooling-off period usually lasts longer than that.
When the SEC is satisfied with the content of the registration statement, the issue is released for sale to the public. The SEC does not approve or disapprove the securities, and this fact must be displayed prominently on the prospectus.
The new issue must be registered in each state in which the underwriter wishes to sell securities. During the cooling-off period, the issue will be blue-skyed, the term applied to registration with state securities department in states where the securities are to be sold. Most states have provisions in their blue-sky law (state statue regulating the offering and sale of securities in the state) calling for registration of certain securities that are to be sold to the public.
After the Securities Act of 1933 was enacted regulating primary issues of securities, attention turned to the need for regulation of secondary trading. That is trading on the national and regional securities exchanges. The intent of the Securities Act of 1934 is to “maintain a fair and orderly market.” It seeks to attain this goal by regulating the securities exchanges and the over-the-counter (OTC) markets. Commonly called the Exchange Act, it formed the Securities and Exchange Commission (SEC) and gave the commission authority to oversee the Securities Act of 1933, the securities markets and to register and regulate the exchanges.
According to the Securities Exchange Act of 1934, several other entities must also register with the SEC, including exchange members and broker-dealers that trade securities OTC and on exchanges and individuals who affect securities trades with the public.
The Securities Exchange Act of 1934, which has much greater breadth than the act of 1933, addressed the:
• creation of the SEC
• regulation of exchanges
• regulation of credit by the Federal Reserve Board
• regulation of broker-dealers
• regulation of insider transactions, short sales and proxies
• regulation of trading activities
• regulation of client accounts
• Customer Protection Rule
• regulation of the OTC market
• Net Capital Rule (amount of net capital broker-dealers maintain)
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Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.