Blue Sky Laws

Aside from all the federal laws and SRO rules you need to know thoroughly, you should at least be aware of blue sky laws: state level anti-fraud statutes enforced by the individual states' attorneys-general. All states have the authority to take action against securities scams, and they often do if they feel the SEC has been slow or lax.

Specific provisions vary state-by-state. Generally speaking, however, they require the following:

  • All securities sold in a particular state must either be registered there or be exempt from registration; and
  • All broker-dealers and their representatives must be registered there or be exempt from registration.

The Securities Act of 1933
The seminal federal law governing the issuance of new offerings is the Securities Act of 1933, or the Truth in Securities law. It has two basic objectives:

  1. to ensure investors have all significant financial and non-financial information about securities being offered for sale, and
  2. to prohibit deceit, misrepresentations and fraud in the sale of securities.

Prospectus Requirements
Among other things, the 1933 act requires all securities issued for public sale across state lines to have a prospectus, which must include basics such as the following:

  • Name under which the issuer is doing business
  • State or sovereign nation under which the issuer is organized
  • Headquarters location
  • General character of the business
  • Names and addresses of the following parties:
    • All directors
    • The chief executive, financial and accounting officers
    • The underwriters
    • All persons owning 10% or more of the company
  • Pertinent financial information:
    • A statement of the issuer's capitalization, including the authorized and outstanding amount of stock
    • Estimated proceeds from offering the securities
    • The proposed offering price of the security, or at least the method by which that price will be derived
    • The balance sheet as of a date not more than 90 days prior to the date of the registration statement filing
    • An income statement showing profits or loss

The prospectus is not designed to offer investment advice, nor does it indicate that the SEC approved the issue or verified the information. It just means the company has filed all the paperwork needed to go ahead with the issue. The prospectus is really no more than a summary of the information found in the registration statement, which does the following:

  • describes the company's properties and business,
  • describes the security offered for sale,
  • provides information about management, and
  • provides financial statements certified by independent auditors.

Registration statements and prospectuses become public shortly after being filed with the SEC.

Regulation A & D

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