The Securities Act of 1933 was the first major piece of securities industry regulation that was brought about largely as a result of the stock market crash of 1929. Other major laws were also enacted to help prevent another meltdown of the nation’s financial system such as the Securities Exchange Act of 1934, but we will start our review with the Securities Act of 1933 as it regulates the issuance of corporate securities.

 

The Securities Act of 1933 was the first major piece of securities industry legislation and it regulates the primary market. The primary market consists exclusively of transactions between issuers of securities and investors. In a primary market transaction, the issuer of the securities receives the proceeds from the sale of the securities. The Securities Act of 1933 requires non-exempt issuers (typically corporate issuers) to file a registration statement with the Securities Exchange Commission (SEC). The Registration statement will be under review by the SEC for a minimum of 20 days. During this time, known as the “cooling off” period, no sales of securities may take place. If the SEC requires additional information regarding the offering, the SEC may issue a deficiency letter or a stop order that will extend the cooling off period beyond the original 20 days. The cooling off period will continue until the SEC has received all of the information it had requested. The registration statement that is formally known as an “S1” is the issuer’s full disclosure document for the registration of the securities with the SEC.

The Prospectus

While the SEC is reviewing the securities’ registration statement, a registered repre­sentative is very limited as to what they may do with regard to the new issue. During the cooling off period, the only thing that a registered representative may do is obtain indications on interest from clients by providing them with a preliminary prospectus also known as a “red herring”. The term “red herring” originated from the fact that all preliminary prospectus must have a statement printed in red ink on the front cover stating: “that these securities have not yet become registered with the SEC and therefore may not be sold.” An indication of interest is an investor’s or broker dealer’s statement that they might be interested in purchasing the securities being offered. The preliminary prospectus contains most of the same information that will be contained in the final prospectus, except for the offering price and the proceeds to the issuer. The preliminary prospectus will usually contain a price range for the security to be offered. All information contained in a preliminary prospectus is subject to change or revision.

The Final Prospectus

All purchasers of new issues must be given a final prospectus before any sales may be allowed. The final prospectus serves as the issuer’s full disclosure document for the purchaser of the securities. If the issuer has filed a prospectus with the SEC and the prospectus can be viewed on the SEC’s website a prospectus will be deemed to have been provided to the investor through the “access equals delivery” rule. Once the issuer’s registration statement becomes effective, the final prospectus must include:

  • Type and description of the securities
  • Price of the security
  • Use of the proceeds
  • Underwriter’s discount
  • Date of offering
  • Type and description of underwriting
  • Business history of issuer
  • Biographical data for company officers and directors
  • Information regarding large stockholders
  • Company financial data
  • Risks to purchaser
  • Legal matters concerning the company
  • SEC disclaimer

 

PROSPECTUS TO BE PROVIDED TO AFTERMARKET PURCHASERS

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