The Securities Act of 1933 was the first federal law in the United States to regulate the sale of company shares, bonds and other investment interests. However, in enacting a framework to prevent stock fraud and other exploitation of investors, Congress did not attempt to make sure that investments would grow. Instead, the law focused on accurate disclosure of relevant information.
From Blue Sky Laws to Federal Regulation
The Securities Act of 1933 was a response to the stock market crash of 1929, which had precipitated the Great Depression. Prior to the Securities Act of 1933, corporate securities were regulated solely by the states through what have come to be known as blue sky laws. The colorful metaphor appears to derive from references to fraudulent stock sellers offering shares not in a solid company but in the empty blue sky. In enacting the first federal securities law, Congress established a national standard for the issuance and initial distribution of investment interests.
The Sunlight of Transparency
The new federal legislation did not use exactly the same regulatory strategy as earlier state laws. Traditional blue sky legislation generally sought to promote honest disclosure of relevant facts as well as to make sure that the investment opportunity was sound. In contrast, the Securities Act of 1933 embodies the oft-cited principle that "sunlight is the best disinfectant." The law does not require proof that the investment is good. Rather, its exclusive concern is whether facts pertinent to assessing the securities' value are completely and accurately disclosed to potential investors.
The Securities and Exchange Commission
The Securities Act of 1933 created the Securities and Exchange Commission (SEC), which is the federal government agency charged with overseeing securities transactions. The law states that the SEC has the authority to issue regulations, establish filing procedures, set official accounting standards, conduct investigations and cooperate with state securities regulators.
Registration and Sale of Securities
The Securities Act of 1933 sets forth requirements for the issuance and initial sale of securities. Unless a specific exception applies, securities cannot be distributed through the mail, stock exchanges or any other form of interstate commerce without filing a registration statement with the SEC and for providing pertinent information to potential investors in a prospectus. A related regulation, Rule 10b-5, expressly prohibits untrue or misleading statements of material fact, and its prohibition of stock fraud has been interpreted to extend to insider trading, in which insiders or people they tip off buy or sell company stock based on information that has not yet been disclosed.
The Securities Act of 1933 been amended and supplemented a number of times. For instance, one year later Congress enacted the Securities Exchange Act of 1934, which regulates trading on exchanges and other secondary markets. More recently, in 2012 Congress passed the JOBS Act, which among other things made it legal for companies to raise funds by selling stock on an online crowdfunding site.
- Treatise on the Law of Securities Regulation; Thomas Lee Hazen
- Securities and Exchange Commission: Securities Act of 1933
- Securities and Exchange Commission Historical Society: Timeline
- Transactions: The Tennessee Journal of Business Law; Reform for Hire: The JOBS Act Legislation; James E. Bitter and Todd B. Skelton
- Texas Law Review; Origin of the Blue Sky Laws; Jonathan R. Macey and Geoffrey P. Miller
- Bloomberg.com: Crowdfunding for Internet Stock Sales Approved by SEC
- Government Printing Office: Jumpstart Our Business Startups Act
- Georgetown Law Library: Securities Law Research - U.S. and Int'l
- George Washington Law Review; Legislative History of the Securities Act of 1933; Landis, James M.
- Marquette Law Review: The Federal Securities Act of 1933
- Understanding Securities Law: Marc I. Steinberg
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