Securities Act of 1933

Congress passed the Securities Act of 1933 in response to the Stock Market Crash of 1929. Many people felt that the lack of regulation regarding the sale of stocks, bonds, and other securities was responsible for the stock market crash, which in turn led to the Great Depression.

Prior to the Securities Act of 1933, the sale of securities was generally covered by state law. These laws were mostly written between the turn of the century and 1933, and were viewed by many people as inadequate to protect consumers from companies that might be spreading misinformation in order to sell their stock.

The act required companies to provide information about their business to consumers. The aim of this requirement was to allow consumers the information necessary to make an informed decision about what securities they might want to purchase. The principle of “disclosure” was also introduced in the Securities Act; that is, companies and issuers of stock were required, and expected to inform consumers, as opposed to the previous “buyer beware” mentality, where the consumer was expected to do their own research.

Another aim of the Securities Act was to stop issuers of security from lying, defrauding, or misleading consumers. Examples include overstating assets, revenues, sales, capital expenditures (instead of including them with costs), or earnings, as well as understating costs, liabilities, and risks. The law prohibited issuers of stock from giving out false information in order to inflate the value of a security.

The Securities Act required issuers of stock and bonds to register their companies, initially with the Federal Trade Commission, and later with the SEC, which was created by the Securities Exchange Act of 1934. The registration required information about the business being entered, the managers of the company, financial statements certified by an outside accountant, the exact nature of the security, such as what percentage of the company a stock owner held, or what rights a bondholder had to recover debts.

The act did provide some exemptions. Government securities, such as municipal bonds, were exempted from SEC registration. Small offerings, or offerings to a limited number of people were exempted, as were offerings that were only offered in one state.

Lastly, the Securities Act began the process of prohibiting insider trading, by the requirement of Form 144. Form 144 is a form that officers or other people who may have privileged information about a company must file before they can sell stock. It requires that they hold the stock for a year, and requires that they disclose their sale of stock to the SEC.

The Securities Act of 1933 was the first major federal legislation in the United States governing the sale of securities. Shortly afterward, the SEC was created to further the goals of achieving transparency in the securities markets in the United States. Today, most state laws are modeled on federal law, including the 1933 and 1934 Acts, as well as Uniform Securities Act of 1956. As a result of this legislation, most investors feel safer about investing with US firms, and feel that, in general, they can trust that the information available about issuers of securities is reliable.