Why Securities Act of 1933 is Necessary - Essay Example

Why securities act of 1933 is necessary Securities act of 1933 is necessary to bring into light more information about the offered securities for theinvestors. It has bounded the companies to disclose accurate information based on which the investors will share their capital or invest their money to the market. Thus, it has opened up a new door to enhance capital growth and thereby balanced the economy somewhat. Again, this law is necessary in order to resist fraudulent activity, misrepresentation, deceitful dealing in the securities market while the issuer is selling an offer or sale of securities. In fact, this law was brought into light after the great depression in 1929 in the US economy. By means of fraudulent activities, many companies sold fake securities based on false information and thus huge investment from the investors went in vain. So, underlying principle of 1933 act was to help potential investors get information about the company (issuer) and its securities that are offered for sale publicly. This overt expression from the issuer, thereby results a more concerned securities market because the investor were fully aware of the background of the company and their securities before investing money into purchase. However, without such an act against the deceitful behave of emptor it would not be possible to regulate the market with a maximum capital flow by the investors who are the heart of securities market. Thus, it was a pressing need for a first major federal law which can govern the unstable situation in a uniform manner. In fact, from the buyer point of view, it was really inspiring step to make the issuers conformed to certain rules as to disclose their information accurately before they offer or sale securities. Tracing the implementation of Securities act 1933 Act, code and agencies In order to provide disclosure of information and prohibits fraud and deceit , the issuer requires to be registered by filling a form with SEC (Securities and Exchange Commission). After getting certain information from the company, SEC discloses the information. Registration Requires a registration statement Requires registration of a corporation Regulation A-Simplified registration process Regulation C, Rule 415-Corporations with stock having a minimum value of $150 million may register the new securities and sell them over time Misrepresentations in registering with the SEC can make the issuer, signers, and those named or participating liable. Exemptions: Not all offerings of securities must be registered with the SEC. They include: Small offering exemptions (Reg. D) Private offering exemptions (Reg. D, Rule 506) Intrastate offering exemptions (Rule 147) Exempt securities include 1. Government issued securities 2. Securities of municipal, state, and federal governments 3. Stock splits Regardless of whether securities must be registered, the 1933 Act makes it illegal to commit fraud in conjunction with the offer or sale of securities. A scammed investor can sue for recovery under the 1933 Act. Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances, the sale of restricted and controlled securities without registration.. The amount of securities sold during any subsequent 3-month period generally does not exceed any of the following limitations: 1% of the stock outstanding, The avg. weekly reported volume of trading in the securities on all national securities exchanges for the preceding 4 weeks, and The avg. weekly volume of trading of the securities reported through the consolidated transactions reporting system (NASDAQ). Regulation S is a "safe harbor" that defines when an offering of 'securities' will be deemed to come to rest abroad and therefore not be subject to the registration obligations imposed under Section 5 of the 1933 Act. Civil Liability under the 1933 Securities Act Any violation of the registration requirements can be a cause to civil liability for the issuer and underwriters Sections 11, 12(a) (1) or 12(a) (2) of the Act. Additional liability may be imposed under the Securities Exchange Act of 1934 (Rule 10b-5). Impact on Business and Society Securities act 1933 has direct and indirect impact on business and society. After the rule enacted, many investors got benefit by it, however, fraudulent activity couldn't disappear because of highly modernized market. According to enotes, "SEC regulations also limit the amount of publicity issuers of new securities are able to provide. This provision was adopted to curb speculation such as that seen prior to the stock market crash of 1929, and to prevent use of securities issues to influence future market conditions. While succeeding in its initial goals, changes in the marketplace have rendered the act's publicity regulations difficult to enforce. For instance, companies fulfilling the disclosure portions of the act may at the same time be violating its publicity regulations. Furthermore, the increased globalization of securities markets makes the publicity regulations of the act unenforceable, as legal publicity overseas is rapidly communicated to the U.S. market, where it may be in violation of SEC regulations. In response to this and other problems, the SEC established a team of experts in the summer of 1998 to revamp the act and make it more responsive to modern business practices and technological advancement." From this we can conclude that securities act was fighting for its value in the globalized market. According to SEC news, there was a conversation in the early seventies among the employees who invested to the securities market discussed several facts about social impacts of security law. They specially expressed that in the employees case, security law didn't do well. Strength of the Securities Act Actually, security law has several strengths which have made this law in favor of the investors. Company is bound to disclose all the information about the securities which are offered for sale. Thus, it provides the investors with full and truthful disclosure which is a key to big contribution to the market. By providing disclosure it prohibits frauds and insider trading. "Any kind of deceitful disclosure or action goes liability for the civil''- this is a great remedy for investor when a breach of law occurs. Section 5 of the 1933 Act goes in favor of in favor of the investors in order to protect them. According to David's research, we can say that security act simply gives more advantage to the investors of the US. However, SEC doesn't follow it strictly. He also mentioned, "SEC has made relatively little distinction between U.S. and non-U.S. companies." Limitation The U.S. SEC had previously enforced registration of foreign transactions, with having handful constitutional power to do so. Strict liability imposed on the issuer has made some limitations of securities law. According to Spindler, "The securities act of 1933 was once considered a great benefit for investors because of the strict liability it places on firms to truthfully disclose information to investors. But the strict liability provisions are now dissuading firms from communicating useful information for fear that it may inadvertently contains errors or inaccuracies. The resulting silence is no benefit to investors. Strict liability simply makes no sense in today's sophisticated and deep capital markets." Also, Under 144, securities act has imposed rules weakly. Future Policy makers should be aware of globalized market in order to understand the investor and company's need and make policy accordingly. We have discussed several topics on it in strength, limitation and impact on business and society. Works Cited 1. http://www.sec.gov/about/laws.shtml#secact1933 2. http://sec.gov/about/laws/sa33.pdf 3. Splinder James C, Is it Time to Wind UP the Securities Act of 1933 4. Regulation, Vol. 29, No.4 winter 2006-2007 pp. 48-55. Available at ssrn http://ssrn.com/abstract=956900 5. http://www.enotes.com/biz-encyclopedia/securities-act-1933 6. David W. Leapard, "Doing Business in the United States of America", Eastern Michigan University, December 15, 2007. Available at: www.acteonline.org/uploadedFiles/Events/files/DoingBusinessUSA.ppt 7. http://www.sec.gov/news/speech/1954/060354armstrong.pdf Read More