The Securities Exchange Act of 1933 regulates the initial sale of securities and was enacted during The Great Depression following the stock market crash of 1929. The Securities Act of 1933 acts as the regulatory framework for the issuing of new securities. The Securities Act of 1933 requires a Corporation to file a registration statement with the Securities Exchange Commission (SEC) which is available to all potential buyers of the firm's securities. The purpose behind this disclosure is to give the potential investors all the necessary information needed to make a sound Investment decision. The company and underwriters are held responsible for the information that is registered. This enormous liability is supposed to ensure that "due diligence" is done so that all registers information is complete and accurate. The primary purpose of The Securities Exchange Act of 1933 is to maintain investor's confidence so that they will support the markets.
The Registration Process
Unless an exemption is found, all new securities must be registered with the SEC. The issuing company must generate a prospectus, which is a document that describes the security for the potential investors. Among many other forms, the prospective contains the following:
A description of the security to be sold;
information about the underlying company’s management;
information about the security (if other than common stock; and
financial statements which are audited by independent accountants
Securities that may be exempt from registering with the SEC include short-term commercial paper, municipal Bonds, securities of some banks and non-profit organizations and certain insurance policies and annuity contracts.
Rule 144Rule 144 provides an exemption and permits the public resale of restricted or controlled securities even if they have not been registered with the SEC if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time. If the required conditions have been met, the issuing firm is required to file form 144 with the SEC. The 5 conditions of Rule 144 are below:
Holding Period - Before you may sell any restricted securities in the marketplace, you must hold them for a certain period of time. If the company that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934 , then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The relevant holding period begins when the securities were bought and fully paid for. The holding period only applies to restricted securities. Because securities acquired in the public market are not restricted, there is no holding period for an affiliate who purchases securities of the issuer in the marketplace. But the resale of an affiliate's shares is subject to the other conditions of the rule.
Additional securities purchased from the issuer do not affect the holding period of previously purchased securities of the same class. If you purchased restricted securities from another non-affiliate, you can tack on that non-affiliate's holding period to your holding period. For gifts made by an affiliate, the holding period begins when the affiliate acquired the securities and not on the date of the gift. In the case of a stock option, such as one an employee receives, the holding period begins as of the date the option is exercised and not the date it is Grant ed.
Adequate Current Information - There must be adequate current information about the issuer of the securities before the sale can be made. This generally means that the issuer has complied with the periodic reporting requirements of the Exchange Act.
Trading Volume Formula - If you are an affiliate, the number of Equity securities you may sell during any three-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange or quoted on Nasdaq, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing a notice of sale on Form 144. Over-the-counter stocks, including those quoted on theOTC Bulletin Board and the Pink Sheets, can only be sold using the 1% measurement.
Ordinary Brokerage Transactions - If you are an affiliate, the sales must be handled in all respects as routine trading transactions, and brokers may not receive more than a normal commission. Neither the seller nor the broker can solicit orders to buy the securities.
Filing a Notice of Proposed Sale With the SEC - If you are an affiliate, you must file a notice with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period. The sale must take place within three months of filing the Form and, if the securities have not been sold, you must file an amended notice.
Regulation S pertains to the offering or resale of unregistered securities outside the United States. If the offering or resale of unregistered securities is made outside U.S. then the sale of the securities is not subject to the registration requirements under section 5 of the Securities Exchange Act of 1933. The sale or any party involved in the sale of securities under Regulation S must not engage in “directed selling efforts”. For securities that are substantial in United States. market interest must not be sold to U.S. citizens, even if they are located outside of the United States.
Liabilities Unregistered Sales - Section 12(a)(1) imposes absolute civil liability in the case of selling unregistered securities because there are no defenses.
False Registration Statements - Section 11 imposes liability on the issuer, all persons who signed the statement, every director or partner, experts who prepared or certified any part of the statement, and all underwriters; defendants other than issuer may assert the defense of due diligence.
Antifraud Provisions - Section 12(a)(2) imposes liability on the seller of the securities even if he did not have knowledge of the false or inaccurate registrations, however sellers are protected from being held liable if they did not know of the untruth and the untruth was not possible to be found with reasonable due care.
Punishment - Willful violators may be subject to fines up to $10,000 and/or no more than 5 years in prison.