What is the Securities Act of 1933?
The Securities Act of 1933, also known as the ‘33 Act or the Truth in Securities law, was the first major federal legislation passed to regulate the securities markets. It was put into place in response to the stock market crash of 1929 as a means of ensuring better transparency in financial statements to protect investors in their investment decisions as well as protect investors from fraudulent activity and deceit in the securities market.
Prior to the ‘33 Act, it was left to the states to regulate securities which lead to an inconsistent representation of securities issued and inconsistent disclosure requirements and enforcement. The ’33 Act required companies to register with the Securities and Exchange Commission (SEC) and provide all potential investors with standard documentation including prospectus including detailed and certified financial statements, information about management and business plans, and a description of the securities being offered. In order for a company to go public and have its shares traded on an Exchange, the Securities and Exchange Commission must declare the company submission “effective”.
In addition to setting oversight at the federal versus state level, the ’33 Act set out uniform rules and disclosure requirements for public company reporting to help protect investors from fraudulent activities or misrepresentation.
The Securities Act of 1933 was signed into law by President Franklin D. Roosevelt as part of the New Deal during the Great Depression. Its genesis was the meteoric stock market rise in the 1920s and then the cataclysmic stock market crash which began on Black Thursday, October 24, 1929 when the stock market lost 11% of its value. Then came Black Monday, October 28, 1929 when the stock market fell 13% in a single day. The next day saw more hemorrhaging when the market fell another 12% and continued to fall until it lost nearly half of its value in mid-November and would take 15 years to raise to the pre-stock market crash level. The fall scared potential investors and consumers who feared for their future financial outlook and refrained from spending which further exacerbated the problem leading to further economic contractions. The United States didn’t fully emerge from the Stock Market Crash of 1929 and the ensuing Great Depression until World War 2 which required men and machinery to fuel the effort.
The Stock Market Crash that permeated America for more than a decade was attributed to a speculative boom that went uncontested. With the ’33 Act, capital markets regulation was in the hands of the United States Federal government. Standards including the creation and submission of registration statements that include a prospectus containing detailed financial information on the securities offered, company and business. All those signing the registration statement, including the company’s senior management and underwriter, must conduct thorough due diligence to verify that the document is complete and accurate.
Registration statements and their accompanying prospectuses must be filed via the Security and Exchange Commission’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) system, where it is made publicly available on sec.gov. These registration statements are examined by the Securities and Exchange Commission to ensure that they are compliant with disclosure requirements and that the American public and investors can make informed decisions about their investment decisions.