Securities Act of 1933

Securities Act of 1933
The Securities Act of 1933 aims to ensure that investors have all the material infor¬mation they need before buying stocks and bonds issued on the primary market and that this information is accurate and not misleading.
As the SEC explains on their website:
Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:
•    require that investors receive financial and other significant information concerning securities being offered for public sale; and
•    prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The scope of this securities law is narrower than the far-reaching Securities Exchange Act of 1934. The Securities Act of 1933 focuses solely on the offering of securities to public investors for the first time. The Act requires issuers to register an offering of securities with the SEC before the issuer can offer or sell their securities to the public. Because of this securities law an investor must be provided with a disclosure document that discloses everything he might need to know about the company issuing the security before the issuer or underwriters take his money and close the deal. Investors can read about the issuer's history, its board of directors, its products and services, its chances for success, and its chances for failure. They'll still be taking a risk if they buy, but at least they'll be able to make an informed decision because of this full and fair disclosure.
When a corporation wants to raise capital by selling securities, they get a group of underwriters together and fill out paperwork for the federal government in the form of a registration statement. Part of this registration statement will become the prospectus, which is the disclosure brochure that investors are provided with. An underwriter is just a broker-dealer that likes to take companies public. Another name for an underwriter is investment banker, but they don't act like a traditional bank. No deposits or checking offered here. Their job is to raise money for their clients, other people's money.

Once the underwriters file the registration statement on behalf of the issuer, the pro¬cess goes into a cooling off period, which will last 20 days or longer for most offerings. This process can drag on and on as the SEC reviews the paperwork, but no matter how long it takes, the issuer and underwriters can only do certain things during this "cooling off' period. Number one, they can't sell anything. They can't do any general advertising of the securities offering. They can announce that a sale is going to take place by publishing a tombstone ad in the financial press, because a tombstone ad is just a rectangle with some text. It announces that a sale of securities will take place at a particular offering price (or yield) and informs the reader how he/she can obtain a prospectus. But it is neither an offer to sell nor a solicitation to buy the securities. The underwriters can find out if anyone wants to give an "indication of interest," but those aren't sales. Just names on a list.
If someone gives an indication of interest, he must receive a preliminary prospectus, which contains everything the final prospectus will contain except for the effective date and the final/public offering price or "POP." The registered rep may not send a research report along with the preliminary prospectus and may not highlight or alter it in any way.
The preliminary prospectus is also referred to as a "red herring," due to the red-text warning that information may be added or altered. The release date and the final public offering price are two pieces of information yet to be added to what's in the red herring to make it a final prospectus. But, the preliminary prospectus has virtually all the material information a potential investor would need before deciding to invest or not.
The issuer and the underwriters attend a due diligence meeting toward the end of the cooling-off period to try and make sure they provided the SEC and the public with accurate and full disclosure. Nothing gets sold until the SEC grants the release date/ effective date. Starting on that date, the prospectus must be delivered to all buyers of these new securities for a certain length of time.
And, even though the SEC makes issuers jump through all kinds of hoops, the SEC doesn't approve or disapprove of the security. They don't guarantee accuracy or adequacy of the information provided by the issuer and its underwriters. In other words, if this whole thing goes horribly wrong, the liability still rests squarely on the shoulders of the issuers and underwriters, not on the SEC. For that reason, there must be a disclaimer saying basically that on the prospectus. It usually looks like this:
The Securities and Exchange Commission has not approved or disapproved of these securities. Further, it has not determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
So, how does the SEC feel about the investment merits of the security? No opinion whatsoever. They just want to make sure you receive full and fair disclosure to make an informed decision to invest or to take a pass.


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