In the United States, the Securities and Exchange Commission (SEC) is the main governmental agency that oversees public market activity. Initially created by Congress to administer securities laws in the aftermath of the Great Depression, the SEC’s purpose is to regulate the securities industry and bolster investor protections.
The President of the United States selects five commissioners subject to Senate confirmation to serve five-year terms, and the SEC provides regulatory oversight by following a number of securities laws. Here we will provide a high-level overview of the key federal statutes.
Securities Act of 1933
The Securities Act of 1933 regulates the primary market. That market consists of transactions that govern the initial offering and sale of securities. In other words, it regulates transactions between issuers of securities and investors.
The 1933 Act requires the issuer to provide extensive disclosure under the securities laws. An issuer initiates a contemplated securities offering by filing an S-1 registration statement with the SEC. During a required cooling-off period, which is a minimum of 20 days and often significantly longer, the SEC will review the registration statement. The SEC has the ability to extend this period beyond the minimum of 20 days in order to request and review additional information about the company.
The securities laws prohibit the sale of securities during the cooling off period. However, a preliminary prospectus, also known as a red herring, may be provided to potential investors. This enables the company to gather indications of interests in the securities offering. The red herring name refers to the bold red disclaimer language on the cover page that states, “These securities have not yet become registered with the SEC and therefore may not be sold.” The preliminary prospectus provides information about the securities offering. This information includes the purpose of the offering, company financial data, business history, risk factors, and the intended uses of the proceeds.
The company delivers the final prospectus after pricing and prior to sale of the securities. The final prospectus contains much of the same information as the preliminary prospectus. The main difference is that the final prospectus contains the security’s price. Once the SEC posts the final prospectus on the SEC’s website, notice is deemed delivered to investors in accordance with the “access equals delivery” rule.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934, often referred to as the Exchange Act or ’34 Act, includes the securities laws that regulate the secondary market. In other words, it regulates investor-to-investor transactions. The secondary trading of securities often occurs through broker dealers or parties unrelated to the issuer.
The Exchange Act is responsible for the creation of the SEC and regulates broker dealer registration requirements. It also is responsible for promulgating a number of important periodic reporting and disclosure procedures that public companies must follow.
Securities Laws Timeline
A timeline of key reports that a company must file with the SEC includes:
Form 8-K: Form 8-K is the current report public companies must file with the SEC to disclosure material events to shareholders. Generally, companies must file Forms 8-K within 4 business days of a triggering event.
Form 10-Q: Form 10-Q is the quarterly SEC report. It includes unaudited financial statements and a Management Discussion and Analysis (MD&A) section. Companies normally must file Forms 10-Q within 45 days after the end of each of the first three fiscal quarters.
Form 10-K: Form 10-K is the annual SEC report. It includes audited financial statements accompanied by a MD&A section. Companies must file these forms with within 90 days after the end of the fiscal year.
Schedule 14A Proxy Statements: In connection with each annual or special meeting of a public company, companies must provide shareholders with a proxy statement. The SEC’s proxy rules detail the information that must be included in proxy materials depending on the circumstances. Companies must file proxy statements within 120 days after the end of the fiscal year.
More Securities Laws: The Trust Indenture Act of 1939
The Trust Indenture Act of 1939 prohibits the offering of bond issues in excess of $5 million without an indenture. An indenture is the governing contractual agreement between the corporate issuer and the trustee. The trustee is typically a bank or a trust company and is responsible for managing the relationship between the corporate issuer and all the bondholders.
Investment Company Act of 1940
The Investment Company Act of 1940 regulates investment companies, such as mutual funds, that are primarily focused on investing or reinvesting money for investors. The 1940 Act requires public disclosure of information about the fund, including its investment policies and financial data. The Act’s purpose is to reduce conflicts of interest in the investment decisions of these companies.
Newest of the Securities Laws: The Jumpstart Our Business Startups Act of 2012
In April 2012, Congress passed the Jumpstart Our Business Startups Act, more commonly referred to as the JOBS Act. The JOBS Act makes it easier for qualifying startups to meet certain criteria in the IPO process. These qualifying startups are called emerging growth companies, or EGCs. To initially qualify for EGC status, the company must have revenues of less than $1.07 billion during its most recently completed fiscal year. The company will retain EGC status until it no longer meets certain eligibility criteria.
EGCs get the benefit of an IPO on-ramp transition period. These on-ramp accommodations enable EGCs to avoid a number of costly disclosure and compliance requirements in going public under the securities laws. For example, an EGC may only be required to provide two, rather than three, years of past audited financial statements. More costly disclosure requirements that regular public companies must abide by will gradually phase in at later stages of the on-ramp period.