Securities Act of 1933 (15 U.S.C. §§ 77a–77aa)
Citation: 15 U.S.C. §§ 77a–77aa
Overview
The Securities Act of 1933 — sometimes called the “truth in securities” law — was enacted in the wake of the 1929 market crash to restore investor confidence in capital markets. Its primary purpose is to ensure that investors receive meaningful financial and other information about securities being offered for public sale, and to prohibit deceit, misrepresentations, and fraud in the sale of securities. The Act governs primary offerings (original issuance by the company). Ongoing trading in secondary markets is governed by the Securities Exchange Act of 1934 (15 U.S.C. §§ 78a–78pp).
§ 2(a)(1) — Definition of “Security”
Whether an instrument is a “security” determines if the Act applies at all.
Howey Investment Contract Test (SEC v. W.J. Howey Co., 1946)
An investment contract is a security if there is:
- An investment of money
- In a common enterprise
- With an expectation of profits
- Derived solely (predominantly) from the efforts of others
Applied broadly to novel instruments: limited partnerships, certain cryptocurrency tokens, orange groves, whiskey warehouse receipts.
Reves Family Resemblance Test (Notes)
Notes are presumptively securities under Reves v. Ernst & Young (1990), unless they bear a “family resemblance” to a category of non-security notes (e.g., notes for consumer financing, home mortgages, short-term business loans). Four factors:
- Motivations of buyer and seller (investment vs. commercial).
- Plan of distribution (broad vs. limited).
- Reasonable expectation of the investing public.
- Whether another regulatory scheme reduces the risk.
§ 5 — The Registration Requirement
Core prohibition: It is unlawful to offer or sell any security through interstate commerce or the mails unless a registration statement is effective or an exemption applies.
The Three Offering Periods
| Period | Timing | Permissible Activities |
|---|---|---|
| Pre-filing (quiet period) | Before registration statement filed | No offers; only factual business communications; “tombstone” ads if compliant |
| Waiting period | After filing; before effective date | Oral offers permitted; written offers only by means of a prospectus (preliminary/red herring); no sales |
| Post-effective period | After registration effective | Offers and sales permitted; final prospectus must accompany or precede delivery of securities |
Gun-Jumping
Violations of the pre-filing or waiting period restrictions are called “gun-jumping.” Consequences include potential § 5 violations and the possibility of a “conditioning the market” defense to any subsequent § 11 claims.
Well-Known Seasoned Issuers (WKSIs)
Large, seasoned public companies enjoy relaxed § 5 restrictions, including the ability to use shelf registration and make oral and written offers before filing.
Registration Statement (Form S-1)
Filed with the SEC. Two parts:
| Part | Contents | Distribution |
|---|---|---|
| Part I — Prospectus | Business description, risk factors, financial statements, use of proceeds, management, selling shareholders | Delivered to investors |
| Part II — Supplemental Info | Exhibits, additional financial data, undertakings | Available via EDGAR; not delivered to investors |
The SEC staff reviews and issues comment letters; issuer responds until registration is declared effective.
§ 11 — Liability for Misstatements in Registration Statement
Scope
Applies to material misstatements or omissions in the registration statement (including the prospectus incorporated by reference).
Who Can Be Sued (Defendants)
- Every person who signed the registration statement (includes the issuer and certain officers).
- Every director of the issuer at the time of filing.
- Every person named as about to become a director.
- Every accountant, engineer, appraiser, or expert who consented to be named and whose expertised portion was materially false.
- Every underwriter of the offering.
Plaintiff’s Burden
- Plaintiff must show: (1) they acquired the security; (2) the registration statement contained a material misstatement or omission at the time it became effective.
- No scienter required.
- Reliance: Plaintiff who purchased after the issuer made an earnings release covering the same period must show actual reliance on the registration statement. Otherwise, reliance is presumed (acquisition below offering price sufficient).
- Tracing requirement: Plaintiff must trace their shares to the relevant offering (critical in secondary markets).
Due Diligence Defense
Non-issuer defendants (directors, experts, underwriters) may escape liability by showing:
- Expertised portions: Defendant had reasonable grounds to believe (and did believe) the statements were accurate (reliance on expert opinion is a complete defense for non-experts).
- Non-expertised portions: Defendant conducted a reasonable investigation and had reasonable grounds to believe, and did believe, the statements were accurate.
The standard of reasonableness is that of a prudent person in the management of their own property — a demanding standard for underwriters (Escott v. BarChris).
§ 12(a)(1) — Strict Liability for § 5 Violations
Any person who offers or sells a security in violation of § 5 (unregistered offering) is liable to the purchaser for the consideration paid, plus interest, less any income received, or for damages if the purchaser no longer holds the security. Strict liability — no scienter, no fault required.
§ 12(a)(2) — Negligence Liability for Prospectus Misstatements
Liability for material misstatements or omissions by means of a prospectus or oral communication. Requires negligence (no scienter). Limited to public offerings — does not apply to secondary market transactions (Gustafson v. Alloyd Co. — § 12(a)(2) applies only to public offerings by a statutory seller).
§ 15 — Control Person Liability
Any person who “controls” a person liable under § 11 or § 12 is jointly and severally liable unless the controlling person had no knowledge of or reasonable grounds to believe in the existence of the facts causing liability.
Major Exemptions from § 5 Registration
| Exemption | Key Terms |
|---|---|
| § 4(a)(2) Private Placement | Transactions not involving any public offering; narrow common-law exemption |
| Reg D, Rule 506(b) | Up to 35 non-accredited investors + unlimited accredited investors; no general solicitation; issuer must reasonably believe sophisticated non-accredited investors |
| Reg D, Rule 506(c) | Unlimited accredited investors only; general solicitation permitted; must verify accredited status |
| Rule 144A | Resales to Qualified Institutional Buyers (QIBs); large-volume institutional secondary market |
| Reg A+ | Smaller public offerings up to $75M (Tier 2); lighter disclosure; state preemption for Tier 2 |
| Reg S | Offers and sales outside the United States |
| Rule 144 | Resales of restricted and control securities after holding period; volume and manner-of-sale limits |