About Regulation Exceptions?

Much ado has been made about the exemptions to various regulations, including and definitely not limited to the crowdfunding rules which are still pending in the Securities and Exchange Commission (SEC)’s queue. The SEC itself has followed closely legislation that was put in place after the stock market crash of 1933 which brought about the great depression. After the fall of the stock market in 1933 the US Congress adopted the Securities Act of 1933, which has become the cornerstone for all legislation relating to stocks and shares ever since. It is important to understand the implications of the 1933 Act, in order to understand the essential nature of the exemptions offered to it.

The primary purpose of the ’33 Act is to ensure that securities markets receive accurate and timely disclosure, in order to protect investors and ensure fair dealings.[1] Accurate and timely disclosure of material information goes to the heart of federal securities regulation. The legislature intended to augment the existing State laws, which were commonly known as “Blue Sky Laws”. The philosophy behind the Securities Act was one of accurate disclosure, meaning that the law did not make it illegal to sell a bad stock, it made it illegal to not provide the proper documentation and information about the stock. The liability for companies to reveal, accidentally or intentionally, false information was extremely high and so teams of experts are now required to ensure that every i is dotted and every t is crossed, Hence the term “due diligence” took on its current and very broad appeal. The registration process with the SEC is not only long and tedious, but also extremely expensive creating a natural barrier to the market for companies with less time, money, and expertise at their disposal. It is important to note that unless they qualify for an exemption, securities offered or sold to the public in the U.S. must be registered by filing a registration statement with the SEC.

A company that is required to register under the ’33 act must create a registration statement, which includes a prospectus, with copious information about the security, the company, the business, including audited financial statements. The prospectus alone has a registration component which requires –

  • A description of the securities to be offered for sale;
  • Information about the management of the issuer;
  • Information about the securities (if other than common stock); and
  • Financial statements certified by independent accountants.

These requirements place a significant challenges on the company seeking investment and essentially have turned small businesses away from seeking money on the stock market or through a public offering. The various exemptions were put into place to limit this heavy burden for companies who could meet certain criteria. The rules and the exceptions have been like a brick wall which has both protected consumers and restricted business growth from 1933 on. Now with the advents of the JOBS Act and Crowdfunding, the legislature and people in general, have changed the very nature of the process and have left the SEC scrambling to formulate a new regulation for  the old philosophies.

We hope this article has been informative regarding regulation exceptions.SEC logo

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