1.2.1. Communications Rules for a Public Underwriting
Before an issuer can begin selling its securities, the issuer must register the new securities with the SEC. Before the stock market crash of 1929, many people invested in securities without having much information about securities they were buying.
The Securities Act of 1933 was enacted to make sure investors have enough information about a security to make an informed decision. The Securities Act requires a registration process that culminates in a comprehensive document called a prospectus. An acceptable prospectus provides investors with enough detailed information about the issuer of the security to make an informed investment decision about the investment. When judging whether a prospectus is acceptable, the SEC assesses whether all the relevant information is contained in the prospectus and that there are no material omissions.
The SEC does not judge the merits of the securities themselves. In other words, the SEC transfers the burden of good financial decision-making from the government to the investor. For this reason, a broker, underwriter, or issuer of a security cannot say that the SEC “approved” of the security, even if the security is registered with the SEC. This is a basic and critical point that may come up in some form on the exam.
The registration process can be divided into three periods: the pre-filing period, the cooling-off period, and the post-effective period. The pre-filing period is the period before the issuer files the registration statement with the SEC. The cooling-off period is the time period after the registration statement has been filed until the registration statement becomes effective. During this time, the SEC will evaluate the registration statement. The Securities Act's timeframe for SEC review of the statement is 20 calendar days ̶ in practice, it often takes longer, but know 20 days fo