Violations of Registration Process: Types & Remedies

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  • 0:01 Securities Act of 1933
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

The Security Exchange Commission (SEC) requires that publicly traded companies disclose financial information to their investors. Common registration violations include selling non-exempt securities, untrue statements, misstatements or omissions.

Securities Act of 1933

When businesses need to raise capital for special projects that require big money, they offer securities for purchase to investors. These are financial instruments that make an investor a partial owner of a company, and this instrument can be traded in secondary markets.

When a company needs extra cash to expand or make some major extensive changes, it would be in their best interest to present themselves in the best light. After all, they are asking investors to fork over money.

One way to do this is to make the company look attractive to investors. A company may do this based on attributes like low debt, high projected sales, and profits using truthful data.

Or, a not-so-nice company may report financial information that is just not true. So, in order to be sure that every company that offers the sale of securities is doing the right thing, Congress enacted the Securities Act of 1933. This act does two things:

  1. Requires that companies that sell securities provide full financial disclosure
  2. Ensures that information reported is truthful

The end goal of the act is to provide investors with the assurance that the companies they invest in are providing correct and accurate information. As with many things, some companies don't do the right thing. Well, the act provides investors with the right to take action against a company if the company violates any one or number of sections of the act.

Security Act of 1933 Violations and Remedies

There are several provisions, which can be used as the basis for bringing an action against a company in violation of the Securities Act of 1933. Our focus is on three provisions.

In Section 11, it states that a publicly traded company cannot make untrue statements of material fact or leave out any information that investors need to make a decision. In other words, a company is required to fully disclose their financial condition to potential and current investors. If an investor believes untrue statements were made that directly influenced his decision to purchase the investment, he may recover. However, it is important to understand the timeline in making a claim.

Let's say an Initial Public Offering (IPO), or the first time stock is sold by a company, is up for grabs. The investor may base his decision on information conveyed by the offering company. Since this is the first time the company is selling securities, the reported information may be limited. If, after several months, the investor believes that the information stated about the IPO was wrong, it may be difficult to prove since the company does not have a security sale track record.

A legal case may help. In Hertzberg v. Dignity Partners, Inc., Hertzberg, the plaintiff, purchased stock in Dignity Partners based on its initial public offering. Dignity Partners was a company who purchased life insurance policies on AIDS patients with the intent of cashing in on the policy when the patient died. Since AIDS patients started living much longer lives than they had in the past, the company had to pay out premiums for a much longer period of time. This caused financial disaster for them.

Hertzberg filed suit claiming that under Section 11, the company left out material facts in its offering. Mostly, the company did not reveal the data on the lifespan of AIDS patients. Unfortunately, the court ruled in favor of the defendant, Dignity Partners, citing that the claim had to be made one year after the public offering or three years after registration. This gives the company time to substantiate the facts they first made and make good on their promises.

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