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Disclosure Documents in a Securities Issuance

 

11. What are the primary disclosure documents required in a offer to sell securities?

The ’33 Act requires that an issuer of securities register with the SEC by filing a registration statement prior to any offer or sale of securities. Further, the issuer (or individual offering to sell securities) must provide a detailed disclosure document, known as a “prospectus”, to any potential investor prior to consummating a sale.

•    Registration Statement – Generally, it is illegal to sell securities to the public unless those securities are registered or there is an exemption from registration. The registration statement is the primary document that the entrepreneur must file with the SEC before undertaking a securities offering. The registration statement provides extremely detailed information about the business and the intended equity offering. The SEC reviews this information and makes it available to the public. Potential investors considering investing in the venture will use this information to make an informed decision. The investor can feel confident in the veracity of the information.

⁃    Note: There are several versions of the registration statement – the applicability of each depends upon the character and status of the business. The most common and recognized registration statement is the S-1, which applies to larger corporate entity forms that intend to offer securities to the public at large. The form S-1 contains instructions and references to dozens, if not hundreds, of applicable regulations that provide detailed information that must be included in the statement. While the actual requirements for registration are sufficient to fill a textbook, we simply make reference to them in order to illustrate the extensive requirements associated with registering the sale of a covered security.

•    Prospectus – Due to the volume of the disclosure included in the statement, it is somewhat difficult for a perspective investor to use the registration statement effectively to glean information about a particular investment opportunity. As such, the SEC requires that an issuer also prepare a “prospectus”, which is summary document containing fundamental information about the issuer, the security issuance, and the terms that apply. It provides the investor with sufficient facts (including financial information) to allow her to make an informed investment decision. At a bare minimum, it includes balance sheets and statements of operation by the investor. The issuer must provide this document to prospective investors prior to selling a security or accepting any investor funds. Like the registration statement, the information contained in the prospectus is subject to review and approval by the SEC.

⁃    Note: The prospectus delivery requirements generally do not apply to persons other than issuers (and their affiliates), underwriters or dealers. An individual purchaser of a security is generally exempt from providing this document in sales to a subsequent purchaser.

•    Discussion: Why do you think the SEC requires both an issuer to file a registration statement and prospectus prior to offering securities for sale? Why do you think the SEC requires the issuer to provide the prospectus to perspective purchasers of securities? Do you think this method of disclosure is effective? Why or why not?

•    Practice Question: What are the disclosure documents required under the Securities Act of 1933 and how are they used?

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