A “Bona Fide” Loophole for Dealers: Three-Year Protection from Section 12(a)(1) Actions under the 1933 Act

Abstract

The goal of the Securities Act of 1933 (“the Act”) is to protect investors. The Act protects investors by requiring anyone who wishes to sell a security to provide potential investors with the information needed to make an informed purchase decision. For newly issued securities, this information is contained in a registration statement filed with the United States Securities and Exchange Commission (“SEC”). Section 5 is the heart of the Act. It, along with associated SEC rules, governs the actions of issuers, underwriters, and dealers in securities covered by this registration statement. The Act and rules provide the SEC with powers to prevent the sale of these securities by refusing to declare the registration statement “effective,” and by “stop orders” after it is declared effective. The SEC may also order anyone who violates the provisions of the Act to “cease and desist,” may pursue them civilly for violations, or may make referrals to the Department of Justice for criminal prosecution. The Act also provides private remedies for investors to pursue anyone who offers or sells securities in violation of the Act.