In a reaction to the stock market crash of the late 1920′s Congress enacted the Securities Act of 1933. The primary goal of the ’33 Act was to ensure that investors received complete and accurate information about companies issuing securities. Before Congress enacted the ’33 Act, there was no overarching federal scheme for regulating securities; states were the primary source of securities regulation. The general rule under the ’33 Act is that interstate public securities offerings cannot be made in the United States unless a registration statement has been filed with the Securities and Exchange Commission (the “SEC”). There are a number of important exemptions to these requirements that enable companies to raise money through what are commonly called “private placements.”
The registration statement must have a plethora of information including a description of the securities to be offered for sale; information about the management of the issuer; information about the securities; and financial statements certified by independent accountants. The prospectus, which is the document an issuer of securities gives to prospective investors to solicit investment, also must be included with the registration statement. The prospectus and the registration statements become public information after they are filed with the SEC. If you want to check out the public documents you can find them online through the SEC’s searchable database: EDGAR.
“Going Public” is Burdensome
The filing of a registration statement and a prospectus doesn’t sound too bad, right? Well, it is. Zynga, the Seattle-based mobile games maker, recently filed its registration statement–check out their documents: Zynga’s prospectus, and Zynga’s registration statement. If you scroll all the way down to page II-1 of the registration statement, you’ll see that Zynga’s legal fees and costs are $3,200,000. Going public is not cheap. And once companies go public, they are subject to federal reporting obligations, which are also burdensome and costly.
The Benefits of Going Public
There are some major benefits that go with the burdens and expenses of being a public company. For one, going public can raise massive sums of money for companies. And for existing stockholders going public is a way of cashing in on the value of their stock. Until the stock is registered it is difficult to trade. Publicly registered stock provides shareholders with liquidity that is not available to unregistered stock.
There are a handful of registration exemptions which we will discuss in detail in a future post. But the basics of the registration exemptions are that the offered securities must be limited in how they are offered, to whom they are offered, to how many people they are offered, and to how much money is being raised. Intrastate offerings may also qualify for exemption, but will still be subject to state “blue sky laws“, which are states’ methods of regulating securities.