Selling securities is a serious business

While not reviewing the actual merits of a security, the SEC does require that all facts be disclosed and that no facts are concealed. The penalty for failing to do so can be severe.

Howard Z. Gopman, Howard Z. Gopman & Associates, Skokie, Ill.

The Securities Act of 1933 was enacted as an answer to the famous stock market crash of 1929.

The basic purpose of the 1933 Act is to give potential investors adequate information on which they could make an investment decision. The purpose of the act is also to prevent misrepresentation, deceit, and other fraudulent practices in the sale of securities.

The idea of disclosure is fundamental to this Act. This means that all the facts needed by a prudent investor for analysis should be presented by the issuer of the securities. The US Securities and Exchange Commission does not review the actual merits of a security. Furthermore, just because the SEC has reviewed an issue, it does not mean that the investor has been guaranteed against a loss.

The SEC merely requires that all the facts that the issuer must disclose are truthfully stated and that no facts are concealed. The SEC does not classify securities as to whether they are conservative or speculative; the Commissioner merely wants to know that the true facts with regard to the issuer are available for the potential buyer’s examination.

How does the SEC force the required disclosure? Generally, this is done by way of a registration statement. A registration statement must be filed by all issuers whose securities are to be offered for public sale. The only way to not file a registration statement is to have an exempt security or what is called an exempt transaction. Exempted Securities cover the Intrastate Offering Exemption of Sec. 3(a)(11) of the 1933 Act and the Regulation A Offering Exemption. Exempt transactions under Sec. 4(2) cover the Private Offering Exemption. These provisions for exempt securities and exempt transactions are important to know if you are in the oil and gas business.

The exempt security and exempt transaction provisions are important for those of you in the oil and gas business because the costs of a public registration are generally prohibitive for all except very large deals. This is so because of burdensome legal, accounting, and printing costs. In addition, since a public deal is reviewed by the SEC’s Washington office, there can be numerous delays in getting your deal approved - even if it is as pure as the driven snow. This is just the nature of doing business with Washington bureaucrats.

Most of you have seen a prospectus. It is part of the registration statement in a public deal. It must reflect all the pertinent facts disclosed in the registration statement. The prospectus is subject to the same disclosure requirements as the registration statement, and it is the document which must be delivered to a prospective investor.

After a registration statement has been filed with the SEC, the SEC reviews it. If the SEC thinks that the registration statement does not correctly detail all required facts, the Commission may call for the filing of any necessary correcting or additional amendments.

Furthermore, the Commission has the power to issue a “stop order” and suspend the effectiveness of the registration statement until the deficiency is corrected by an amendment, if, after a hearing, the SEC finds that the registration statement is false and misleading, or incomplete with respect to material facts.

So, you can see from this brief sketch that registering a security with the SEC is not exactly a lighthearted matter. It is time consuming and expensive and thus should only be done for larger deals of at least $10 million.

An investor who has been defrauded by a false registration statement can sue for damages.

However, even more important is Section 24 of the 1933 Act which says that if any person willfully violates the 1933 Act or the rules and regulations established by the Commission, or if the person willfully, in a registration statement, makes an untrue statement of material fact or omits to state material fact, he can be convicted of a crime and upon conviction, can be fined not more than $10,000 or imprisoned not more than five years, or both.

As you can see, selling securities is a deadly serious business. If you are not willing to spend the time, money, and effort to do the job right, my advice is to stay out. $

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