Prior to 1933, regulation of financial securities was governed by the states. Every state had its own set of laws commonly referred to as Blue Sky Laws.
The Blue Sky Law had its origin in Kansas. The public’s growing appetite for speculative securities, misrepresentation and fraudulent promotions led to massive sales of spurious and low quality stocks in the early years of the twentieth century.
It was in 1911 when all foreign companies desiring to do business in Kansas were forced to file additional information about financial stability.
This helped to assure credit and investment confidence as well as prevented deception.
It said the Law was designed to clear away the clouds and fogs from the simple investor’s horizon and thus the metaphor is the Blue Sky.
Blue sky regulation remains today as a significant part aside from all the federal laws. Generally, it requires that all securities sold in a particular state must be registered there.
The Blue Sky regulation had some major problems. After the stock market crush in the October 29, 1929, it became obvious that there is no control on the issuing and trading securities and unreported concentration of controlling stocks in a very few hands may lead to any number of frauds and shadow schemes. Therefore Federal regulation was started with the securities Act of 1933 adopted by Congress also known as the Truth in Securities Act. The Act required public companies to register their stock and make regular financial disclosures. This was the beginning of financial regulation which exists now.
The Exchange Act of 1934 established the Securities and Exchange Commission (SEC). This was the second step taken by Congress.
SEC was obliged to register and oversee brokerage firms, clearing agencies as well as the nation’s securities organizations, including the NY Stock Exchange and the American Stock Exchange.
The Public Utility Holding Company Act (PUHCA) of 1935 requires that all side businesses be kept separate from the regulated business.
This was the third step taken by Congress as a response to the shadow schemes practices during the 1920s.
Today, SEC enables investor to get a clear view of a company’s profile.
There is a lot of information available online on publicly listed companies. Some of this information is required by SEC and is provided according with the filling standards within specified periods during and after the fiscal year.
SEC also requires providing ongoing disclosure of key information. If any material events take place, they must be reported through a publicly available Form 8-K.
SEC has designed the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System to support the assembly, transmission, validation, acceptance, and dissemination of public documents as filed by public companies. Since 1996, these filings must be made in an SGML coded format in order to be easily stored in the EDGAR database.
Under the Securities Act of 1933, companies must register their securities but some company’s securities offerings may meet an exemption from the registration requirements if there are intrastate offerings, regulation A and D offerings, private offerings or sales of securities through employee benefit plans.
The registration form S-1 is submitted when a company decides to go public.
The S-2, S-3 and S-4 forms give additional optionality for registration.
Under the Securities Act of 1934 all public companies must file financial documents unless the number of its record shareholders fall below 500 stockholders and less than $10 million in total assets or 300 shareholders of the class of securities offered.
Financial reporting forms are the most interesting part for any conscious investor. Here is a short list of main documents for public companies:
Form 10-K (Annual report) provides a comprehensive overview of the company’s business and financial stability. The report issued on the annual basis within 60 to 90 days after the end of the financial year.
Form 10-K/A: is an amendment to a previously filed 10-K.
Form 10-Q is the quarterly filing of financial reports. The filing is due 45 days after each of the first three fiscal quarters.
There is no 10-Q for the fourth fiscal quarter.
Form 8-K provides information about unscheduled material events or corporate changes such as acquisition, bankruptcy, resignation of directors etc.
Definitive Proxy statement Def 14A contains details of the business to be conducted at the Annual Meeting. In the proxy statement, investors can view management’s salaries, bonuses, options etc.
Corporate insiders and beneficial owners of more than 10% of stocks must report purchases, sales, and holdings of their company’s securities by filing Forms 3, 4 and 5.
Form 3 is filed when a person becomes insider, Form 4 filed when an insider executes a transaction, Form 5 is only required when at least one transaction was not reported during the year.
A statement of Ownership SC 13D introduces the owners.