 Hello, and welcome to the session in which we will discuss the Securities Act of 1933. This topic is covered on the CPA exam. So what I want you to do when you think of the Securities Act of 1933, I want you to think of this picture. And this picture is from the 1930s about the depression when the US went through a depression, not economic depression. Why did we go through the depression or the Great Depression? It's because the stock market collapsed. Why did the stock market collapse? The stock market collapsed because one of the main reasons is there was a lot of fraud going on. People, investors were buying stocks in companies that doesn't exist or if they existed, they were not doing as well as were advertised. So simply put, people were buying stocks and losing companies, or companies actually did not exist in the first place. Back then you did not have the internet. You did not have TV. You did not have modern communication to find out what's going on. Therefore the government intervened and said, okay, now we're gonna regulate this industry. So this is what I want you to think of it. That's important to remember that point about the 1933 Act. Now, if you're studying for your CPA exam, I strongly suggest you check out my website, farhatlectures.com. I don't replace your backer, Roger, Glean or Wiley. I don't do that. I don't intend to do that. But I can be a useful addition to your CPA review course. I can explain the material differently, no better, no less, just differently. And by doing so, I can help you understand the material better. By doing so, I can add 10 to 15 points. By doing so, you will pass your exam. And this is the risk that you are taking. Try me out for one month. That's your risk. Your return is potentially understanding the information better and passing the exam. That's your return. Are you willing to take that risk? And if not for anything, check out my website to find out how well or not well your university doing on the CPA exam. Also, you can check out other courses that I have offered. Please connect with me on LinkedIn and you can review some of my LinkedIn recommendation. Individuals that use my system to pass the exam connect with me on YouTube, Instagram and Facebook. So the Securities Act of 1933, what is it? It is the act that regulate, notice, initial offering, IPOs, initial public offering. Initial public offering when you sell securities, and I'm gonna be, when I say securities, I'm gonna assume stocks, but we're gonna define the word security in a moment. When you sell security first time to the public, now companies are required to do what? To file a registration statement, to file something with the SEC before you can sell those securities, before selling or offering the securities to public. Why? Because the government wants to protect the public from people who are trying to defraud them, selling them securities for companies either they don't exist or it's a fraudulent transaction. Now, what do we mean by securities? Securities to include any offering that constitute an investment. What would constitute an investment? Again, when we think of investments, we think of stocks and bonds, which is true. The ventures, stock options, warrant, notice limited a partnership interest. Anytime that you are a passive investor, it's a passive investment. Passive means you are not practically, practically participating in the management of the company versus a general partnership. General partnership are not securities. Why? Because as a general partner, you participate, you make decision. Therefore, it's not a security, also a city at the bank is not a security, it's governed by other rules. Now, we also have something called the blue sky laws. Think of them as the state security law, just like the SECs as a federal. Blue sky laws are states. So you have to comply with both the state and the federal. Generally speaking, the federal securities will preempt any not flu blue sky laws. So let's specifically talk about the objectives of 1933. Although I told you what they are, it's to protect the investors. How prevent fraud, deceit, misrepresentation and that public offering. How will require issuers, supply, force issuers to supply investors with adequate information so they can make an informed decision. Now, why are we learning about this? Because when companies supply this information as auditors, as accountant, as CPA, we are the people that prepare this information that certify that they are in compliance with whether it's GAAP or IFRS. Remember, we make a judgment about the accounting, whether they are complying with GAAP and IFRS. How do we do so? Well, disclose to potential investors. All material information, it might impact their decision regarding the securities. Think about what would influence your decision? Well, I wanna look at their balance sheet. I wanna look at their income statement. I wanna look at their cash flow statement. I wanna take a look at if they have any pending allegations, I wanna examine their business risk. I want to know as much as possible. And all this information will be provided to you in a prospectus, which we'll talk about shortly. However, the SEC does not judge the merit of the investment. It doesn't tell you whether it's a good investment or not, nor guarantee the accuracy of the information, okay, contained in the registration. You just wanna make sure they are disclosing the information, they're giving you the information. They cannot tell you whether this information is correct or not. The auditor, all what the auditor does is make sure it's free of material misstatement and it will tell you whether it's in compliance with the framework, talking in the US, US gap, okay? So keep that in mind. They need to disclose the associated risk. The SEC does not disclose the associated risk. You have to make that judgment. So registration does not ensure against any loss. You buy it, you have the information, it's your loss. The SEC tests for completeness. Make sure they supply you with everything that you need. Then it's your decision, whether you want to buy or not buy, okay? So who's required to register with the SEC? Well, obviously anyone that's involved in this process, who will be involved in the process of selling securities? Well, guess what? The company itself, the issuer, the company that's trying to raise money. Okay, now it doesn't have to be a company, but think of it as a company because it's easier to understand. But the issuers could be government, trust, corporations, and this is what we mean by company, corporation. Any person who owns more than 10% of the company's stocks is considered a corporation as far as the SEC when they sell stocks. Now, when you sell stocks, you're not gonna do it by yourself. Although some companies are doing it lately by themselves, like Google and Facebook, but what you do is you will need an underwriter. Who's an underwriter? A company like Goldman Sachs. What they do is they help you sell, distribute the stocks, the securities to potential investors, who has the money because that's what you need. So basically think of the underwriter. It's the middle person between you, the company, and the people with the money. They participate in the original offering of the securities. Why to help you raise money? Because the company's job, for example, if you are manufacturing widgets, that's your job. Your job is not to raise money. You will ask someone if you wanna go public to raise money. So also dealers offer, who are dealers? They offer sell-buys, deals, or otherwise trade-in securities issued by another party. They have security inventory. So when you say a dealer, the dealer holds the securities inventory versus a broker, execute the transaction between two parties for clients. Usually they have no inventory. Just know who are the player in this arena. Now bear in mind that underwriters with higher dealers and brokers to help them sell the stock. So that's why they are all part of these parties that are involved in this process. Now, those are the parties who are involved. They are required to register. What is required? What do you have to supply? Well, you have to supply a registration statement. And this is a registration statement to comply with the 1933 and sure must prepare and file publicly a registration statement. And the registration statement will have a prospectus and will have supplementary information. We really don't care about the supplementary information. It's provided to the SEC, but we need to know more about the prospectus, which is part of the registration statement. So it is a registration statement from a grant perspective, from a macro perspective. It's the disclosure that everything you wanna tell the SEC, okay? Any information relevant to the securities. It will include this important term, the prospectus. The prospectus is giving to the investors. Why? You're trying to solicit. You want to inform them about the company. Therefore, you will give them a prospectus. The prospect, the registration statement is effective on the 20th day after filing. So you file it. If you don't hear anything from the IRS, I'm sorry, not IRS, the SEC, it becomes effective. Or the SEC accelerate the effective data. I'll tell you, you know what? Five days later, you're good. You can sell. Or they would require an amendment. Let's say you have to make some changes to your registration statement. If that's the case, the new 20 period will begin after that amendment. You have another 20 period. So any sale or offer may occur after the effective date, as long as the buyer receive a prospectus. Now, what is a prospectus? Well, let's talk about the prospectus. It's a legal document describing the company's securities that has been put on sale. I hope you are familiar with the annual report. Think of the annual report. It doesn't mean it has the same thing as annual report, but it has similar things as the annual report that's informing you about the company. So what does it include? Think about the annual report. It will include audited financial statements. And usually they have to be like recent. MDNA, management discussion and analysis, the registrant, business property and competition, names of the company's principles, number of shares, the type of securities that they're offering, any significant provision of the securities to be sold, management compensation, compensation of directors, material transaction, anything like this, any material legal proceeding, any lawsuit, the principal purpose for which the proceeds will be used. For example, Tesla, every once in a while, they raise money and you have to disclose, when you raise money, when you ask people for money, come on, you gotta tell them why you're asking people for money. Usually it's for expansion. It's either for expansion or the company's in trouble. Those are the two reasons why companies ask for money, right? If they can raise money on their own, they don't need you. If they need to expand and they're not generating enough cash internally, then they will raise money through the public. Red hearing is a preliminary prospectus. So basically, remember, you have that 20 days waiting period, you can give them that prospectus and you tell them, look, it's not final. It's called red hearing because it has like red colors on the cover of it. So it's not ready. There's something called shelf registration, like basically shelf, you can have something on the shelf. Shelf registration is when the securities are issued without filing a new registration statement. So simply put, you can issue the securities and you don't have to go through the filing registration statement, waiting, so on and so forth, observing the 20 days and preparing a new prospectus. Simply put, you can do it, why? Because what you do, as you prepare all the paperwork, sometime in the past and you have everything ready on the shelf, once you need the money, you can take it out. Now, only large, well-established corporations do that. So corporations who are considered seasoned or well-known seasoned issuer can file this registration, okay, covering an unlimited amount of securities that might be issued within three years. So they simply put, they have those securities ready for the next three years. However, the issuer must update the information so it's accurate and current, because since three years ago, a lot of things has changed or they will tell the investors, look, check out our annual report, check out our quarterly financial statements to stay up to date if you want to buy our securities. So this is what shelf registration is. Then we have something called, not something called, we have certain securities that are exempt under the 1933 Act. What does it mean exempt? It means they don't have to go through this whole registration thing, issue a prospectus, wait 20 days, so on and so forth. Now there's a list of them and you need to know, you need to know this list. I'm gonna try to explain really briefly why this security is not required to help you understand it. So this way you can remember on the exam. One thing is any governmental agency that's raising money for governmental purposes. Simply put, the government is raising money for government purposes, then you don't have to, because the government is trying to protect the public and now the government is raising money. Therefore we don't have to do it. Not for profit organization, they're not trying, the assumption is they're not trying to rip off anyone, right? That's the idea, not for profit, they're exempt. Stock dividend and stocks, but generally are exempt because they are the result of existing stocks. Therefore they are generally exempt. Commercial paper with a maturity less than nine month. What is commercial paper? Commercial paper is short-term borrowing. It's used by well-established companies. Well-established means they have a good credit rating and what they do, they borrow money on a short-term basis usually for a month, 45 days to operate their business, to buy inventory, to make payroll. Therefore they don't have that time leisure to file for registration. Therefore if you could raise money through commercial paper you don't have to go through the registration as long as those commercial paper are less than nine month and by their nature most of them are short-term. Domestic banks and savings and loan association. Insurance policies and annuity contract of state-regulated, okay let's talk about five and six. Five and six deals with banks, insurance companies, usually savings and loan association. Usually these organizations are overseen by the state. Therefore they have some type of regulations and that's why they're exempt. Issue that are federally regulated. Okay, if they're already regulated don't over-regulate them, they're regulated enough. Just like five, six and seven they're kind of regulated as is. Or a receiver or trustee in a bankruptcy or a corporation in reorganization with the prior court or government approval. So look, we already looked into them either the court look under them or the government. So that's why you are exempt from the SEC. Not because we like you because somebody's already looking over your shoulder we're not gonna keep looking over your shoulder ourselves. So remember those exempt securities. And the reason I say this because we have exempt securities under the 1933 Act and we have exempt transactions under the 1933 Act. The exempt transaction. This is what I'm gonna be discussing in the next recording. I don't want to overwhelm you. I want you to understand the SEC very well because it's tested. It's very much tested on the CPA exam. That's why I don't want to overload you in this recording. I will have a part two. And in part two I will talk about I believe I will talk about those exempt transaction. Okay, those exempt transaction. But before I end up I'd just like to remind you if you are a CPA candidate check out my website farhatlectures.com. It doesn't matter which course you are taking my lectures are organized to parallel your course to make it easy for you. So you know what to review you can go back and forth between my material and your course. It's a really good supplement. What's the difference between a supplement and getting another course? Well, if the supplement is the same thing as your course it's useless. The supplement has to offer you something different and what can I offer you something different? Yes, I do have multiple choice and practice exercises and through false and CPA questions. But really what I offer you is my explanation of the material. And once you understand it, you will be good to go. Good luck, study hard and stay safe.