In Defense of a Federally Mandated Disclosure System: Observing Pre–Securities Act Prospectuses
54 Am. Bus. L. J. 743 (2017)
49 Pages Posted: 21 Feb 2018
Date Written: November 6, 2017
Some legal scholars—skeptics—question the conventional wisdom that corporations failed to provide adequate information to prospective investors before the passage of the Securities Act of 1933 (Securities Act). These skeptics argue that the Securities Act’s disclosure requirements were largely unnecessary. For example, Paul G. Mahoney in his 2015 book, Wasting A Crisis: Why Securities Regulation Fails, relied on the fact that the New York Stock Exchange (NYSE) imposed disclosure requirements in the 1920s to conclude that stories about poor pre-Act disclosure are “demonstrably wrong”. (Likewise, Roberta Romano argued in Empowering Investors that “there is little tangible proof” that disclosure was inadequate pre-Securities Act.)
This Article sets out to determine who is correct, those that accept the conventional wisdom that pre-Securities Act disclosure was inadequate, or the skeptics?
The Author examined twenty-five stock prospectuses (the key piece of disclosure provided to prospective investors) that predate the Securities Act. This primary-source documentation strongly suggests that—contrary to the assertions of skeptics—pre-Act prospectuses did fail to provide potential investors with financial statements, as well as information about capitalization and voting rights, and executive compensation.
Keywords: Securities Laws, Securities Act, registration statement, prospectus, securities regulation, primary-source evidence, disclosure, information asymmetries, investors
JEL Classification: K22, N22
Suggested Citation: Suggested Citation