Federal Deregulation of Small Issues of Securities: Rule 240

The fundamental purpose of the Securities Act of 1933 is the protection of the investor through the disclosure and distribution of information necessary to informed investment decisions. This disclosure is achieved through section 53 of the Act, which requires that, with certain enumerated exceptions, all issues of securities offered for sale to the public through the mails or other instrumentalities of interstate commerce shall be registered with the Securities and Exchange Commission. When filed, the registration statement becomes a public document setting forth all material facts about the offered securities and the issuer. No offer of securities is lawful until the registration statement has been filed, and no sale of securities is permitted until the registration statement becomes effective, usually twenty days after filing. Not every new issue of securities, however, must be registered. The Act exempts certain carefully defined issues in the belief that the protection afforded by registration is unnecessary. These exemptions are principally directed to small issues where either the limited volume of securities offered or the number and character of the offerees is thought to preclude the dangers attendant upon a large issue. The major exemptions have been the private offering, the intrastate offering, and the Regulation A offering. To these exemptions the SEC has recently added Rule 240. Because of the conditions around which it is structured, Rule 240 is the least restrictive of exemptions available to the small issuer. Accompanying the advantage to the issuer, however, is a potential danger to the investor through the effective deregulation of offerings within the purview of the Rule. The purpose of this Note is to examine the operation of the Rule and to suggest some of the problems incident to its administration.