Securities Acts: Requirements for Accounting | Research & Encyclopedia Articles

Companies issuing securities to the public are required to file registration reports and statements with the U.S. Securities and Exchange Commission (SEC) in accordance with the 1933 and 1934 Securities Acts. Such reports and statements are intended to provide accounting disclosure to the prospective investors. A company's first offering of securities to the public market is called an Initial Public Offering (IPO).

Registrants rely on specialists in accounting to meet the criteria of the Securities Acts. The chief accountant of the SEC is the principal accounting adviser with respect to difficult or controversial accounting issues. The office of The Chief Accountant is in charge of establishing, coordinating, and expressing SEC policy regarding Accounting and Auditing Standards. Communication is provided through the SEC Accounting Series Releases (Financial Reporting Releases).

The 1933 Securities Act requires that the registration statement be filed and accepted by the SEC before securities are initially offered for sale. The SEC does not evaluate the merit of the securities; it merely determines whether the disclosures provide sufficient information to the investment community.

The registration statement for an IPO consists of two principal components: Part I is the prospectus, an offering document to be distributed to prospective buyers; Part II contains supplemental information that is available for public inspection at the office of the SEC.

The SEC has adopted a revised framework for registration as part of the integrated disclosure system, whereby the form to be used by the registrant depends on the periodic reporting history and the nature of specific transaction events. In the case of an IPO, for example, Form S-L becomes the forepart of the registration statement and outside front cover page of the prospectus.

Disclosures on the inside front and outside back cover pages of the prospectus must provide the following information: summary of the securities offering, risk factors and the ratio of earnings to fixed charges, the use of proceeds, determination of offering price, dilution, plan of securities distribution, description of securities to be registered, and interests of named experts and counsel. The prospectus must also provide information related to the registrant, such as a description of business and property, legal proceedings, market price of equity and dividends, financial statements, supplementary financial information, executive compensation, and Management's Discussion and Analysis (MD&A).

Part II of the IPO covers other information not required in the prospectus, such as issuance and distribution-related expenses, indemnification of directors and officers, recent sales of unregistered securities, exhibits, and financial statement schedules. An accountant's consent is required for financial information to be included in this part.

The 1934 Securities Act regulates and controls the secondary securities markets and related matters and practices. This legislation also regulates the reporting and registration forms for the financial statements and audit requirements. The principal annual report to be filed by commercial and industrial companies is Form 10-K, which covers financial statements and supplementary data.

Form 10-K also includes information about the business, properties, legal proceedings, security holder voting, Management's Discussion and Analysis regarding financial conditions and operations results, and information about the elective officers of the corporation, their compensation, and their security ownership.

The requirements for Form 10-K are set forth by SEC Regulation S-X. Under this regulation, the balance sheets at the end of each of the two latest fiscal periods, as well as the income statements and cash-flow statements for each of the three latest fiscal years, should be filed within ninety days after the end of the fiscal year. The principal executive officer, the principal financial officer, the principal accounting officer (the controller), and a majority of the board of directors must sign the Form 10-K.

Issuers of securities registered under the 1933 and 1934 Securities Acts are required to file Form 10-Q for each of the first three quarters of the fiscal year within forty-five days after the end of each of the first three fiscal quarters of each year. Form 10-Q calls for financial information, such as a condensed financial statement, and also covers the following: Management's Discussion and Analysis, financial condition and results of operations as required in Regulations S-K and S-X; and special event reports occurring during the quarter, such as legal proceedings, defaults upon senior securities, and matters to be voted by security holders. Form 10-Q may be integrated with the quarterly stockholders' report if the combined report contains full and complete answers to all items required by Part I of Form 10-Q.

The SEC Division of Corporation Finance is in charge of reviewing registration statements as well as annual and periodic reports. It establishes standards for economic and financial disclosure by determining the nature of information required in the registration statements, reports, and other documents to be filed with the SEC. In addition, it enforces provisions with respect to securities offered for sale to the public, listed for trading on securities exchanges, or traded in the over-the-counter market. The Division of Corporation Finance is organized into twelve branches of corporate analysis and examination, covering approximately forty industry groups based on standard classification codes.

Preparation of the registration statements as well as related reports and documents may take three to four months. The lengthy timetable is governed by legal considerations. All parties in volved in the preparation, such as the accounting firm, attorneys, and other professionals, may be subject to civil and criminal penalties under the 1933 Securities Act for any misstatements or omissions.

The completed registration statement is submitted to the Division of Corporation Finance, where the statements are reviewed to determine whether the disclosures comply with the 1933 and 1934 Securities Acts. In cases where deficiencies are identified, the Division requests that the registrants complete or explain.

The principal forms identified in this section are intended to provide a convenient point of reference when only a general understanding of their purpose is required. Accountants, after consulting the registrants, should consider whether the company meets the criteria for the use of a particular form.

The forms required by the 1933 Securities Act include: S-1 through S-3, the general forms for registration; S-4, for business combinations; S-11, for estate entities; and SB-1 and SB-2, for small businesses. Form N-1 is used for open-ended investment companies; N-2, for closedended investment companies; N-3 and N-4, for insurance companies offering annuity contracts; and N-5 and N-SAR, for registered international investment companies.

Under the 1934 Securities Act, the principal forms required of most registrants are 10-K and 10-KSB, with the latter appropriate for small businesses. Other forms include 11-K, for employee stock purchase or employee option plans; 10-Q, for quarterly reports; 8-K, for certain significant corporate events reported immediately after the month in which event occurred; and 15, to terminate registration.

As a general rule, a foreign company intending to offer securities in the United States qualifies as a foreign private issuer, unless (1) more than 50 percent of its outstanding voting securities are held by U.S. residents and (2) either the majority of its executive officers are U.S. citizens or residents, or its business is administered or located in the United States.

Under Regulation S-X, foreign issuers are required to provide disclosures under U.S. generally accepted accounting principles (GAAPs). SEC Accounting Bulletin 88 (SAB 88) allows the foreign issuer to include U.S. GAAP disclosures in Management's Discussion and Analysis for information that is not required under its home-country GAAPs.

Form 20-F is the form most commonly used for the registration statement and for annual reporting. Foreign issuers are also required to furnish reports on Form 6-K instead of Forms 10-Q and 8-K, which are applicable to U.S. issuers.

For Canadian companies, Form 40-F has been adapted as part of the Multijurisdictional Disclosure System. Canadian firms may qualify to use Forms F-1, F-2, or F-3 for registering securities under the 1933 Securities Act, instead of the S-1, S-2, and S-3 forms applicable to U.S. companies. The SEC staff allows Canadian issuers to file on U.S. domestic forms (e.g., Form 10-K or 10-Q) prepared in accordance with Canadian GAAP's, as long as the requirements of Form 20-F are satisfied.

All forms described here are subject to change, so be certain to check with the SEC to keep current on reporting requirements.

Securities and Exchange Commision)

Murray, R. J., Decker, Jr., W. E., and Ditmar, Jr., N. W. (1998). The Coopers & Lybrand SEC Manual, 6th ed., Englewood Cliffs, NJ: Prentice-Hall.

Strategies for Going Public. (1998). New York: Deloitte Touche Tohmatsu International.

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