Lessons from the past should not be forgotten. When the stock market crashed in 1929, throwing the country into the Depression, it became apparent that many financiers had been pitching the public risky securities through fraudulent practices. Chief among them were “pump and dump” schemes. Through these manipulative moves, company insiders would take their profits from outside investors by selling them stock at artificially inflated prices. Congress found that such securities were “sold, not bought,” that is, they were aggressively marketed.
To prevent deceitful practices in that process, the lawmakers responded with two major pieces of financial legislation: the Securities Act of 1933 and the Securities Exchange Act of 1934. The first mandates that a company raising money from the public must file a registration statement with the U.S. Securities and Exchange Commission (SEC). To prevent investors from buying overpriced stock, its prospectus must truthfully disclose all financial and other significant information about the company and its securities.
