Section 5 of the Securities Act of 1933 is slowly dying. We have to be careful about making such a bold-sounding claim because Section 5 performs two distinct legal functions. First, it creates a presumption that offerings of securities using the facilities of interstate commerce have to be registered with the Securities and Exchange Commission. That is not the aspect of Section 5 that concerns us here, however. Our aim in our current research is entirely at the separate function that takes up most of Section 5’s statutory text: restraining the marketing of registered public offerings so that salesmanship does not run ahead of the mandatory disclosure that is supposed to inform investor decisions of whether to buy or not, often referred to as “gun-jumping.” This is a devolution we find interesting and insufficiently examined in legal scholarship. Our focus is entirely on the IPO, the paradigmatic form of issuer capital-raising, and not offerings by seasoned issuers.
We describe this as a slow death because it began almost as soon as the Act was passed. Section 5 started as a simple, rigid and coherent rule that limited sales efforts after the SEC had declared the registration statement “effective.” The industry found this impracticable and to some extent just ignored it, setting in motion two decades of negotiations as to a proper balance between the demand for pre-effective marketing and the concerns about gun-jumping. A legislative compromise, eventually reached in 1954, gave us the statutory language that is mostly still with us today.