Mr. Ross. I am quite certain that if the exemption were raised to $1 million it would help a lot more companies than the present $300,000 or the $500,000 for the reason, Mr. Chairman, that it is usually possible to obtain local financing in the small amount of $300,000 or $500,000. I think that is the reason that there have been only about 20 applications under regulation A. It would be of real assistance if the Commission would see fit to raise the limit to $1 million, because when you get past the $500,000, there are many more companies that need these funds but can't get them locally.

Senator WILLIAMS. Have you compared the costs of the methods of regulation A and regular registration?

Mr. Ross. I haven't for the purpose of this testimony. We have looked into that in the past and find that there is a substantial burden. There seems to be some difference of opinion, I have noticed, among the witnesses in prior hearings in the House, at least, on how much of a burden it is. I think it is substantial, and I believe the SEC testimony concedes that there is a substantial difference. I am not in a position to tell you statistically just exactly how much.

Senator WILLIAMS. How about cost comparison?

Mr. Ross. The costs of printing, I think, are quite substantial. Senator WILLIAMS. And attorney's fees, and accountant's fees. Mr. Ross. Attorney's fees and accountant's fees also make it substantially high.

Senator WILLIAMS. But you cannot give us, roughly, how much the average cost differential is?"

Mr. Ross. I am not prepared to do so. If you want us to survey the situation, we can do it; but at this point we have testified so many times it seems to be conceded, so I didn't go into that. Senator WILLIAMS. That is perfectly all right. much.

Thank you very

The final witness this morning is Mr. James W. Robinson, an attorney from New York. Glad to have you with us, Mr. Robinson. You may proceed in your own way.

Mr. ROBINSON. Glad to be here, and I will hurry it up and get you out in very quick order.

Senator WILLIAMS. We are not complaining about that.

STATEMENT OF JAMES W. ROBINSON, ATTORNEY, NEW YORK, N.Y.

Mr. ROBINSON. My testimony relates to S. 1178, particularly with the raising of the exemption, and the new civil and criminal liabilities.

Senator WILLIAMS. Could you give us just a word.on your background?

Mr. ROBINSON. I am an associate in a law firm in New York City which does a good deal of corporate work and corporate financial work. Is that sufficient?

Senator WILLIAMS. Is it your own firm?

Mr. ROBINSON. No, I am not a partner; I am an associate.

Senator WILLIAMS. What firm?

Mr. ROBINSON. Frueauff, Farrell, Shanley & Johnsen.

Senator WILLIAMS. All right.

Mr. ROBINSON. I would like to make two points with respect to raising the exemption. The first point relates somewhat to what was just

said. Whatever the situation may be with respect to ordinary financing, I think I can show that with respect to employee plans-and that is what I am talking about mainly here-it is much more advantageous and much cheaper to use a notification with an offering circular than a full registration with a formal prospectus.

Senator WILLIAMS. You spoke of employee plans?

Mr. ROBINSON. Employee stock plans that have to be registered because they are public offerings. Senator WILLIAMS. I see. Senator Javits has advanced the philosophy of getting ownership more broadly held in our companies. I know he did mention that people who work in a plant should have a share in the ownership of the plant.

I gather you are directing your attention now to this with the idea of making the opportunities easier for employees to share in the ownership.

Mr. ROBINSON. That is correct. The plan I just had as an example in front of me happens to be that type of plan. Whenever a corporation wants to establish and run an employee stock plan, as a practical matter, regardless of what the law may be, they have to get out an employee booklet-some kind of a booklet which will explain in easy terms to the employee what the plan is all about. They have to have that regardless of what other things they may have to have. When we use a notification and offering circular, as we have done, we can make the offering circular very simple to meet the requirements of the act and the Commission. We just need a few printed pages and we wrap it around our employee booklet which we have to have anyway, and there is our offering circular. You can see just by looking at it the printing cost is very minimal. The notification itself is a typewritten document, and the cost of typewriting is very small. A large part of the notification is the offering circular I just presented. So I can't see how we can argue that a full registration statement is about the same in cost as a notification, where it comes to employee plans. I think it is clear on its face that an employee plan can be offered much cheaper and much quicker and more practically with a notification.

The second point I would like to make is that when we do this we do not sacrifice any information to the employee. He gets full, adequate disclosure and is protected in every way that information can protect him. In this particular plan the employee can have his own contributions and the company contributions invested in one or two stocks of large companies listed on the New York Stock Exchange. If he says that he wants his contributions invested in stock A, the result is that he is treated as a stockholder in company A. He gets the notice of the annual meeting, he gets proxy statements, and he gets an annual report, which in this case happens to be 36 pages long, and he gets interim reports every quarter. Since this is a listed stock and since it is involved in financing all this material, it meets the standards of the Securities Exchange Act and since the stock is listed on the New York Stock Exchange, he gets the benefits of the rules and regulations of the New York Stock Exchange.

It also happens that this plan is exempt under the Internal Revenue Code and, therefore, he has all the protection that comes from operations in accordance with the code and the regulations. Em

ployers are very careful to see to it that they don't do anything which will lose their exemption under the code.

The same thing, of course, applies if he wanted to have his contributions invested in company B. He would get the same kind of materials for stock B.

I would like to made one other distinction between an employee plan and ordinary financing. And that is that the employee plan keeps going on year after year.

Senator WILLIAMS. This is an employee stock plan?

Mr. ROBINSON. That is the only kind that I think the SEC would be involved in, a plan where securities are issued.

Senator WILLIAMS. You are talking about employees. Now what is the

Mr. ROBINSON. You mean, how does that come into the Securities Act? The trustee buys securities, and the securities are held by the trustee, and eventually, under specified circumstances, the securities are transferred to the employee.

Senator WILLIAMS. This a pension plan?

Mr. ROBINSON. It happens to be technically a profit-sharing plan in this case.

Senator WILLIAMS. Oh, you are dealing with a specific case?

Mr. ROBINSON. It is not just one case; there are lots of them around. Senator WILLIAMS. And is the stock purchased by the trustee, the stock of the employer?

Mr. ROBINSON. It depends. In some cases it is, but it happens in this particular plan, it was the stock of the corporate stockholders of the employer. This is a special corporation. It is a petrochemical corporation set up by two large oil companies, and the employees have been transferred from the large oil company to this small petrochemical company. The two large oil companies have their own big plants, but this petrochemical company has a small plant, and the employees of the petrochemical company, many of whom were once employed by the oil companies, can invest in the stock of either or both of the large oil companies through the plan.

Senator WILLIAMS. Fine.

Mr. ROBINSON. And the interests in the plan are considered securities by the Commission.

I wanted to mention one point before I leave that, and that is that stock offerings, through employee plans, continue year after year. It is not like a financing case. Each year there have to be filings, and, therefore, the cumulative effects of having to put in these filings each year is substantial. Maybe if you look at it just for 1 year it may not be so much, but if the plan is continued year after year for decades, the saving would be substantial over a long period of time.

To move on to my second point, on criminal and civil liabilities. I would like to make three points in that regard.

The first is that customers of some underwriting houses won't buy unless a security is fully registered. I discovered that 3 or 4 years ago some of the small houses which had been using regulation A offerings stopped using them and apparently the reason for that was customer resistance. They were not able to sell the securities through a regulation A offering. In other words, the customers preferred full registration. When they had in front of them the question of whether they would participate or originate the underwriting, they asked

themselves: "Is this a large enough underwriting to justify the burden of full registration?" If it wasn't, they didn't handle it. If it was, they gave it full registration.

And these houses think that if these new additional civil and criminal liabilities become law that the offering circular's reputation would go up and that the customer resistance to offering stock through offering circular would be diminished.

The second point I would like to make is that I find, from those I interviewed, that underwriters do not seem to be very concerned about their own liabilities under the Securities Act. In other words, they look at a proposed issue almost entirely from a business point of view. If they like it from a business point of view, they are not too worried. I am talking about the reputable houses. They are not too worried about their own liability. Their name is on the offering circular or the prospectus; they feel they have to stand behind it. And for that reason, at least one of the officers I talked to would not have been concerned if these new proposed civil liabilities for nonissuers were extended to underwriters as well as to those who signed the notification and the issuer.

The third point I would like to make is that the largest underwriting houses never, or hardly ever, use regulation A. They won't say it so bluntly, maybe, but I think the reason is that they feel there is a possible risk of losing their reputation for a small issue. In other words, they are not convinced that regulation A is a sound way of offering the securities. It is just possible that if you insert these new civil and criminal liabilities that some of the bigger houses will offer securities through regulation A. I don't know, I just say it is a possibility. Of course, it is the bigger houses that have the money and that will help the small issuer. That is not confined just to the top underwriting houses. Other securities houses which have a substantial securities business, but maybe a relatively small part is in underwriting, also do not use regulation A and apparently don't think they will use regulation A. The example I have of that is Francis I. du Pont & Co. There is an advertisement which appeared in the Wall Street Journal which shows the underwritings in which they participated. This is a substantial amount of underwriting, but it is nothing like what the biggest houses engage in in the course of a year.

So the fact is that the biggest underwriting houses and moderate securities houses which have a relatively small amount of underwriting business do not use regulation A at all.

That is all I have to say.

Senator WILLIAMS. We are very grateful for this testimony. You have opened up a subject that has not been examined in these hearings, and it is good to have this testimony. It will be helpful later on. Thank you, Mr. Robinson.

Did you submit your statement for the record?

Mr. ROBINSON. Yes, sir.

(The material accompanying Mr. Robinson's statement follows:)

S. 1178, SECTION 3, SMALL ISSUES-EMPLOYEE OFFERINGS

Section 3 of S. 1178 would amend the Securities Act of 1933, as amended (the act), by raising the exemption provided by section 3(b) of the act from $300,000 to $500,000.

Among the beneficial effects of such an increase in the exemption would be the facilitation of the offering of small employee stock plans through offering circulars pursuant to regulation A.

As of June 1, 1959, approximately 20 of such plans were being offered pursuant to notifications of form I-A filed in the New York regional office and were enjoying the advantages of the exemption provided by section 3(b) of the act and regulation A of the rules of the Commission. The Commission, I understand, does not keep any central statistics giving the total number of employee stock plans filed and currently being offered under regulation A in all its regional offices, so the nationwide figures are not readily available.

Except as to offerings of not more than $50,000 which have no unusual features (rule 257) an offering to each employee under regulation A is effected by the distribution to him of an offering circular, which is part of a notification filed with the Commission (rule 255). The offering circular and notification are generally much less of a burden on an issuer than a prospectus and a registration statement. For instance, the offering circular with respect to an employee plan may consist of just a few small printed pages wrapped around the employee plan booklet. The booklet itself sometimes gives not only a comprehensive, detailed description of the plan, in conformity (in the case of exempt plans) with Treasury Department regulations, but also the full text of the plan, which is more than is required to appear in a prospectus forming part of a registration statement on form S-8 or form S-1. Since an employee booklet is necessary in any event, the few additional pages needed to meet the requirements for an offering circular are not overly difficult or expensive to prepare. Under one type of employee plan offered by an offering circular, employees can direct that their contributions be invested in U.S. Government bonds, series E, or in one or more of the stocks of the corporate stockholders of the corporation offering the plan. A plan of this type is often called an employee thrift or savings plan. The corporation offering the plan is basically the issuer, because it is issuing interests in the plan; but no money contributed to the plan is invested in the stock of the corporation offering the plan, so the offering corporation is not an issuer in the sense that it is issuing its own stock or obligations. If a participating employee directs that his contributions be invested in the stock of one of the stockholder corporations, he is treated under such a plan as if he were a stockholder of that corporation and receives its proxy material as well as its annual reports and interim financial reports. The stocks in which employee contributions to such a plan may be invested often are listed on the New York Stock Exchange; and if they are listed on any national securities exchange, the information which the employee gets is very voluminous and meets the standards set by the Securities Exchange Act of 1934 and Commission regulations thereunder.

From the point of view of protecting the employee there is really no need of offering such a plan under a registration statement and prospectus. The method of offering such a plan through an offering circular protects the employee as well as full and adequate information can protect him and substantially as well as if it were offered by a prospectus.

Nevertheless, under the present section 3(b) of the act the corporation offering such a plan will have to file a registration statement and offer the plan through a prospectus as soon as the contributions of participating employees exceed the relatively small amount of $300,000 a year. In my opinion it is unreasonable to require employers offering such employee plans to fully register them when they still are small operations and participants can be adequately protected under regulation A.

You are no doubt aware that corporate joint ventures are now quite common. An article, entitled "Corporate Ventures in Operation," which appeared in the January 1959, issue of "The Business Lawyer" attests to their significance. When two or more unaffiliated corporations, embarking on such a joint venture, create a new corporation to construct and operate plants or engage in a specialized activity, very often many of the employees of the new corporation have been transferred to it from one or more of its stockholder corporations. While such employees were employed by the stockholder corporations, they probably were members of employee plans through which on favorable terms they could purchase, directly or indirectly, the stocks of the stockholder corporations; and upon transfer to the new corporation they want some equivalent of the plan benefits which their transfers force them to give up. A plan which would enable them to purchase the stock of the new corporation would gen