We know there are many, particularly in this type of interstate sales of some cases, only that we call junk lands who don't agree with

you.

Your response seems to be, let the States handle it. First of all, if the States are going to handle it, I think it is symptomatic of the problem that their national association has not even appeared here today. They have no position.

Secondly, there are serious jurisdictional problems that the States are trying to enforce the law. It is hard to reach interstate commerce with the proper type of legal procedure. When they deal through the mails or deal by use of the telephone it is very difficult for a State to find for itself the power needed to protect itself, protect the citizens.

What I am saying in my opinion is that I think I am glad to see that you are supporting this change embodied in S. 1364, but I believe there is an area of need here that you are not helping us satisfy, an area of need which your association will accept in the abstract, namely the problem of assuring that the prospective purchasers of these lots in interstate commerce shall be provided with the information they need to make a rational choice.

Will you comment on that?

Mr. WILLIAMSON. I want to make one statement. For one thing, Senator, I think that the promoters that we are talking about, the ones we are trying to reach, couldn't stay in business for a week if their incoming mail was impounded. They rely almost totally on the mails.

The second point I would like to bring

Senator MONDALE. Impounded for what, fraud?

Mr. WILLIAMSON. If the postal inspector finds probable cause that their literature has a material misrepresentation or misrepresentation of a material fact, without proving intent.

Senator MONDALE. What about failure of providing

Mr. WILLIAMSON. That isn't covered.

Senator MONDALE. Isn't the consumer many times in just about as bad a trap?

Mr. WILLIAMSON. Yes, that is true.

Senator MONDALE. What are we going to do about that?

Mr. WILLIAMSON. Let me take the other one. The SEC will require that the prospectus includes all material facts. We are talking about the unsophisticated investor, the elderly couple, the retired people, and I have had enough experience with the SEC to convince me that a prospectus would be almost worthless to an unsophisticated investor. Senator MONDALE. I think you have a good point.

Mr. WILLIAMSON. I have filed a registration statement on a simple real estate limited partnership and followed the law, item for item, and I get back 20 pages of deficiencies and by the time I end up with all of the financial statements and all of the information, I can't see how any unsophisticated investor would go beyond the cover page.

Senator MONDALE. I think you have a very good point. I think this is one of the main problems in this proposal, because the proposal assumes that once you provide the complicated prospecti to a customer he is going to understand it. I am not sure that is true.

They are required in stocks, and I don't think many people read them, and I think that is a basic problem, the fact that you are trying to accomplish directives of full disclosure.

Mr. WILLIAMSON. The witness from Oregon referred to the comfort to the prospective purchaser, knowing that the Government was protecting his interest. I don't think that he realizes what we are talking about, a disclosure statute, because the Government isn't going to protect his investment.

Senator MONDALE. I think this measure seeks to protect the consumer by providing him with the information, good and bad that a rational customer needs to make a wise choice. I think there are some problems here about how we achieve that objective. I think you have put your finger on a good one.

I had hoped that your association would help us solve that problem, help us solve the questions of exemptions and nonexemptions so we don't impose unnecessary administrative and costly procedures upon the dealers. Instead of opposing the concept, I don't think the State alternative from a practical standpoint is going to go very far to help here. These real estate problems have been with us for about 25 years, longer than that, and in recent years we have had a great deal of discussion about this.

We tried to do something about it in our State. I think we have gone further than most States, but we still recognize that it is not as adequate as it should be and we feel, at least I did when I was attorney general, we need some sort of Federal help.

Mr. ÉMLEN. Senator, I think this is a very important point you have raised about the defining exemptions and I think I certainly, as chairman of this committee, would like to see some more work done on that, and not just by changing the number from 5 to 25 or 50 or 300 or what, because these birds operate in all numerical levels, so it has to be something better than that for a definition.

Senator MONDALE. I think the committee would be most interested in any suggestions along that line.

Getting back to your point about the readability and understandability of a dull, long prospectus, would you consider it desirable to have a fair-comment section in the prospectus in which the SEC would try to inform the layman in language he could understand what some of the problems might be?

Mr. WILLIAMSON. You mean for the SEC to make comment on whether it is a good or bad investment?

Senator MONDALE. I think the committee would be most interested that the consumer ought to clearly see.

Mr. WILLIAMSON. I think it would be very dangerous. The last registration statement I filed with SEC involved a real estate syndicate and there have been a few real estate syndicates that have gone bad and many of them haven't, but I had the registration statement in a branch and there is a certain psychology that permeates many of the branches of the SEC.

If anything is going to go bad, they don't want it to go bad with the registration statement that went through their branch and I am convinced that every branch of the SEC would take a dim view of any speculative real estate venture, and if they had a chance to comment, then I am sure that the tendency would be that this is a bad deal, because they don't want a year or two from now, people to lose money, and then the finger is put on that particular branch for clearing the registration statement.

I think it is a dangerous area and I am sure that the SEC itself would not want to become involved in it. Appraisal is an inexact science and, as one of the witnesses said today, one person might think land is worthless and another person might think it is a good deal.

If the SEC had been in operation back in the 1860's, we may never have bought Alaska, because that was supposed to be a worthless real estate venture. I don't think that people in the SEC would be competent to render an opinion of whether something is good or bad as an investment.

Mr. EMLEN. Or want to be put in that position.

Senator MONDALE. So this is a problem that can't be solved?

Mr. WILLIAMSON. I am afraid that it can't. The people make good investments and they make bad investments. Even in the mutual funds, and that is not only subject to disclosure, but it is a regulated industry, and

Senator MONDALE. Do you think you help your case much by comparing the normal commercial real estate business or the normal commercial mutual business, stock business, with what we are trying to get at here? Isn't it perfectly obvious from this Golden Palms case, and that Brazil case, that we are dealing with outrageous indefensible commercial practices and, in the light of that, can't you help us shape something to meet it? Doesn't it put your real estate association in a very bad light to just be so relaxed about this outrageous practice which results in swindling of hundreds of Americans, and opposing measures that just aren't going to meet the problem?

Mr. WILLIAMSON. I don't know of any developer-El Rancho, or Paradise Shorts, or Rocket-that ever would have made any money if postal authorities were able to move in, because those people aren't going to attract buyers by omitting facts. They are only going to attract buyers by misrepresenting facts, and I think in every one of those publicity ventures, in every one, there was a misrepresentation of a material fact.

We would like to see the postal authorities have a chance to correct this problem by changing the law before we go into a more drastic remedy.

Senator MONDALE. I agree that the postal laws ought to be strengthened, but isn't it perfectly obvious that there is a large area short of fraud where through subleties, through failure to provide information, not an affirmative misrepresentation of fact, just a failure to mention it, which, to take the Golden Palm example, they weren't lying when they, in most of their sales pitch, they just failed to mention that it was a flood reservoir. It is not fraud.

It might be some extreme that in a long criminal trial you could prove that they had a duty to mention it, but that is a very tough, long hard case. They just failed to tell anybody that it is a very nice location for a home, it just floods from time to time.

Don't you think that there should be some requirement somewhere that they affirmatively state salient facts that any reasonable purchaser would want to know and any decent realtor would surely provide? Do you think there are any members of your association that would resort to a scheme like Golden Palms?

Mr. EMLEN. I doubt it.

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Senator MONDALE. I don't think so either. In Minnesota, our State association helped us shape and adopt our real estate measure. theory was disclosure of all of the facts.

Mr. EMLEN. Senator, I would like to say one thing in response to your comment. My testimony says, I don't think we have been relaxed. Whether we agree with this proposed legislation or not, we nevertheless have been working for a long time through our license laws committee, and some darned dedicated men have been working to try to get our 50 States to adopt statutes to cover this the way California, New Mexico, New York have, and we are going to keep on working to try to get the rest of the States to adopt these, and maybe raise this to a felony level in all States, so extradition could be resorted to so that we could really pull those boys in from other States when they get out of line.

I think it is a matter of approach here, not what the desired end is. We couldn't agree with you more as to the seriousness of the situation. Mr. WILLIAMSON. Senator, there is one very technical point that I would like to call your attention to. On page 4, in exempting the sale of security and issues by real estate investment trust regulated under any State and Federal statute, there is a question whether or not real estate investment trusts are regulated. I don't think they are. They are subject to disclosure statute, but that is different than regulation. So I think that you probably mean subject to the Securities Act of 1933 or any Federal securities law.

Senator MONDALE. I appreciate your comment there, and we will review that section in light of that observation.

Do you have any others?

Mr. WILLIAMSON. That is the only one. I just noticed that because we worked on the Real Estate Investment Trust Act.

Senator MONDALE. Thank you, Mr. Emlen and Mr. Williamson. We appreciate your testimony here.

Is there anyone in the room representing the National Association of Community & Land Developers?

Mr. Cooper was scheduled to testify today. I understand he has left a statement which we will include at this point in the record. (The statement follows:)

STATEMENT OF JOHN A. COOPER, PRESIDENT, NATIONAL ASSOCIATION OF
COMMUNITY AND LAND DEVELOPERS

The National Association of Community and Land Developers is a non-profit association organized under the laws of the State of Delaware in February 1966. Among the principal objectives set forth in our Articles of Incorporation are:

1. To unite in common organization those professionally engaged in the real estate development business, community developers, and others interested in real estate and in the general welfare of the United States of America from the standpoint of the development of its natural resources. 2. To formulate and maintain ethical standards for the guidance of its members in their relations with each other and with the public. We who are engaged in the industry of community and land development have felt for some time that there is a need for the type of association which we have organized. This feeling on our part was, and is, prompted by the fact that we are a part of an industry which is annually investing millions in the development of America's greatest natural resource-land. We feel that our industry has a moral and civic obligation to police itself in all of its dealings, particularly in its dealings with the general public upon which it depends in order to survive

and prosper. Many of us in the community and development business have our lives and substantially all of our material means invested in our companies and we assure you, Mr. Chairman, we are vitally interested in the future of our industry.

We believe that the future of our industry requires that we as industry members take affirmative action in establishing a high level of business practice within our industry and by so doing, protect the general public, our customers. While our Association is still relatively new and we do not speak for the entire industry, our membership does, however, represent a major segment of the total industry and includes members from all major land development areas.

With the foregoing explanation, we would like to state our position on Senate Bill 2672. We sincerely thank the Chairman and the other member of this Subcommittee for the opportunity to appear before you. At the outset, we want you to know that we are in sympathy with appropriate public regulation and supervision of our business, but we do have strenuous objection to the supervision and control as proposed in the bill now under consideration. It is obvious that this bill to control the interstate sale of real estate has been patterned after the Securities Act of 1933, Title 15, Section 77 (a) et. seq., U.S.C.A. We are cognizant of the application of the Securities Act of 1933 to the sale of certain oil and gas interests and to real estate and related financing. However, the Securities Act of 1933 is primarily legislation covering corporate stock and other securities, and we hasten to add that it is most effective legislation in the area for which it was written and passed by the Congress. We suggest that because legislation is effective legislation as to securities does not mean that similar legislation is the answer for the regulation and control of interstate land sales. For example, in some of the states in which our members operate, we are required to furnish a prospectus, similar to the prospectus required by Senate Bill 2672, to every prospective purchaser. This requirement imposes an enormous additional expense upon the developer without, in our opinion, aiding the prospect in his understanding of the transaction. Why is this? We have concluded that to the average corporate stock purchaser, the prospectus has meaning because it fits the item of sale and purchase of an intangible. By the same token, the “one time purchaser," which is generally the case with the purchaser of real estate, a tangible asset, evidences little interest in the prospectus because it does not fit the item of sale and purchase.

The members of this Association firmly believe that the sale of land is not a security and that it is not in the public interest to so treat or regulate it.

Also, we question the advisability of placing the supervision of interstate land sales under the Securities and Exchange Commission. We do not pretend to speak for the Securities and Exchange Commission, but it is seriously doubted that its personnel will be enthused about the additional duties imposed upon it if S. 2672 is enacted, since control of interstate land sales is entirely foreign to the functions which the Commission has performed since its creation. We submit that the staff of the Securities and Exchange Commission is eminently qualified in the field of securities but is not qualified in the area of community development.

To ask the SEC to undertake the responsibility of administering the proposed bill will entail the creation of a large new bureaucratic apparatus, duplicating the existing State regulatory bodies. Such additional public expenditure will, in our opinion, not yield the beneficial results hoped for by the sponsors of the bill.

We would like to call attention to the fact that at the present time numerous States have legislation imposing supervisory control as to land sales made to residents of the particular State. In addition, other states vigorously regulate land developers where their properties are located. It is suggested that under such circumstances Federal regulation, regardless of the Department under which it may be placed, would result in the imposition upon the industry and the public, of an additional cost to support a Federal bureaucracy which by reason of the State supervision aforesaid, is of doubtful value to the purchaser and will usurp the powers of the several States.

Frankly, we believe our objections to S. 2672, which are myriad, are predicated upon a basic difference in understanding of the problem involved. The persons who drafted S. 2672 have approached the problem on the basic premise that interstate land sales are securities, and the problem can be solved by the adoption of legislation applicable to securities. We, in the industry, cannot