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certain developments—developments of less than 25 lots. Now the significance of that decision is that even the antifraud provisions of the statute would not apply, if a particular promoter decided, for example, to set up subdivisions of 24 lots each.

Now, conceivably, if it represented a pattern, we might say that in fact he was engaged in selling more than 24 as part of a common plan and that all the operations were subject to the statute, but, the way the bill is drawn, neither the antifraud provisions nor the registration provisions apply to a single subdivision of less than 25 lots.

In the securities acts, there is a different pattern. The antifraud provisions—as distinguished from the registration provisions—apply whether there are 1,000 or 1. It doesn't matter. This is a basic feature of those statutes and, in this regard, this bill is different.

Senator MONDALE. In other words, under the Securities Act, even though a particular security is exempted from registration, yet the criminal sanctions still prevail for fraud.

Mr. COHEN. Not only the criminal sanctions, but other sanctions, which the courts have fashioned out of these antifraud provisions. In other words, the right to bring a private suit. I would think, for example, that, if this statute were passed, in appropriate cases, the courts would look to the developing law under the Securities Acts to provide remedies to individuals who may feel aggrieved in situations that are not subject to registration, as well as those subject to registration.

Now, the registered issues are, of course, subject to remedies spelled out in the statute, comparable to those provided in the Securities Act. But the point I make represents an important difference. I thought it was necessary to make that point, so that there would be no misunderstanding and the committee could then determine which path it would choose to take.

Senator MONDALE. Proceed.
Mr. Cohen. The third question presented is what agency should ad-

COHEN minister the bill, if enacted? While a new agency could be created for that purpose, this does not appear to have been seriously proposed and I doubt if the problem is of sufficient magnitude to make this necessary

However, in considering whether the Commission should administer the bill, if it is enacted, we are at something of a disadvantage. There are a number of other agencies, such as the Bureau of Land Management in the Department of the Interior, or the Housing and Home Finance Agency in the Department of Housing

and Urban Development, which have far more experience than we with real estate problems and the evaluation of lands and subdivisions, particularly unimproved lands. We, however, have some experience in this field since a fair number of securities offerings involve either interests in land or companies formed to invest or deal in land and other real estate interest. Other agencies, such as the Post Office Department and the Federal Trade Commission, have more experience with a broad spectrum of false advertising and consumer frauds. Consequently, if the bill were merely designed to prevent frauds in the sale of land, it could appropriately be administered by any one of these other agencies.



Fraud in the interstate sale of land is, however, speaking generally, now prohibited by the mail fraud statutes and consequently new legislation is probably not needed to accomplish that purpose alone. If, as the Subcommittee on Frauds and Misrepresentations Affecting the Elderly and the authors of this bill have concluded, there is, in addition, a need for mandatory disclosure supervised and enforced through the administrative process, then it must be recognized, albeit somewhat immodestly on my part that we have had substantial experience with that process.

Senator MONDALE. Mr. Chairman, would you permit me to ask a question at that point? I think you put your finger on a critical distinction here, that some of the witnesses have not fully emphasized and that is the distinction between fraud, that is, where a promoter affirmatively misrepresents a fact, which is so substantial and material that the buyer relies upon it and the promoter has intended to defraud the person, on the one hand, and the failure to disclose the salient fact, on the other hand, required by the purchaser to make a rational choice. Therefore, it is possible to escape the fraud laws entirely, and, yet, fail to disclose a fact, which, if it were known, would probably kill the sale.

Mr. COHEN. As a practical matter, I think the Senator is absolutely correct.

Senator MONDALE. The other point I would like to make on the question of which agency should administer is that I believe you are being a little modest, when you say that your agency has had substantial experience in the process of requiring disclosure of salient information; as a matter of fact, there is no agency in the Federal Government, or probably in the world, that has had more experience in this particular field than you.

Mr. COHEN. My mother always told me modesty was becoming.
Senator MONDALE. You do it


well. Mr. COHEN. Now, if the Commission were to administer such legislation, it must be recognized that costs would be entailed, the magnitude of which is very difficult to estimate. We would have to recruit personnel, trained and experienced in real estate matters, and probably would have to station them not only in Washington but in our field offices. How many people and how much other expense would be necessary is presently almost impossible to determine because we do not know, and I don't think anybody knows, precisely how many interstate sales of subdivision lots which would be subject to the bill would occur or how far we could go in relying upon State regulation. California, for example, has a well-developed disclosure scheme covering the public offering of subdivision lots in that State, and, as the bill would permit, we could probably rely largely on the California Real Estate Commissioner to supervise the interstate sale of California subdivision lots. This may also be true of New Jersey. On the other hand, other States do not have such well-developed controls and even where they do, these can be effective only where the land in question is located in the particular State. It is very difficult for any State to deal with a situation where land located in another State is being offered, perhaps by promoters in a third State.

I don't mean to suggest that the particular administrator may not issue a cease-and-desist order, but that does not stop the mail.' Because of these uncertainties, we cannot say how much it would cost to administer this bill. There certainly would be additional expense. Whether it would be relatively small or relatively large can be determined only by experience.

I would anticipate, however, that, in any report on this bill, that the committee will take specific cognizance of this fact and make such suggestions as may be appropriate to other committees having an interest in that matter.

Now, as the Senator knows, we did not ask for the job of administering this bill, and I must admit that, to do so, would in some degree divert our attention and energy from what, at least until now, has been our primary job, the regulation of the securities markets. Nevertheless, I do wish to assure the committee and the Congress that, if the Congress wishes us to do the job, we will take it on and do it to the best of our ability. We will attempt to carry out the congressional purpose effectively and economically and expeditiously.

Senator MONDALE. Mr. Chairman, if we were to couple this new authority and this responsibility with adequate additional appropriations for staff and so on, it would not in any reasonable or important way divert your attention and energies from your primary job?

Nr. COHEN. No, you are quite right.
Senator MONDALE. Would you go through the

Mr. COHEN. I will go through the explanation of the bill, as you have suggested.


As you know, many of the provisions of the proposed Interstate Land Sales Full Disclosure Act parallel those of the Securities Act of 1933. The bill designates the Securities and Exchange Commission to administer its provisions. Accordingly, this committee has asked that I briefly explain the provisions of this bill, and the procedures which we would expect to follow in its administration if it were enacted.

The basic prohibitory provisions of the bill are sections 4 and 17. Section 4(a) makes it unlawful for a developer or agent, as defined, to use interstate facilities or the mails to offer to sell or lease, or sell or lease, any interests in a subdivision unless a registration statement making specified disclosures with respect to the subdivision has been filed with the Commission and is in effect.

Now, although it is noted later in the document, it may be useful here for me to mention an additional amendment that we suggest. In the definition of "developer” in section 2(4) of the bill, we believe an additional clause should be added so that it would be expanded to cover any person directly or indirectly controlling, controlled by or under direct or indirect common control with any of the foregoing This is to avoid evasion through the ingenuity which we sometimes find attending efforts of some people who engage in activities of this kind.

Senator MONDALE. I think that is very important, Mr. Chairman, one of the attempted promotions for the sale of junk lands in Minnesota involved some undisclosed principals who fervently did not want to be disclosed, working through front men.

You have to know who is substantially in charge, who is in fact the main promoter.

Mr. Cohen. Our experience under the securities acts suggests that is a very important and necessary provision.

Now, while a registration statement is in effect, section 4(b) prohibits any developer or agent from using interstate facilities or the mails to offer to sell or lease, or to sell or lease, interests in any subdivision unless a statutory prospectus is furnished to the prospective purchaser at least 48 hours prior to entering into the contract to buy. Section 17 makes it unlawful for any developer or agent in the offer or sale or lease of any interest in a subdivision to make misleading statements, omit to state material facts, or engage in fraudulent practices. As noted, these basic prohibitions apply only to "developers” and “agents” and then only in respect of their selling or leasing activities in connection with subdivisions." These three terms are

act which is divided into 25 or more units or interests for the purpose of offer, sale or lease as a part of a common promotional plan. A "developer" is defined as a person who having an interest in land causes it to be divided into a subdivision, or acquires an interest therein, and who offers, sells, or leases interests in such subdivision.

As indicated, if the committee adopts our suggestions, it would also include any person who has a control relationship with the developer.

The term "agent” is defined as a person who represents or acts on behalf of a developer in respect of the disposition of an interest in a subdivision.

Further limiting the application of the bill are the exemptions provided in section 3. These are not only exemptions from the registration provisions; they exempt their subjects from all provisions of the bill. You will recall I adverted to this fact. Among the more important provisions contained in section 3 is an exemption for the sale or lease of real estate not pursuant to a common promotional plan to offer or sell 25 or more parcels of subdivided land. This provision would specifically exempt not only the sale by the owner thereof of a single property but would also apply to a single sale by a subdivider of an entire subdivision to another subdivider or developer.

I might note that while the securities acts obviously were drawn for the protection of the general investing public, they are also designed to protect professionals in the business from one another.

Senator MONDALE. Right, and this is one of the points that the record does not fully establish at this point but I think it is obvious that we want to protect the legitimate, ethical realtor who is in the business of selling in interstate commerce, and isn't it a factor that where the fraudulent and unethical are freely permitted to practice their techniques, that the ethical suffers.

Mr. COHEN. I don't want to overstate the position. There are provisions in this bill with respect to a subdivision subject to registration which would provide protection to a professional when he bought from another professional. What I am referring to here is a situation of a sale from one professional to another, which is not subject to the registration or antifraud provisions of the bill because of the all encompassing exemptions.

Senator MONDALE. I see.

Mr. COHEN. Section 3 also contains a specific exemption for the sale or lease of any improved land on which there is a residential, commercial, or industrial building or the sale or lease of land with respect to which there is a contract to erect a dwelling within a period of 2 years. Cemetery lots are specifically exempted as are intrastate offerings in which the developer, the subdivision and the persons to whom the interests are offered or sold are all located or resident within a single State.

Section 3 also grants the Commission authority to exempt by rules and regulations any interests in a subdivision where the aggregate selling price is less than $300,000. The Commission could, in implementing this provision, establish a procedure analogous to regulation A under the Securities Act of 1933 whereby a notification of offering and a simple offering circular are filed in the appropriate regional office of the Commission rather than requiring a full-scale registration.

Section 6 of the act sets forth the information required in the registration statement to be filed with the Commission. Section 8 specifies that the statutory prospectus, which is to be furnished to each prospective purchaser before the contract of sale or lease is entered into, shall consist of the textual portion of the registration statement, with exhibits omitted.

We do have a suggestion in this area, and I think I have already adverted to it in part, that is, to require a list of names and addresses of all persons who will serve as agents.

Among the more important items which are required to be included in the registration statement and prospectus are the names of all persons having an interest in the subdivision; the extent of such interests and the purchase price thereof; the legal description of, statement of the total area included in, and a map of the subdivision; a statement of the condition of the title, including all encumbrances; a statement of the selling price or rent; a statement concerning the condition of access, sewage disposal facilities and public utilities, the proximity of the subdivision to populated areas, and a statement of improvements to be installed by the developer and his schedule for completion; and such certified or uncertified financial statements for the developer as the Commission may require.

Section 5 of the act sets forth the procedure for filing a registration statement and closely parallels section 6 of the Securities Act of 1933. A fee of one-fiftieth of 1 percent of the maximum aggregate price at which the interests are proposed to be offered, which fee shall in no event exceed $1,000, is charged in connection with the registration.

Section 7 of the act governs the taking effect of registration statements and amendments thereto. Here again, it is similar to section 8 of the Securities Act of 1933. However, the period for the taking effect of the registration statement is 30 days after filing rather than 20 days as under the 1933 act. Further, section 7 specifically provides that the developer shall promptly file an amendment to the registration if any change occurs affecting any material fact required to be stated in the registration statement or which makes any such fact misleading. Such an amendment becomes effective on such date as the Commission may determine and if the amendment is of sufficient materiality the

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