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throughout the country have a real interest in the matter. And the public as a whole also has a real interest in seeing to it that the investment banking organization is not destroyed. While we have a selfish interest in the matter, it will, I think, become fully apparent as I proceed with my testimony that a principle of great importance is involved in our proposal wholly transcending any selfish interest on our part.

The importance of the term “public offering” and the need for a statutory definition, as suggested in the proposed section 2 (14), arises from the use of the term in section 4 (1) of the present act, which exempts "transactions by an issuer not involving any public offering." It exempts such transactions from the requirement that there be filed with the Securities and Exchange Commission a “registration statement" disclosing information as to the securities which are to be sold. If a transaction is a transaction by an issuer and does not in fact involve any public offering, the issuer is not required to file a registration statement and the disclosure provisions in the act, with their attendant civil liabilities, do not apply. I refer to the civil liabilities imposed by section 11 of the act.

But what is a transaction "not involving any public offering”? The act as it stands today is silent on this point. The term was not defined in the original statute and has not hitherto been defined by any amendment. While the Securities and Exchange Commission has authority to define “accounting, technical and trade terms” pursuant to the present provisions of section 19 (a) of the 1933 act, there has been some doubt whether this power is broad enough to enable the Commission to define the term "public offering" as used in section 4 (1). Whatever its authority the Commission has not hitherto undertaken, by rule or regulation, to define the meaning of the term “public offering.”

It is instructive to note as to this, that House Report No. 85 of the first session of the Seventy-third Congress, in discussing securities and transactions to be exempted by sections 3 and 4 of the bill which became the present act, states it to be a "prima facie requirement that every security and transaction not specifically exempted by the terms of the bill should be kept within its scope." That is at pages 6 and 7 of House Report No. 85 of the Seventy-third Congress.

Again, in discussing the provisions of paragraph 1 of section 4, the House report observes that it, “exempts transactions by an issuer, unless made by or through an underwriter, so as to permit an issuer to make a specific or an isolated sale of its securities to a particular person, but insisting that if a sale of the issuer's securities should be made generally to the public that that transaction shall come within the purview of the act." That is at pages 15 and 16, House Report No. 85 of the Seventy-third Congress.

While it was the intent of the act as passed by the Congress that the exemption from registration and disclosure should be available only in the case of certain isolated transactions, the Securities and Exchange Commission shows in its annual report, presented to the Congress under date of January 3, 1941, that about $2,700,000,000, principal amount, of securities was sold by issuers to insurance companies and other direct purchasers in the course of the 5 years preceding the date of the report without meeting the disclosure requirements of the act. The issuers concerned were permitted the privilege of exemption from registration on the theory that no "public offering" was involved.

But, surely it is impossible to conceive of any transaction or series of transactions involving this vast sum of money-$2,700,000,000— which did not involve investment of the funds of the public.

Yet the figures published by the Commission probably understate the facts.

I have here a compilation, table A.
(Table A referred to is as follows:)

TABLE A.—Corporate securities sold in transactions exempted from Securities

Act registration as not involving any "public offering" from 1933 to 1940, inclusive

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1933 1934. 1935 1936 1937 1938 1939 1940


$21, 610,000 $74,483, 000 $96, 093, 000
73,987, 300 317, 138, 000 391, 125, 300
92, 105,000 285, 229, 100 377, 334, 100
29, 511,000 299, 295, 500 328, 806, 500
206, 285, 000 626, 119, 700 832, 404, 700
270, 425, 000 557, 475, 250 827, 900, 250
250, 151, 540 1,306, 038, 595 | 1, 556, 190, 135
944, 074, 840 3,465, 779, 145 4, 409, 853, 985
78. 59


Percent of total direct financing..

1 This refers to dealers who have acted as agents in placing securities for issuers.

Mr. STEWART. This compilation, gentlemen, shows that in the 8-year period from 1933 to 1940, $4,409,853,985 of securities were sold, as stated here, in transactions treated as exempt from the Securities Act on the theory that no "public offering” was involved.

I especially invite your attention to the way in which the amounts have increased.

When we look at the year 1933, we see that there were no such sales.
We look at the year 1934, and we find a total of $96,093,000;
For the year 1935, the total is $391,125,300;
For the year 1936, $377,334,100;
For 1937, $328,806,500;

For 1938, we notice a great increase in the dollar volume of investments sold in direct placements. It has risen to $832,404,700.

For 1939, the total is substantially the same, $827,900,250. When we come to 1940, we find that the total has jumped to $1,556,190,135.

All of these securities were sold in transactions which were said not to involve any public offering. Because of this, and in a limited number of cases because of other exemptions—but the other exemptions are of less importance and relate only to a relatively small amount of securities-these securities were sold without making public disclosure of the important facts concerning each issue which are required to be made public through registration when a new offering is made through an underwriter, acting as principal, or when under the theory which has hitherto been followed by the Commission in the administration of the act, there is said to be a "public offering."

I should make it clear that there is no single source from which information can be obtained with respect to the volume of corporate securities sold by issuers without registration under the Securities Act of 1933. Information contained in the tables which I am presenting and in the compilation which I now submit has been taken or derived from the Commercial and Financial Chronicle, Poor's Insurance Co. Holdings, Poor's Insurance Co. Purchases and Sales, Keane's Institutional Holdings, and from various other sources. Owing to the privileged nature of the transactions involved, it is impossible to obtain complete information relating to such direct financing.

Issues maturing within 3 years or less have been regarded and assumed as bank loans rather than security issues and for this reason, they have not been included in the figures relating to this financing contained in this compilation.

Moreover, railroad securities were not included if they were purchased direct by persons in competitive bidding against others, including dealers or underwriters.

This figure aggregates $4,409,853,985, and represents 24 percent of all the new financing-of all of the refunding and new capital financing—by corporate issuers in the United States during the 8-year period under review.

In the year 1940 more than 43.5 percent of all corporate financing bypassed the Security Act.

I invite your attention to the figures contained in table D. (Table D above referred to is as follows:)

TABLE D.-Percentage relationship between corporate securities sold as exempt

from registration and total domestic corporation and foreign? financing

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1 Bonds of foreign issuers payable in United States dollars and registered under the Securities Act of 1933.

Mr. STEWART. I have some smaller copies of this table, which I think may be more easily readable. I will have them submitted to you.

Mr. BOREN. While you have paused there, in line 7, on page 10, I notice the term "not more than one person, and I do not have the original act before me. Is “person" defined in the original definition as an individual, or what does that include?

Mr. STEWART. It includes corporations, Mr. Boren. The term “person” is defined in section 2 (2) of the Securities Act.

Mr. BOREN. That was my recollection. Then, a corporation would be a person?

Mr. STEWART. That is right, sir.

Mr. BOREN. So that if one corporation were buying the total output of an issuing corporation, they would be exempted under the provisions in line 6 and 7 on page 10!

Mr. STEWART. That is true, Mr. Boren. The Securities Act, in subsection (2), defines “person” to mean “an individual, a corporation, a partnership, an association, joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof."

Mr. BOREN. That was my recollection. It brings up this thought, just as a result of a casual examination of this section.

It does not make it clesr then whether the purchasing corporation under this exemption could not in turn become a selling corporation of those securities?

Mr. STEWART. No; it does not, Mr. Boren. That exemption is a complete exemption; the proposed exemption, rather. Where any single indivisible security is purchased by not more than one person, exemption from the registration requirement of the act would be complete.

The reason for that, in our proposal, is to avoid taking into the scope of the registration requirements mortgage loans on single pieces of property acquired, say, through the mortgage department of an insurance company.

I think it was intended in the very beginning, by the original act, that a transaction of that kind should not come within the purview of the act.

Mr. BOREN. I can see good reason for the exemption; but it appears to me that, probably not as a matter of practice but as a matter of possibility, that there is certainly an open gate there for a firm to become a purchasing and selling agent.

Mr. STEWART. Well, there is; yes. Except for this reason, Mr. Boren: The whole theory behind these exemptions is that there shall be that the purchaser to buy for investment and not with a view of distribution. In other words, if the buyer is buying as an underwriter, with a view to the immediate resale of the securities, the exemption would not be available.

Of course, there is this loophole: If he, in good faith buys today with a view to holding the security for investment and then, because of some event occurring tomorrow, or a week from tomorrow, or a month from tomorrow, he, in good faith, changes his mind but can establish his original intent was, in good faith, to buy for investment, then he is free to resell without any registration. That is one of the weaknesses of the present act.

Mr. BOREN. Well, I understand, of course, from the evidence had here, and I presume that as a matter of practice that this probably is not something you think would likely occur.

Mr. STEWART. Well, it may occur. I do not know. If the exemption is utilized chiefly for the purpose of acquiring mortgage loans, or chiefly for the purpose of acquiring single issues of securities by a single buyer who really intends to hold them for investments

Mr. BOREN (interposing). You would not want to count on a good faith and intent as the sole matter to take in the course of a regulation of this kind, would you?

I do not think that this is particularly important, but in reading it, it appeared to me there is definitely an open gate if as a matter of fact anybody saw fit to use that gate.

I would think that as a matter of practice, such evasion or intent of the law would not be engaged in, but I do not think there is any guaranty at all to prevent such a thing.

Mr. STEWART. I certainly would not question for a moment the good faith of the purchaser in such transactions. But most of these buyers are acting as trustees for others. They are not acting for themselves, with their own money; and it seems to me that there would be a duty resting on them, if they should learn of any facts showing that the securities which they had purchased were not a desirable investment, or not ones which they should hold for investment of the funds of the people whose money they are administering, to attempt to get rid of any such security by selling it to others.

Mr. BOREN. If there was an advance in the market and an opportunity for profit to the trustee, there is nothing to keep them from changing their mind and it might be that in their judgment they are obligated to make that profit and to utilize this gate for the purpose of making those sales.

Mr. STEWART. There has been very little—as measured by the total amount of securities purchased, there has been very little reselling; but there has been some, and it is conveivable that if conditions changed in some industries there might be a great deal of selling.

There have actually been sales in which the purchaser made a profit. Whether the making of the profit was a determining factor in the sale, I cannot say; but the profit in some instances has been what would be regarded as a tidy profit in most parts of the world, and that element has been present in the situation.

The purpose of table D [indicating] (table D appears in the record at page 366 is to relate the amount of securities sold without registration to the total amount of domestic corporate financing and of financing through issues of foreign dollar bonds, which has occurred in the United States.

As is seen on referring to column No. 2, there was a grand total of $19,084,734,470, dollar amount, of domestic corporation and foreign bond issues in all financing in the United States from 1934 through 1940.

And here in column 4 [indicating] we have this other total which is the total dollar amount of bond issues in all domestic corporation and foreign financing. The aggregate is $16,911,428,639.

In other words, here we segregate bond issues from total financing, and we get a total of $16,911,428,639, dollar amount, of bond issues.

Then here in column 1 [indicating] we have the total of “issues placed directly" and here the total amount of issues placed directly by issuers with investors. In column 1 we find that ($4,409,853,985), divided by column 4 ($16,911,428,639), showing that direct purchases accounted for 26.08 per cent of all corporate bond issues during the period of vears 1934 to 1940, inclusive.

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