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Mr. Davis. Well, as I understood Mr. Purcell, he did not intend that those figures should apply to a group of small issues only.
Mr. YOUNGDAHL. No.
Mr. Davis. And I do not know what the figures are that he might want to present as to a group of issues of $1,000,000 or less than that on the average.
Mr. YOUNGDAHL. I understood that the information on this chart that was furnished, giving 39 issues, was a basis for this calculation. Am I correct in that?
Mr. Davis. I think that is true.
Mr. YOUNGDAHL. In looking over this chart I find 39 issues, with 29 issues over and above $500,000, many running into millions of dollars and only 10 below $500,000.
Mr. Davis. Yes.
Mr. YOUNGDAHL. Then woud you say that that would be a fair basis of determining cost on issues below $500,000 ?
Mr. Davis. First, Mr. Youngdahl, you see, I am not familiar with that chart. I have not studied it; but generaly speaking, I do not think that would be a fair statement of the costs of issues of $1,000,000 or less.
Mr. YOUNGDAHL. Based upon an issue of $500,000, the cost of registration would run considerably over that amount, would it not?
Mr. Davis. That is the best of my information; yes, sir.
Let me promptly call attention to the fact that this proposed amendment is in the area of agreement between industry and the Securities and Exchange Commission with one exception; namely, the Securities and Exchange Commission has agreed that the amount of permissive exemption may well be increased from $100,000 to $300,000, whereas industry insists that the amount should be increased to at least $500,000. And let me add that a very considerable proportion of individuals from the industry believe that the amount ought to be increased to $1,000,000.
And now let us analyze the proposed amended section 4 (b). The essential parts of this analysis resolve themselves into three phases as follows.
(a) First, the so-called exemption is taken out of section 3—the exempted securities classification—and is placed under section 4 the exempted transaction classification. This removes from the provision every possible implication that the exemption provided for under this provision is or will be based upon any inherent quality of the security. That removes one possible element of misunderstanding and wrongful inference.
(6) The revised language makes it very clear that such exemption is from the registration requirements of section 5 and nothing more. It is thus made very clear that any such exemption does not remove the transaction so exempted from the civil or criminal penalties against fraud. Although the present provisions of the act with respect to such exemption still retain the penal and civil liability provisions in the event of fraud or deception, it is not so clearly stated as to be readily understood and recognized by the average layman. With the adoption of this amendment there would still be applicable to the securities transactions involved (a) the criminal penalties provided in section 24;. (b) the civil liability under section 12; and (c) the injunction provisions under section 20. The injunction section
enables the Securities and Exchange Commission to stop any transactions amounting to fraud or deception without waiting until the situation reaches the proportions warranting criminal proceedings.
The question then really resolves itself into this: ( a) Would the proposed amendments be in the public interest ? and (6) would the law with the proposed amendments afford protection of investors?
Certainly no argument is necessary that any amendment which reduces or permits or leaves a way open for reduction of costs, saves time and removes deterrents to honest business is in the public interest. I think this committee and the Congress will take that for granted.
Will the act still afford investor protection if these smaller issues are exempted from the registration provision, under appropriate rules and regulations? My answer definitely is “Yes."
Section 17 of the act makes it unlawful for any person, in the sale of any security, including a transaction which might be exempted from registration under this act, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to employ any device, scheme, or artifice to defraud or to obtain money or property by means of any untrue statement of a material fact, or to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchasers. These are strong inhibitions and section 24 of the act makes any violation of these inhibitions punishable by fine not to exceed $5,000, or by imprisonment no more than 5 years, or both.
And under section 12 of the act the purchaser of any security, exempted as well as non-exempted, sold by the use of any means of interstate commerce or of the mails, by means of a prospectus or oral communication which includes an untrue statement of a material fact or omits to state a material fact, has the right of civil action against the seller, unless the seller can prove that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission. I do not believe that the amendments to section 12, which industry and the Commission are prosposing, substantially weaken this liability.
So, to summarize, investors are protected in the case of the sales in exempted transactions as provided :
(1) By the criminal penalties of the statute applicable in case of fraud and deceit, or the obtaining of money or property by means of any untrue statement of a material fact, including the omission of a material fact.
(2) By the civil remedies through suits at law or in equity.
(3) By the application of the injunctive process at the instance of the Securities and Exchange Commission where the situation warrants it.
Every State in the Union, except one-Nevada—has a securities law in some form designed to protect the public against fraud in the sale of securities. These laws generally are efficiently administered and effectively enforced. It is a sound and legal presumption, of course, that laws of the State or States in which the securities are being offered must and will be complied with. There are no exemptions from compliance with the State laws by reason of requirements of or compliance with any provision of the Federal laws, and the States have not seen fit to relinquish their jurisdiction over matters taking place in the State with or without compliance with the Securities Act of 1933.
In his testimony early in these hearings Commissioner Purcell very aptly explained that the Securities Act of 1933 is not a “blue sky” law. Herein lies a material distinction of fundamentals. The fundamental objective of State “blue sky” laws does not stop with full disclosure of material facts. Administrative officials may, and in certain instances are, required to take other steps beyond any requirement of full disclosure. To illustrate, many State laws provide that in the case of a promotional issue of securities where a portion of the securities of the class to be offered for sale have been issued for such intangibles as promotion, contracts, organization expenses, promoters' compensation, and so forth, the securities thus issued or to be issued are required to be placed in escrow and withheld from the market and without sale to anyone until the issuer has, through actual operation, demonstrated a prescribed minimum earning capacity. This is required notwithstanding full disclosure and is a measure of protection not afforded by the Federal act. It is also a protection much more applicable to the smaller issues than to the larger issues. In reality, a great deal of protection is afforded through requirements in the State "blue sky” laws which is not afforded through the Federal act.
I want to emphasize that the exemption which would be afforded by the proposed amendment is not mandatory but permissive. That is, it will be entirely up to the Commission to decide to what extent and on what conditions the exemption shall be made available. The draft section says that the Commission may exempt these small issues “by rules or regulations, to such extent and subject to such terms and conditions as may be prescribed therein."
Of course, it is to be expected that the Commission will use this exemptive power—it will probably not take the position that it will not confer an exemption which the Congress has intended to be granted. It is also to be expected, however, that it use the power to impose "terms" and "conditions” in such a maner as to provide adequate protection for investors.
A brief survey of what the Commission has done under the present $100,000 exemption will illustrate this point. The present exemption, like the proposed exemption, is discretionary with the Commission, which has the power to impose any terms and conditions it finds desirable. During the first few years of its administration of the law, the Commission promulgated very complex rules dealing with the $100,000 exemption. The requirements as to what had to be filed with the Commission in order to obtain the exemption varied with the type of the security, and varied greatly. In the case of certain types of issues, very full information had to be filed with the Commission and included in a prospectus; in the case of other types, the requirements were less rigorous.
More recently the Commission has eliminated these differing requirements. Without attempting to cover all the various stages through which the $100,000 exemption has passed, let me describe the present procedure with respect to issues exempted from registration when the offering to the public does not exceed $100,000. This procedure is set out in the Commission's regulation A, which became effective on December 9, 1940, and it applies in the case of all issues under $100,000 except oil and gas royalties. The
Commission's rule No. 222, which is part of regulation A, requires that no offering of securities under the exemption shall be made until 24 hours after a letter of notification has been filed with the Commission giving, among other things, the following information:
(1) The full names and complete mailing addresses of (A) the issuer; (B) all directors and officers of the issuer; (C) the person or persons by, on behalf of, or for the benefit of whom the offering is to be made; and (D) each principal underwriter.
(2) (A) The title of the securities proposed to be offered; (B) the principal amount of evidence of indebtedness or the number of shares or other units proposed to be offered; (C) the price per unit at which they are to be offered to the public; (D) the aggregate amount at which they are to be offered to the public; and (E) the aggregate amount at which ‘all securities of the issuer have been offered to the public within 1 year by the person or persons filing the letter of notification. Where securities are to be offered “at the market” the information required by (C) and (D) shall be given upon the basis of the market price as established by bona fide sales made within a reasonable time prior to the date of filing the letter of notification.
(3) The approximate date of the proposed public offering:
(4) A list of the jurisdictions, that is, the States, Territories, the District of Columbia, or foreign countries, in which it is proposed to sell the securities. No securities shall be offered in any jurisdiction not mentioned in the original letter of notification until a supplementary letter stating the name of that jurisdiction has been filed. However, a statement that all or part of the offering is to be made by use of the facilities of a securities exchange-naming the exchange—shall suffice as to the place in which the securities are to be offered.
(5) If the securities are to be offered by, on behalf of, or for the benefit of the issuer, the purposes for which the net proceeds from the securities are to be used.
As will be seen from the above-quoted provisions of regulation A, disclosure of pertinent information is still required to be made to the Commission, which is thus placed in a position to act to prevent or punish fraud. The difference, however, is that the information required by regulation A is such that it often may be furnished in letter form by the officers of the issuer without employment of attorneys, specialized accountants, and other experts, and without journeying to Washington.
I think it hardly appropriate to suggest inserting in the record a complete copy of regulation A. It is a very common document, in general use, and for that reason, I doubt if it would be necessary to ask that it be put in the record.
Now, let us assume that corporation A, or its officers or directors, should wish to sell some securities and also wish to sell the securities in more than one State. In order to secure the advantage of an exemption under this permissive provision, it would be necessary to give to the Commission the notice and the information specified under regulation A, including copies of any prospectus intended to be used in connection with such sale. The Commission is given notice of intention to sell, the character of the securities to be offered, the name and location of the issuer, and other facts which poses."
would enable the Commission to follow closely the future acts with respect to the proposed offer and sale. The Commission has adopted, and very properly so, the practice of giving notice to the State Commissioners of the States in which it is proposed that such securities be sold. It would be no great difficulty for the Commission to give notice of all such proposals to all the States simultaneously. The States thereby are afforded the opportunity of knowing what to expect and they can immediately ascertain whether the requirements of their own statutes have been met.
I have told you what the Commission's regulations now are as to the $100,000 exemption, Bear in mind, however, that those are the only present regulations which the Commission, at present and under the proposed amendment, has power to change at any time. If the exemption is increased to larger figure, it is entirely possible that the Commission will find it in the public interest to ask more inforination from at least certain kinds of issuers.
The purpose of the Securities Act of 1933 as expressed in the preamble is to “Provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof and for other pur
This should obviously be done without burdening honest business any more than is necessary. Are not the penalties of the law coupled with requirement of notice of intent to sell, nature and character of what is to be sold, names of the parties wishing to sell and the States in which they propose to offer for sale, sufficient to assure truthful statements of all facts material to a full and fair disclosure, except in the case of the man who will violate any law and who will never be stopped until he is in jail? Whenever the law is made to function to accomplish the purposes intended, then the law has fulfilled its purpose. Government and governmental agencies must not become wedded to formalities or to a particular process when a more facile and less expensive process is found sufficient. It is no argument that the existing provision of the law is more convenient to or less burdensome upon the Commission or its staff—the public interest is the controlling factor.
Most securities issues of $500,000 or less in amount, or even of $1,000,000 or less, are sold locally, or sectionally, that is, within the confines of one State or two or three adjacent States at the most. The size of the issue does not justify broader distribution economically or as a practical matter." The State laws are ample and sufficient to guard the public as to such local distribution if merely supplemented as to interstate transactions by the information required under regulation A—and by such further information as the Commission may see fit to require.
On page 17 of its report on the proposal for amendments to the Securities Act, the Securities and Exchange Commission states that the evils of high-pressure salesmanship and selling on the basis of inadequate information are particularly prevalent in small issues. Without doubt, in the past high-pressure selling was all too prevalent. But a number of happenings other than the act of registration of the security have worked against that evil-such as registration of dealers under the Securities Exchange Act of 1934, the fair-practice rules of N. A. S. D., the Commission's power to punish fraud, and so forth. And unless an inadequacy of information amounts to failure of full