The best protection for the small investor is for the Commission toinvestigate before the issues are sold, so that they will not be offered tothe public on the basis of misleading information. Assuming a $100,000.000 sale of such issues in the next 3 years-a conservative enough estimate the expense involved in registration is only around $850,000,. and is well worth the security it would give many thousands of small investors, since the other expenses attributable to registration would normally be incurred in the ordinary course of flotation. We therefore believe that it would be contrary to the spirit of the law and to the best interests of the investing public to raise the exemptive limit above the present $100,000 level. We feel the Commission erred in agreeing "to test the appropriateness of exemptions within the area up to $300,000." It played into the hands of the industry in doing so, since raising the present exemptive limit to any degree opens the way to dangerous practices. In point of fact, the Commission really agreed with our major conclusion when it said that "there are undoubtedly certain types of securities as to which the Commission would feel that any exemption in excess of $100,000 would be contrary to the public interest." We must remember that most small issues by their very nature are speculative common stocks. For that very reason the present permissive character of the Commission's rule under which nonregistered issues are offered to the public should be made an integral part of the law. Leaving the point dangling in the air by making the exemption permissive makes it necessary for the Commission to take the initiative in formulating rules which can be challenged in the courts. By writing into the law the requirement that all issues must be registered, Congress can see to it that every issue, no matter how small, is examined by the Commission before it is sold to the public. We hope that in your deliberations you will pay considerable attention to the need for registering all small issues. The investor who buys them will need the protection you can give him even more in the immediate future than in the past few years. For correctly or not, the feeling is spreading among many small investors—andTM this feeling is being constantly stirred by securities salesmen-that inflation is inevitable and that equity stocks are the best hedges against future inflation losses. This atmosphere will make the United States a happy hunting ground for sucker specialists, unloading speculative stocks on the public, unless at least the present safeguards contained in the law are maintained. We submit for the record a series of tables which the American Investors Union has prepared showing the break-down of expenses by size of issues, the number of issues between $250,000 and $1,000,000 which were floated in 1938 and 1939, the amount of money involved in the flotation of such issues, and a schedule of stop orders, consentrefusal orders, and withdrawal orders issued by the Commission from: September 1, 1934, to June 30, 1940, on issues below $1,000,000.. (The tables referred to are as follows:) Securities Act registration statements as to which stop orders, consent refusal orders, and withdrawal orders were issued Sept. 1, 1934 to June 30, 1935: Per appen- Total.. Break-down of expenses by size of issues of securities proposed for sale by issuers IN 1938-ISSUES $250,000 TO $499,999-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 IN 1938-ISSUES LESS THAN $1,000,000-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 Percent Percent Percent Percent Percent 1.483 1.858 256 . 119 2. 130 .010 2.396 8.490 .010 1. 427 11. 174 IN 1939-ISSUES $250,000 TO $499,999-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 IN 1939-ISSUES LESS THAN $1,000,000-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 Analysis of amount of issues under $1,000,000 proposed for sale by issuers IN 1938-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 IN 1939-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 Analysis of number of issues under $1,000,000 proposed for sale by issuers IN 1938-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933) IN 1939-ISSUES EFFECTIVELY REGISTERED UNDER THE SECURITIES ACT OF 1933 STATEMENT OF WILLIAM B. PUTNEY 3D, OF PUTNEY, TWOMBLY & HALL, COUNSEL FOR THE COMMITTEE ON THE REEMPLOYMENT OF MEN AND MONEY, OF THE COMMERCE AND INDUSTRY ASSOCIATION OF NEW YORK, INC. The CHAIRMAN. Mr. Putney. EXEMPTION OF SMALL ISSUES Mr. PUTNEY. Mr. Chairman and members of the committee, small issues of securities by small companies present one of the most serious problems under the Securities Act of 1933. Obviously, many are more speculative than large, well-established companies. It is undoubtedly true that the evils of high-pressure salesmanship and of inadequate and inaccurate disclosure are more prevalent in the sale of small security issues. On the other hand, there are, in great preponderance, innumerable soundly managed and worthy small businesses in need of additional capital, whose securities would be honestly sold by honest dealers if the companies were not deterred from offering their securities for sale to the public by the visible and invisible costs of registration. NEED FOR CAPITAL These small companies represent the backbone of the Nation's business. They are, in the aggregate, the largest employers of labor and the most productive of national income, and they most need additional funds to carry on and to expand their business. These are the companies which during the past decade have most urgently sought new capital, while the big companies, the issuers of so-called seasoned securities, have devoted themselves principally to refunding and paying off their debts. Thus the Commisison found, in its study of the sales record of unseasoned registered securities, 1933-39, that in the case of the issuers of unseasoned securities nearly three-fourths of the proceeds of the securities sold were used for new money purposes; that is, for plant equipment and working capital. The Commission said, at page 15 of its report: The high porportion of net proceeds designated for new money purposes and the low proportion designated for debt retirement formed almost the exact converse of the record established for seasoned issues registered under the Securities Act. DIFFICULTY OF SELLING SMALL ISSUES In recent years it has been extremely difficult to sell the securities of a new venture or of a small growing enterprise or of a corporation whose securities have been closely held. The Commisison itself has stated at pages 2 to 4 of its report on the sales record of unseasoned registered securities, 1933-39, that The difficulty of selling unseasoned registered securities is indicated by the fact that less than one-fourth of the amount registered actually was sold. * * * Four hundred and ninety-seven (of the companies studied) were new ventures, and these sold only 15.2 percent of the amount registered. The 260 growing concerns, by contrast, sold 39.9 percent of the amount registered. * * * It is noteworthy that over a period of approximately 61⁄2 years only about $100,000,000 of unseasoned registered securities actually were sold, or an average of around $15,000,000 a year. COST OF REGISTRATION This difficulty of selling the securities of new ventures and small enterprises has a direct and important bearing upon registration costs, to which I shall refer in a moment. In his testimony last Wednesday, Mr. Purcell indicated that registration costs generally represent but a small percentage of the amount of the securities registered as proposed for sale. No doubt he will present further statistics indicating that even in the case of small issues the cost of registration, while considerably higher proportion 74947-42-pt. 2-19 ately than in the case of large issues, are still but a small percentage of the amount of the securities registered. In the light of such statistics the consistent complaint, which is the dominating theme of the letters and answers to his questionnaires received by Representative Wadsworth from hundreds and hundreds of businessmen all over the country, that the costs of registration are too high and too burdensome, seems most surprising. Why is that, Mr. Purcell can say with obvious sincerity, that registration costs are insignificant, while business executives with equal sincerity unanimously charge that they are excessive and sometimes prohibitive? There are, I think, several reasons for this, and they stand out most sharply and clearly in the case of the small business company and the new venture. In the first place, the businessmen are thinking in terms of dollars and cents, while the Commission is thinking in terms of abstract percentages. The businessman who is obliged to spend ten or twenty or fifty thousand dollars to defray the costs of registration finds little consolation in the thought that those thousands of dollars pouring out of the company's treasury are only one-half of 1 percent of the amount of the securities being registered. To the extent that this expenditure is caused by unnecessary detail, unnecessary duplications, and unnecessary complexities in the registration process which have no bearing upon the protection of investors, it represents money wasted so far as the businessman is concerned. THE GAMBLE OF REGISTRATION In the case of the small company the situation is most serious. The passages from the Commission's report which I have quoted attest most eloquently to the difficulty of selling the securities of the new venture and of the small, little-known company. It has been brought out clearly in these hearings that it is practically impossible to obtain a firm commitment by an underwriter to purchase an issue of securities, large or small, before registration is substantially completed. Consequently the new venture and the small-growing enterprise, if they wish to offer their securities to the public, must assume all the costs of registration without any assurance that they will be able to recoup these expenses through the sale of their securities. Indeed, the Commission's report from which I read just a moment ago-shows that the odds are about 7 to 1 that the new venture will not be able to sell its securities and nearly 22 to 1 that the small going concern will not be able to sell its securities. The hazards of this gamble are increased by the fact that these companies usually urgently need additional working capital and additional cash, for otherwise they would not be seeking to sell their securities, and by the fact that the costs of registration, if not recovered, will seriously deplete, and sometimes exhaust, their already insufficient working capital and cash resources. Consider for a moment the situation of a small company whose growing business requires additional working capital to carry increased inventories and accounts receivable. It must pay out from five to ten thousand dollars to register its securities for sale without any assurance that they will be sold. If they are sold and it receives the proceeds, all will be well. If, however, they are not sold, the company will find that it has seriously cut down and perhaps ex |