the amounts which have been registered and the amounts concerning which information has been filed with the Commission-the figure approximates $120,000,000 a year. Secondly, the evils of fraud, inadequate disclosure and high-pressure salesmanship Mr. WADSWORTH. Just a moment, again. Mr. WADSWORTH. One of your assistants gave me a table. Mr. WADSWORTH. Which sets forth the issues starting at $100,000, up to $249,999, and from $250,000 up to $500,000. Now I am not sure what period of time that covers. Commissioner PURCELL. It covers the last 4 years, Mr. Wadsworth. Mr. WADSWORTH. The number up to $500,000 in those 4 years was 601, if my arithmetic is correct; but I do not have the total of the issues, so I cannot figure the average size. You can give that later? Commissioner PURCELL. Yes; surely, we shall be glad to. Summarizing my second point was that fraud, inadequate disclosure, and high-pressure salesmanship are particularly prevalent in small issues. Third, small issues are generally somewhat more speculative than large issues and, therefore, the necessity for complete disclosure is greater. Fourth, the small issue problem is not only a problem of expediting the flow of capital to small business but also expediting the flow of capital to promoters, controlling stockholders, big business, and professional security racketeers. RAISING EXEMPTION LIMIT WOULD INCREASE RISKS TO INVESTORS It seems to us that it is very significant that the investment bankers have never undertaken to deny the fact that the use of fraud and deception in small issues is more frequent than in larger issues. The entire emphasis of those who propose that the exemption limit be raised, is based upon the fact that there will still remain some sanctions within and without the act to protect investors, sanctions which, in the opinion of the Commission, are wholly inadequate. It is the considered opinion of the Commission that the protection which would remain if the registration provisions should be dispensed with is not sufficient to prevent a vast increase in the losses which would be incurred by investors. Mr. WADSWORTH. It may be that the number of fraudulent transactions in the so-called small issues is larger, but I doubt if the sum total of money lost is larger than in the great issues. Commissioner PURCELL. If you had Mr. WADSWORTH. I have painful recollections, not personally, but of some of my friends, having Kreuger & Toll. Commissioner PURCELL. In other words, if you had the same number of large and small issues, your point is that dollarwise, the result of the fraud would be greater in the larger issues. Mr. WADSWORTH. Yes. Commissioner PURCELL. Here, however, the proposal is that in a field where the sale of the security is most susceptible of the use of fraud and has been demonstrated to be such, it is proposed to relinquish it in that very field. In the President's message to Congress on March 29, 1933, recommending the enactment of securities legislation, he stated: This proposal adds to the ancient rule of caveat emptor the further doctrine "Let the seller also beware." It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence. The disclosure principle advocated by the President was enacted in the registration provisions of the act. With respect to a large portion of securities issues the proposed exemption would-and this is important in view of the espousal of this provision by the Investment Bankers Association-to a great extent eliminate underwriters' liabilities altogether. These proposals boil down to this-investment bankers and dealers seek to shift to others or to elimnate entirely, as a practical matter, the responsibility of reasonable investigation and truthful disclosure in the areas affected by the exemption. Not only would they have the responsibility of determining informational minima shifted to others, they also wish to avoid responsibility under section 11 for the truth and accuracy of such information as is furnished. We feel that these responsibilities are now properly placed and should remain there. It seems to us self-evident that when an issuer has to file a registration statement for the examination of a Federal body before making an offering of securities, that issuer is going to be very careful that he does not stray too far from the truth in his statements. His is a far different position from an issuer who can try out his scheme on the investing public with a fair chance that he can get away with it. We must, therefore, take sharp issue with the statements made by Mr. Arthur Davis to the effect that the liabilities under section 12 and the possibility of injunctive or criminal proceedings because of a violation of section 17 are an adequate substitute for registration. LACK OF POWER IN BLUE SKY COMMISSIONS One other argument has been advanced by the proponents of the amendment to raise the exemption, namely, that the protection afforded by the State blue-sky commissions will be sufficient to protect investors. A great many of the State commissions are doing excellent work, and I do not wish my remarks to carry the implication that I am critical of the work of blue-sky commissions generally. However, I would be less than frank if I did not point out to you that certain restrictions on the jurisdiction of even the best blue-sky commission present it from being fully effective in protecting investors. When it is recalled that the inability of the States to cope with the problem of interstate securities distribution constituted one of the major reasons for passing the Securities Act in the first instance it seems astounding that the investment bankers should now argue that the 1933 act, on which the State commissions heavily rely, can cope not only with the issue of less than $100,000 but also with issues up to $500,000 or $1,000,000-and this in the face of the established fact that the vast majority of the issues of less than $100,000 and probably all of the registered issues are sold in interstate commerce. The sugges tion that most of the issues which would be affected by the proposed increased exemption would be sold locally is pure fiction and ignores the realities of security distributions. The most flagrant type of security fraud is generally carried on by remote control, so that the seller will be out of reach of the authorities in the States in which purchasers are solicited. That type of issuer may well refrain from selling at all in the State where he is in fact located in order that there may be no jurisdiction of him there, either. Thus we have seen the sale of questionable tung-tree promotions in the Southern States centered very largely in the Chicago area and, conversely, a large portion of western mining speculations are sold in the Southeast. Obviously the recipients of selling literature in distributions of this character have no way of determining the facts. They must rely on the literature itself. If it is false, their only recourse is a lengthy and expensive lawsuit against a defendant who may be hard to find and who, more than likely, is judgment proof even if located. The saddest part of the picture is that the recipients of the literature which promises easy fortunes in far-away ventures are usually the least informed and worldly wise elements of our investing population-the individual who has saved from his earnings a small amount for retirement, the widow who has been left a small estate by her husband, or the retired professional man who is trying to live on a reduced income-who are no match for the cleverly written invitation to embrace the opportunity of a lifetime. The local blue-sky commission may be able to catch up with a few of the local salesmen, but it cannot get at the heart of the problem-the source of the securitieswhich is really one of the principal reasons why the Federal securities legislation was enacted. SMALL ISSUES NOT LOCALLY DISTRIBUTED It has been stated before this committee that small issues are generally locally distributed. That statement, incidentally, is incorrect and in conflict with the statements which have been filed by the issuers themselves with the Commission under our present rules for exemption. Under those rules, you will remember, an issuer is required to give notice of the States in which he intends to make an offer, and an overwhelming majority of the statements which have been filed with us under that rule covering issues of $100,000 or less have indicated that the offering is intended to be made in more than one State. BLUE SKY COMMISSIONERS OPPOSE THE PROPOSAL I think it is fair to assume that nobody is better acquanted with the problem of relegating these issues to State control than are the State commissioners themselves. In this connection I should like to read brief excerpts from two letters which the Commission has recently received from State commissioners. Mr. Clarence H. Adams, director of the securities division of the office of the bank commissioner of Connecticut, the agency in charge of the enforcement of the blue sky law of that State, stated: I am firmly of the opinion that much fraud exists in the distribution of small issues and, therefore, feel that the present exemption of $100,000 is the maximum exemption that should be enjoyed when such conditions are taken into con- sideration. While it is probably true that many of the issues which would come within the scope of the exemption would be local in character, nevertheless, as evidenced by recent reports of letters of notification filed with the regional offices of the Commission, it is clearly demonstrated that a majority of such issues are sold in several States and are, therefore, difficult if not impossible, for State authorities to regulate. Mr. Edward M. Dougherty, commissioner of the division of corporations in the State of California, wrote as follows on November 17 of this year: It is my understanding from you that a question is under consideration by the Congress of the United States of raising the exemption from $100,000 to $300,000 or $500,000. Based upon my experience as the Administrator of the Corporate Securities Act of the State of California for approximately 14 years, it is my carefully studied conviction that there should be no exemption. My judgment is predicated upon the basic subject of whether or not regulation is needed. It is assumed that it is needed for the protection of the investor and particularly for the protection of the small and needy investor. Therefore, it is difficult for me to understand what difference it makes to an investor whose funds the Government is endeavoring to protect in a measure whether the company is capitalized for a very nominal sum or is the largest corporation in the world. I have read only parts of these two letters, but I am submitting the entire letters for inclusion in the record. (The letters referred to are as follows:) STATE OF CONNECTICUT, Re proposed amendments to the Securities Act of 1933. Washington, D. C. GENTLEMEN: Upon reviewing the report of your Commission, dated July 7, 1941, concerning proposals for amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the report on conferences with the Commission and its staff by representatives of the Investment Bankers Association, the National Association of Securities Dealers, and the New York Curb and Stock Exchanges, there appears to be one provision which is of particular interest insofar as the State of Connecticut is concerned. That provision relates to the proposed amendment to section 3 (b) of the Securities Act of 1933, which would increase the present exemption from registration of issues of securities from $100,000 to an amount proposed by the industry of $500,000. It is noted that the Commission feels that an exemption up to $300,000 instead of $100,000 does not seem unreasonable, provided certain safeguards are enacted. The securities laws of this state have been administered by myself since July 1, 1931, the effective date of our act. I am also a member of a committee of the National Association of Securities Commissioners to study State and Federal legislation. During the past 10 years this department has conducted numerous investigations involving the sale to the public of small security issues. As a result thereof, I am firmly of the opinion that much fraud exists in the distribution of small issues, and therefore feel that the present exemption of $100,000 is the maximum exemption that should be enjoyed when such conditions are taken into consideration. While it is probably true that many of the issues which would come within the scope of exemption would be local in character, nevertheless, as evidenced by recent reports of letters of notification filed with the regional offices of the Commission, it is clearly demonstrated that a majority of such issues are sold in several States and are therefore difficult, if not impossible, for State authorities to regulate. As I view the present Securities Act of 1933, it merely requires truthful disclosures of all material facts concerning the securities offered, and most certainly any issuer seeking a bid for public funds in excess of $100,000 should, in my opinion, be required to comply with such provisions. While it is probably true that there are certain expenses in connection with the quali fication of issues, nevertheless I am firmly of the opinion that any such burden placed upon the issuer is more than offset by the protection afforded investors. Our recent investigation of the affairs of the Vanco Co. of Manchester, Conn., clearly demonstrates that, had this company been required to comply with the Securities Act a fraud would not have been committed. This company sold or issued during the past few years securities totaling approximately $168,000 and did not at any time furnish investors with a financial statement or any other information, but continued to pay dividends while the company had little or no business and was being continuously operated at a loss. When the sale of the stock of this company was brought to our attention an immediate investigation was made. During our investigation the death of the president was caused by taking hydrochloric acid, and his agent was sentenced to a long term in State's prison for violation of our Securities Act. In view of all the foregoing, therefore, I trust that the proposed amendment to section 3 (b) of the Securities Act of 1933 is not enacted and that issues in excess of $100,000 will be required to be fully registered in accordance with the terms and conditions of the Securities Act of 1933. DEAR MR. JUDY: This letter relates to your inquiry made of me regarding my views on the subject of exemptions in connection with registration of security issues with the Securities and Exchange Commission. It is my understanding from you that a question is under consideration by the Congress of the United States of raising the exemption from $100,000 to $300,000 or $500,000. Based upon my experience as the administrator of the Corporate Securities Act of the State of California for approximately 14 years, it is my carefully studied conviction that there should be no exemption. My judgment is predicated upon the basic subject of whether or not regulation is needed. It is assumed that it is needed for the protection of the investor and particularly for the protection of the small and needy investor. Therefore it is difficult for me to understand what difference it makes to an investor whose funds the Government is endeavoring to protect in a measure whether the company is capitalized for a very nominal sum or is the largest corporation in the world. From a practical standpoint a governmental agency can police a small percentage of exempted companies. However the larger the percentage of companies financed by public offerings the more difficult it would be for any governmental agency to police the field of exempted companies. If it is the well considered judgment of our law makers that relief should be furnished from burdensome governmental regulation, it is my carefully considered opinion that_simplified registration for these companies is the answer and not exemption. You are at liberty to transmit this information to any interested party as the above-outlined opinion has long been publicly expressed by me repeatedly. Yours very truly, EDWIN M. DAUGHERTY. BETTER BUSINESS BUREAUS OPPOSE THE PROPOSAL Commissioner PURCELL. Last April we asked the National Association of Better Business Bureaus for their attitude on the proposal to increase the exemption to $500,000. As you all know, the betterbusiness bureaus serve an important function in discouraging fraud of all kinds and encouraging sound business ethics. Mr. Robert J. Bauer, who is president of the National Association of Better Business |