Bureaus and who is connected with the Los Angeles organization, stated that without consultation he could not express an official opinion on behalf of the association, but let me quote him: It is my personal horseback opinion that an increase to exempt from registration issues of securities in excess of $100,000 would materially reduce the protection now afforded investors. Mr. Bauer asked some of the local better-business bureaus for their comments on the proposal. As a result, we received directly from three better-business bureaus letters, all of which are opposed to any increase in the exemption. Again, let me give you brief excerpts. The Better Business Bureau of Fort Worth, Tex., wrote: * * the Better Business Bureau of Fort Worth, Inc., desires to go on record as being opposed to any further exemptions. While this Bureau has the utmost sympathy for any regulation that will further the liquid flow of securities, our experience in handling investor inquiries and complaints in close cooperation with the Fort Worth regional office of the Commission indicates that the vast majority of issuers that take advantage of the exemption clause are purveyors of unsound securities which result in loss to investors. Therefore, we believe that a further extension of this exemption would not be in the public interest and would decrease the effectiveness of the administration of your Commission for the purpose for which it was established, namely, the protection of investors. Mr. WADSWORTH. Do you believe, Mr. Purcell, that the vast majority of issuers would take advantage of that exemption by selling unsound securities? Commissioner PURCELL. I have no way of appraising that. An increased exemption, however, would expand tremendously the area within which it would be easier to sell all securities, sound or unsound, without adequate disclosure under appropriate sanctions. Mr. WADSWORTH. The intimation is that in rather close cooperation with you that he got that Commissioner PURCELL. No, sir; I beg your pardon. He says "our experience in handling investor inquiries and complaints in close cooperation with" the Commission. Mr. WADSWORTH. Continue. Commission PURCELL (reading): indicates that the vast majority of issuers that take advantage of the exemption clause are purveyors of unsound securities which result in loss to investors. Mr. WADSWORTH. What is your own observation? Commissioner PURCELL. My own personal observation, such as it has been in that line, is that it is true that a great many of them are. The Better Business Bureau of Scranton, Pa, has this to say: We definitely feel that the $100,000 limit for exemption should not be increased. The Tulsa, Okla., Better Business Bureau says: Our feeling is that the exemption now allowed should not be changed and that if it were changed, it would surely deprive investors of much of the protection now afforded under this act. We feel $100,000 is still a lot of money and that any organization, seeking more than this amount from the public, should not only be compelled to furnish all the information requested by the Securities and Exchange Commission but should welcome the opportunity of presenting it. Also, that any expense involved in the process of registration is of secondary importance to the protection of investors' funds, who, we believe, are entitled to every possible safeguard. I submit photo copies of these four letters for insertion in the record. (The letters referred to are as follows:) NATIONAL ASSOCIATION OF BETTER BUSINESS BUREAUS, INC., Mr. CHESTER T. LANE, Washington, D. C. DEAR MR. LANE: Thank you for calling to my attention current proposals to amend section 3 (b) of the Securities Act of 1933. This is a matter of real interest to the National Association of Better Business Bureaus, and I am placing it upon the agenda for consideration at our June conference. In the meantime I, of course, cannot voice an official opinion on behalf of the association. It is my personal horseback opinion that an increase to exempt from registration issues of securities in excess of $100,000 would materially reduce the protection now afforded investors. Is it likely that Congress will consider the proposal amendments before late summer? If it is, and if it seems desirable that you obtain expressions from individual bureaus, let me know and I will communicate with them on the subject. It would be more satisfactory, however, to consider it at our conference. DEAR MR. LANE: On April 29, you addressed a communication to Mr. Robt. J. Bauer, president of the National Association of Better Business Bureaus, Inc., relative to the attitude of the Better Business Bureau concerning the proposed plan to amend rules and regulations authorized by section 3 (b) of the Securities Act of 1933 to permit exemptions from registration of securities issues in excess of the present exemption of $100,000. Mr. Bauer placed this matter before the individual better-business bureaus in order that they might make individual comments on the subject if they so desired. Availing ourselves of this privilege, the Better Business Bureau of Fort Worth, Inc., desires to go on record as being opposed to any further exemptions. While this bureau has the utmost sympathy for any regulation that will further the liquid flow of securities, our experience in handling investor inquiries and complaints in close cooperation with the Fort Worth regional office of the Commission indicates that the vast majority of issuers that take advantage of the exemption clause are purveyors of unsound securities which result in loss to investors. Therefore, we believe that a further extension of this exemption would not be in the public interest and would decrease the effectiveness of the administration of your commission for the purpose for which it was established, namely, the protection of investors. DEAR MR. LANE: Mr. Robert J. Bauer, president of the National Association of Better Business Bureaus, has forwarded to us a copy of your recent communication to him relative to recent proposals which have been made regarding the matter of amending the Securities Act of 1933 in order to permit the exemption of issues of securities larger than the present minimum of $100,000. We were particularly interested in the third paragraph of your letter, in which you point out that, although the fraud provisions of the act would not be affected by the change, any increase in the exemption would deprive investors of the protection which is now afforded by registration under the act. We heartily concur in this opinion, and therefore we definitely feel that the $100,000 limit for exemption should not be increased. We know it to be a fact that questionable stock promoters operating in Pennsylvania have frequently studied the Pennsylvania Securities Act for the purpose of acquainting themselves with exemptions, and then limited the amount of their stock issues in an endeavor to come within exemptions. Consequently, we feel that any increase in the exemptions would enable fraudulent stock promoters to at last begin to unload larger issues of doubtful securities upon the public and might make it possible for them to reap a larger harvest before the fraud section of the act could be brought into effect. As you undoubtedly know, fraudulent promoters are frequently able to unload rather large amounts of questionable securities upon innocent investors before their activities are brought to the attention of proper authorities, and consequently any increase in the exemptions would magnify this hazard. Consequently, we feel the Securities and Exchange Commission should take this phase of the matter into serious consideration before taking any action relative to increasing the exemptions under the Securities Act of 1933. DEAR MR. LANE: A copy of your letter to Mr. Robert J. Bauer, president of the National Association of Better Business Bureaus, has been sent to us. We appreciate the opportunity of commenting informally on this proposed amendment, as we believe it is a matter in which the Better Business Bureaus have a very real interest. Our feeling is that the exemption now allowed should not be changed, and that if it were changed it would surely deprive investors of much of the protection now afforded under this act. We feel $100,000 is still a lot of money and that any organization, seeking more than this amount from the public, should not only be compelled to furnish all the information requested by the Securities and Exchange Commission but should welcome the opportunity of presenting it. Also, that any expense involved in the process of registration is of secondary importance to the protection of investors' funds, who, we believe, are entitled to every possible safeguard. Yours very truly, BETTER BUSINESS BUREAU OF TULSA, INC., Commissioner PURCELL. On this point, in summary, I would call to the attention of the committee the fact that it is not only our opinion, the opinion of the Commission, but also of these State agencies and better business bureaus, who have so much local experience, that raising the exemption would in some inevitable measure open the door to fraud at the expense of the investors. COST OF REGISTRATION OF SMALL ISSUES Now, I want to turn to what the effect of the present provisions are on small business. That is the question of costs and delay. Under the last point I purposely laid emphasis on the dangers to investors from fraudulent securities distributions and the extent to which those dangers would be accentuated by lifting the limit on the exemption. The argument is presented that the registration requirements which may be necessary for such issuers are at the same time so burdensome both in cost and in delay that they stifle the effort of legitimate small business to raise capital. If it is demonstrated, as I believe we can demonstrate, that the present registration requirements do not impose an unfair burden on legitimate small issues, then the last vestige of the argument in favor of increasing the exemption to $500,000 is destroyed. I understood Mr. Arthur Davis to state the other day in a reply to a question by Congressman Youngdahl that small issues are subjected to the same registration expense as large issues. I think that either Mr. Davis must have misundertood Congressman Youngdahl's question or I may have misunderstood his reply. Of course, that cannot be so. Mr. YOUNGDAHL. May I interrupt there, please? I just read that testimony this morning, and I do not think you got the full answer. He said that except inasmuch as the small issuer did not have to furnish as much information as the larger issuer, and that cost would be saved. Commissioner PURCELL. I certainly missed that. Mr. YOUNGDAHL. I just read the testimony this morning. Commissioner PURCELL. Thank you very much, Congressman. Of course, it is obvious that the expense of registering small issues is naturally less than for large issues. The expense of investigation, of auditing, of lawyer's fees, and of printing is tremendously smaller for a small, simple corporation than it is for the larger enterprise with a complicated corporate structure Mr. YOUNGDAHL. Of course, Mr. Purcell, you will admit that the percentage of the small issue is much higher than the larger. Commissioner PURCELL. It tends to be slightly higher, but very little higher, as the figures I have will show. Mr. Dickson, in his testimony, said that it was his experience that a very minimum of $5,000 must be spent on the smallest registration. That is Mr. Dickson's experience. However, our records show thatto take a specific company-Motors Securities Co., Inc., of Shreveport, La., filed a registration statement for $200,000 of securities and that its expenses for registering that amount amounted to $320. Later the same company filed other registration statements for one issue of $700,000 and seven issues of $1,000,000 each. The expenses of each of these succeeding registration statements except one were $320 apiece and in the case of that one the expenses were $450. Mr. PADDOCK. What are the items of the total you just mentioned, what did you include under expenses? Commissioner PURCELL. Everything. Mr. PADDOCK. Everything? Commissioner PURCELL. Those are the total expense figures stated by the company in its registration statement. Mr. PADDOCK. Any classification of officers' time or the time of corporation employees? Commissioner PURCELL. In preparing the material? Mr. PADDOCK. Yes. Commissioner PURCELL. I do not know, sir. Mr. PADDOCK. Their money outlay? Commissioner PURCELL. Their money outlay; that is correct, sir. And, of course, I do not mean by presenting these figures to indicate that they are average. But I did want to correct the impression left with the committee that it takes a minimum of $5,000 to register securities under the Securities Act. It does not take anything like that. The committee has heard witnesses state time and time again in the course of these hearings that the expense and burden of registration has discouraged small business from making public offerings. It seems to us that much of the testimony here before the committee relating to costs has confused the cost of public offering with the cost of registration, and as I have tried to point out on previous occasions the two terms are by no means synonymous. Costs of registration are in fact only a very small part of the costs of a public offering and the two must not be confused. The primary reason for the higher cost of public distribution to small business is found in the underwriting fees. In view of the committee's particular interest in the cost of registering small issues, we have made a study of our records in order to determine exactly what those costs are. Our study has covered the years 1938 through 1940. We have estimated that the average cost of registration per $100 of securities in offerings under $1,000,000 amounts to not more than 92 cents. We have also found that the average underwriters' compensation per $100 of securities in those offerings has amounted to $12.03. In other words, the underwriters' compensation in these cases averaged about 12 times, or a little over 12 times, the cost of the actual cost of registration. I have had prepared a table setting forth in detail issues classified by amount during each of the years 1938, 1939, and 1940, and showing in each case the amount of securities offered, the registration expense, the compensation to underwriters, and the total cost of flotation. The table omits stock issued for account of controlling stockholders, and stock as to which figures on expenses are not available. It is not a complete list. I submit this table for the record: Common stocks Expenses per $100 of common stock (other than stock issued by investment companies) registered under the Securities Act of 1933 for sale for account of the issuer for which a break-down of expenses is available, classified by size of issue: |