PART I SECURITIES ACT* OF 1933 ACCOUNTING ACCOUNTANT'S CERTIFICATE Opinion of Accounting Procedure and Principles Followed by Registrant Certificate of accountant which stated that financial statements were in accordance with accepted principles of accounting, but which omitted entirely any reference to accounting principles and procedures followed by registrant, held not to comply with Rule 651 specifying minimum contents of such certificates . . . Page 60. Failure to state clearly the opinion of the accountant in respect to the accounting principles and procedures followed by the registrant held a material deficiency ... Page 543. BALANCE SHEET Description of Security Failure to Describe Certain Rights Balance sheet which failed to disclose that the liquidation preferences of stock proposed to be issued differed materially from its par value, and which failed to include an opinion of counsel as to whether there are any restrictions on surplus or on the declaration of dividends arising out of the preferences held to omit material facts . . . Page 287. COST OF PROPERTY (see also Option Agreement and VALUATION OF PROPERTY) Inclusion of Promoter's Fees Proper accounting practice requires that shares issued for promotional services be listed separately from amounts representing consideration given for an intangible asset such as a formula . . . Page 60. Inclusion of Shares Issued and Concurrently Donated Back to Issuer Inclusion in amount at which property is carried in balance sheet of par value of shares issued therefor and concurrently "donated back" to issuer held improper and misleading... Page 60. Value of stocks issued for options and concurrently donated back to the issuer held improperly included in the original cost of the options. . . Page 543. Notes to Balance Sheet A note to explain an asset described in a balance sheet held misleading because of inclusion of optimistic statements therein without disclosure of other factors having an adverse effect... Page 982. The term "Act" as used in Part I of this Digest refers to the Securities Act of 1933, as amended. 1039 ACCOUNTING-Continued Where a note explains a deferred charge against future crop operations, carried as an asset in the balance sheet, and indicates that crop operations after balance sheet date had been delayed by labor difficulties held omission to disclose increases in costs operations after balance sheet date resulting from settlement of labor difficulties not misleading under the circumstances of the case... Page 982. Option Agreement Cost of Property Inclusion in balance sheet of asset of $420,000 as "purchase price of options to buy properties, plant, and equipment" held false and misleading where $170,000 of this amount represented the purchase price due on the property held under option... Page 543. Reflection of Liability Arising Thereunder in Balance Sheet Where option agreement contained no actual commitment to purchase held that it would be misleading to carry the full purchase price of the property upon the balance sheet as a liability . . . Page 543. If contract to purchase option contains binding promise by registrant to promoter to purchase property held under option, the $170,000 due on the property cannot be designated as a liability "due on options" EXPERTS Consent to Use of Report Page 543. Where accountants who certified financial statements filed as part of registration statement relied upon a report of other accountants, written consent of such other accountants to the use of their names held to be specifically required by Section 7 of the Act and Rule 670 of the General Rules and Regulations thereunder... Page 287. FINANCIAL STATEMENTS IN REGISTRATION STATEMEnt and proSPECTUS Rule 821 (a) Under Rule 821 (a) of the General Rules and Regulations under the Act such financial statements as are set forth in the prospectus must conform exactly with corresponding financial statements in the registration statement; condensing or summarizing financial statements required to be included in the prospectus is not permitted under the rule . . . Page 982. PROFIT-AND-LOSS STATEMENTS Profit-and-loss statements held not misleading where no disclosure is made of probable effect of higher wages on cost of operations subsequent to end of period covered by statements. . . Page 982. SURPLUS (See also-BALANCE SHEET-Description of Security) Shares Issued for Property and Concurrently "Donated Back" as Surplus "Surplus" representing par value of shares issued to vendor for property and concurrently "donated back" to issuer held fictitious . . . Page 60. VALUATION OF PROPERTY Assumption of Accurate Valuation Created by Use of Specific Sum A dollar-and-cents figure set opposite an item of property implies that it was reached on some rational or precise basis. . . Page 60. ACCOUNTING-Continued Non-Disclosure of Relationship Existing Between Vendor and Vendee Amount at which property was carried on balance sheet held misleading in absence of statement that it was arbitrarily fixed by registrant and vendor, who was the principal promoter, without arm's length bargaining, and without reference to cost to vendor. . . Page 60. DESCRIPTION OF SECURITIES FAILURE TO DESCRIBE CERTAIN RIGHTS Where answer to item calling for description of voting rights, preferences, conversion, exchange rights, etc., was challenged because it failed to state that there were no exchange or conversion rights, held that absence of description of such rights implied a negation that such rights existed. . . Page 60. MISREPRESENTATIONS CONCERNING OUTSTANDING SECURITIES Answer to item calling for information concerning stock authorized and outstanding held deficient for failure to disclose that 50,000 out of 150,000 shares listed as outstanding were treasury stock rather than stock outstanding in hands of public... Page 60. MISREPRESENTATIONS CONCERNING SECURITIES TO BE OFFERED Answers to items calling for dividend rate for each class of stock stating that dividend rate of class A stock was 35¢ held inadequate where it appeared that dividends were cumulative when earned, and only to extent earned Security for Notes Page 60. Statement that "security shall consist of first mortgage on all present and future real estate, freehold and leasehold lands," held false and misleading where registrant does not presently own any real estate ... Page 543. DISTRIBUTION OF SECURITIES PRICE Basis of Exchange Information concerning "the basis upon which the outstanding securities of the registrant are to be modified or exchanged" which failed to disclose effects of exchange of stock on cumulative dividends in arrears held to be materially deficient, and statement which did not make security holders aware of the possible effect upon the value of their securities resulting from the proposed exchange held to be incomplete in a material respect... Page 287. Information concerning the consideration to be received for stock to be issued under plan of recapitalization which merely disclosed amount of cash to be received upon exercise of stock purchase warrants, but failed to disclose that part of the new stock was to be exchanged for outstanding class A stock and that accrued and unpaid dividends on class A stock would be canceled held deficient.. Page 287. DISTRIBUTION OF SECURITIES-Continued SUBSCRIPTION BY DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS Where directors of a corporation subscribe to the registered shares held failure to disclose this fact in the registration statement is a material omission.. Page 1009. UNDERWRITING OF ISSUE Assignment of Options Where the optionee has assigned options prior to the registration of the securities held failure to disclose the assignments of the option is a material omission... Page 1009. Intention to Distribute Publicly Where purchasers of large blocks of the registered shares distributed such shares publicly, held that it may be inferred that the shares were purchased with an intent to distribute them publicly, and failure to disclose the names of such persons as underwriters is a material omission . . . Page 1009. Offering "at the Market" Where a substantial amount of stock was kept off the market shortly before the filing of the registration statement held misleading to omit to disclose this fact in a statement that the stock was to be offered "at the market."... Page 982. Where offering is to be made "at the market" and the underwriter has agreed to purchase a certain number of shares at a fixed price held misleading not to disclose that the underwriter will be unable to fulfill his agreement unless the market price appreciates... Page 982. Offering Price of Securities Where registrant stated that its securities would be offered at $5 per unit, but that if shares were listed on exchange, offering price would be determined by exchange closing price for previous day held incumbent on registrant to disclose fact that underwriter had reserved right to trade in units for its own account and whether right would be used to stabilize market... Page 60. Price to Underwriters A statement that the price per unit of the registered shares to the underwriters is $1 per share, where a bonus of 75,000 shares is to be delivered in consideration of underwriter's services in procuring capital, held to be materially misleading... Page 1009. Underwriter Where an optionee of the registered shares or a partial assignee thereof whose interests are known to the registrant, has formed the intention to distribute publicly the shares to be acquired under the option, held he is an underwriter of the issue within the meaning of Section 2 (11) of the Act, and must be named as such in the registration statement . . . Page 1009. Underwriter-Underwriter's Commissions Where issuer had entered into a so-called "service contract" with underwriter pursuant to which underwriter had received $1,250 for services in connection with registration of issue held agreement is so closely connected with "sale" of securities that it should have been disclosed in response to item calling for statement of commissions paid to underwriter... Page 60. Failure to disclose alternative measure of compensation to underwriter in event issuer failed to perform its part of agreement held material omission... Page 6C DISTRIBUTION OF SECURITIES-Continued Underwriting Contract-False Impression of Firm Commitment Where None Existed Statement that underwriter had agreed to "take down" entire offering when in fact underwriter had agreed merely to use his best efforts to sell issuer's securities held materially misleading... Page 60. EXPERTS CONTINGENT BASIS OF EMPLOYMENT Where a mining engineer was to receive stock in payment for his report filed with the registration statement contingent upon the registrant's ability to dispose of 370,000 shares of registrant's stock, held that failure to disclose the contingent basis of employment was materially misleading . . . Page 1009. Where an attorney was to receive stock in payment for his legal opinion filed with the registration statement contingent upon the registrant's ability to dispose of 370,000 shares of registrant's stock, held that failure to disclose the contingent basis of employment was materially misleading . . . Page 1009. EXPERTS' REPORTS CONSENT TO USE OF OPINION In view of serious consequences which might result from improper use of the opinion of an expert, Section 7 of the Act held to require that an original or duplicate original of consent be filed . . . Page 60. USE OF MISLEADING OR UNACCEPTABLE ENGINEERING TERMINOLOGY Where map in engineer's report shows only nominal tonnage in scattered stopes, statement that engineer's report indicates that there are many places where ore is known to exist held to be materially misleading. . . Page 1009. HISTORY AND BUSINESS ACQUISITION OF PROPERTY Failure to Disclose Details of Property Acquisition Failure of registrant to show that options sold by promoter to the corporation for 170,000 shares of stock cost the promoter nothing held a material deficiency... Page 543. CHARACTER OF BUSINESS Inadequate Description of Character of Registrant's Business Where registrant had ceased to operate its mine several years earlier and could not resume operations without substantial repairs and further development, held the unqualified statement that registrant is engaged in mining is materially misleading... Page 1009. Misleading Statement of Ability to Resume Operations A statement in mining engineer's report that operations could be resumed as early as thought advisable held materially misleading where there was no explanation that it was not intended to resume operations on known ore bodies... Page 1009. 5 S. E. C. |