D. C., to Chicago, Ill. On May 2, 1938, Doroshaw became president of the corporation.

Once in the saddle the new management started to revamp the enterprise. In addition to the changes in corporate structure which have already been alluded to, the charter was amended to remove all effectual provisions requiring a diversification of the portfolio. Loans totaling $13,400, or more than 25 percent of the registrant's assets, were then made to two corporations with which the management of the registrant was associated." The greater portion of these loans was made as a result of negotiations between Greenspau and Doroshaw. The sequence of events since their entry into the corporation's affairs, seems clearly to indicate a community of interest between Doroshaw and Greenspau. Doroshaw's denial of any "actual understanding" between himself and Greenspau, not in itself convincing in the light of what transpired, does not preclude us from accepting the only inference the record allows. We find that Doroshaw and Greenspau together have actual voting control of the registrant and that they have jointly exercised this control to cause various fundamental changes in the capitalization and financial policies of the corporation, all to their own personal advantage.

Due to the peculiar character of an investment trust, information regarding the affiliations of the management and the identity of the controlling group is of more than ordinary importance. The management of an investment trust with no more limitation on its selection of investments than is contained in the charter of the registrant, may direct the corporation's activities into any one of a countless number of businesses. The advantages which may be gained from obtaining control over such a source of credit are obvious. Equally obvious is the danger that investments may not always be made for the benefit of the corporation's security holders.

The investors, therefore, are dependent in a correspondingly greater degree on the integrity of the management. The holders of the registrant's stock who are asked to participate in this reorganization, as well as future purchasers of these securities, should be given adequate information concerning Doroshaw and Greenspau, their interest in the corporation, and the changes which they propose to make in its financial policies.

Item 4 (b). This item calls for the names of "parents" of the registrant. By definition the word "parents" includes individuals

Three loans aggregating $9,900 were made to Woodlands Corporation, of which S. Harvey Greenspau is president. $3,500 was loaned to Beckman Mills Corporation. Jack L. Finer, who was elected a director of the registrant in April 1938, is president of this company; Fred Fidanque, chairman of the registrant's board of directors, is also a director of Beckman Mills.

5 S. E. C.

who control the corporation. In its answer the registrant gave the names of the three voting trustees who had been holding the class B stock. But the voting trust agreement had expired prior to the effective date of this statement. The holders of the voting trust certificates thereupon became entitled to have those certificates exchanged for the underlying class B common shares. That actual retransfer had not occurred prior to registration does not alter the fact that control of the corporation at that time was vested in the holders of the certificates, and not the trustees. It is therefore clear that the voting trustees were not the parents of the registrant when the statement became effective.

In view of our finding that Doroshaw and Greenspau together own a controlling interest in the class B stock and in view of the evidence of joint action by Doroshaw and Greenspau in the affairs of the corporation, we find that they are "parents" within the meaning of Item 4 (b). Failure to make this disclosure is an omission to state a material fact.

The proposed amendment filed on March 13, 1939, would, if acceptable in other particulars, cure this deficiency since it discloses the relationship of Doroshaw and Greenspau to the registrant.

Items 5 and 6. These items require a description of the nature of the enterprise and an outline of the general development of the business during the preceding 5 years.

The answers are materially deficient because they fail to disclose the present and intended scope of the registrant's business and the fundamental changes which have resulted from the shift in control.

The new management, immediately upon coming into power, elected a new board of directors, new officers, moved the offices of the registrant to Chicago, and announced the intention to embark upon a program of expansion. At the same time, the registrant's charter was amended to remove certain restrictions on its authority to make investments as a result of which the new management was able to make sweeping changes in the character of the registrant's portfolio.

Prior to the election of Doroshaw as president of the corporation, it had been the registrant's policy to invest chiefly in securities listed on the New York Stock Exchange. None of the assets had been used for the making of loans.

The term "parent" is defined in the instructions for the use of Form A-2 to include "an affiliate controlling the registrant directly or indirectly through one or more intermediaries." The term "affiliate" is defined as "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the registrant." The term "person" is defined in Section 2 (2) of the Securities Act of 1933 to include "an individual" as well as corporations or other legal persons.

8

Between July 1, 1938, and the effective date of the registration statement, four loans were made aggregating $13,400, or more than 25 percent of the registrant's net assets. Three of these, amounting to $9,900, were made to Woodlands Corporation; the fourth, amounting to $3,500, was made to Beckman Mills Corporation. Greenspau is president of Woodlands Corporation, which owns timber in Florida. Finer and Fidanque, who were elected to the registrant's board of directors when Greenspau and Doroshaw bought control, are respectively president and a director of Beckman Mills Corporation, which manufactures wool products. Both corporations are still in a promotional stage.

A change from investments in stocks listed on national securities exchanges to loans to corporations still in the promotional stage in which "insiders" are interested is a material change in business. The nature of these transactions, as well as the relationship between the management and the borrowers, should have been disclosed. The registrant's statement that "the essential character of the portfolio has been maintained" is patently untrue and misleading.

We find a further deficiency in the statement that the certificate of incorporation "provides that the investments of the registrant shall be widely distributed." In view of the fact that the present management has obtained amendments to the certificate of incorporation which remove practically all of the restrictions and limitations on the investment policy of the corporation designed to assure diversification, this statement is untrue.

We also find a deficiency in the registrant's failure to set forth its intention to become an underwriter of securities and of corporate reorganizations. The testimony of the registrant's president indicates that such activities are in fact contemplated. These are new fields of endeavor and as such should be called to the attention of investors.

Counsel for the Commission contended, and the trial examiner found, that the registrant's answer to Item 5 contained a further deficiency, in the assertion that the registrant "purchases, retains for investment, and sells domestic and foreign securities." In view of Doroshaw's testimony that the registrant has never had any foreign securities in its portfolio, and has no present intention of acquiring any, the statement quoted is inaccurate.

The proposed amendment filed on March 13, 1939, would, if declared effective, cure certain of the deficiencies found in the original

One of the discarded charter restrictions was the limitation "that not more than 7 percent of the net assets of the company shall be invested in securities of any one company, including the subsidiaries of such companies." Unless this restriction had been removed the second and third loans to Woodlands Corporation, totaling $6,400, could not have been made, since the amount would have aggregated more than 7 percent of the net assets of the corporation.

statement. However, this proposed amendment fails to mention the third loan of $1,400 to Woodlands Corporation which was made after the original statement was filed, but prior to its effective date. Information concerning this loan should have been included. The description of the loan of $5,000 to Woodlands Corporation as "secured" by an agreement whereby the registrant is to receive a minimum bonus of $1,500, is misleading. Actually the loan is unsecured. The bonus agreement, while it might conceivably result in a profit to the corporation, is rather an indication of a lack of security, since if the loan could have been obtained from any banking institution at the usual rates, it is difficult to understand why the borrower agreed to make this additional payment.

The statement in the amendment that these loans aggregated approximately 23 percent of the registrant's assets is not technically correct, since this percentage was computed on the original balance sheet date and does not include the third loan to Woodlands Corporation.

Item 7. In response to this item the registrant has stated that its assets "consist entirely of investment in securities, the greater portion of which is listed upon the New York Stock Exchange." ." Actually, on the effective date of the registration statement over 16 percent of the assets were cash.

The statement is also untrue because, if the cash and securities be considered together, the proof clearly establishes that less than half the total assets of the registrant were invested in securities listed on the New York Stock Exchange either on the balance sheet date, or on the date the registration statement became effective.10

• Item 7 does not call for information with respect to the registrant's portfolio, but, since the registrant has chosen to include it, it should be stated truthfully.

10 The assets as of the balance sheet date, segregating securities listed on the New York Stock Exchange, were as follows:

The proposed amendment attempts to cure this deficiency by specifically exempting the cash on hand. It also adds the fact that investments include notes receivable as well as securities. We find the answer, as stated in the amendment, satisfactory.

Item 24 (and Rule 1 of the special rules for the use of Form A-2).— This item calls for information with respect to the price to the public and proceeds to the registrant of the registered securities. Rule 1 of the special rules for the use of Form A-2 provides that if an issuer uses Form A-2 to register securities offered in exchange for other of its securities the answer to Item 24 must disclose "the basis upon which the outstanding securities of the registrant are to be modified or exchanged." 11

This registration statement was filed to cover shares which the registrant intends to offer in exchange for outstanding securities, as well as securities to be issued upon the exercise of warrants. It was filed on Form A-2. Therefore the information required to be given under Item 24 is subject to Rule 1.

The answer gives information with respect to the price to the public and proceeds to the registrant of the prior participating preference stock to be issued upon exercise of the warrants. It refers to the preference stock which is to be exchanged for the class A common in a footnote, omitting all mention of the fact that the cumulative dividends in arrears on class A stock, amounting to $32,369.62, will be wiped out in case the exchange is consummated in full.

The surrender of the accumulated dividends on the class A stock was a condition on the right to exchange that stock for the new issue of prior participating preference stock. Obviously the stockholders should be fully informed as to what they are asked to give up with respect to these arrearages. Since the registrant has elected to use Form A-2, it must submit this information in answer to Item 24. Failure to do so is a material deficiency, and was so found by the trial examiner.

The amendment of March 13, 1939, does include the required information concerning the cancelation of accrued dividends on the class A common, and thereby cures the deficiency found by the trial examiner.

However, in view of the radical changes proposed in the registrant's capital structure, it would appear that the present holders of the class A stock are entitled to have a more exhaustive statement concerning the possible effects upon the value of their securities re

"Rule 1 of the special rules as to the use of Form A-2 provides in part as follows: "(1) Notwithstanding that Form E-1 is specifically prescribed for use in cases involving an exchange of securities by the issuer thereof for other of its securities otherwise entitled to use Form A-2 may, at its option, use Form A-2... requirements shall also be complied with:

a registrant The following

(a) There shall be furnished in answer to Item 24 information as to the basis upon which the outstanding securities of the registrant are to be modified or exchanged."