Mr. BENNETT. Suppose this company's securities were registered in the first instance and offered for sale to the public and this controlling stockholder bought his holdings under that, by virtue of that registration.

Mr. WOODSIDE. By virtue of the initial public offering?

Mr. BENNETT. Yes.

Mr. WOODSIDE. I do not think I have heard of such a case, but I guess it could happen.

Mr. BENNETT. Then he wanted to sell his stock. Would he have to register it?

Mr. WOODSIDE. We would take the position that it should be reregistered.

Mr. BENNETT. Why?

Mr. WOODSIDE. Because the statute says that a person who sells for a controlling person is an underwriter, and the securities must be registered or else there must be some exemption available.

Mr. BENNETT. Even though they had just been registered and the purchaser who owns the controlling interest bought them by virtue of a registration proceeding or after the securities had recently been registered?

Mr. WOODSIDE. I think you are putting me a hypothetical which I never heard of or knew of. It is a rare case where the securities of a company are registered for sale to the public in a public offering and someone acquires that stock to the point of securing control of it.

Mr. BENNETT. Suppose a uranium company, or a new promotional company, offers 300,000 shares of stock for sale and the company files under this regulation A. Suppose I go to the broker and buy a controlling interest in that company.

Now, a week later I want to sell that stock. Before I can sell the stock to the public do I have to offer my stock to a broker to sell, and do I have to file an application under regulation A?

Mr. WOODSIDE. Either I don't understand you or you don't understand me.

If the company sells $300,000 worth of its common stock under regulation A to the public, and that were the entire issue of that stock, and there was no common stock in the hands of anyone else, and I bought the entire issue of that stock and thereby became a controlling person of the company, and I wished in turn to resell the stock to the public, I would have to use the offering circular because I became an underwriter when I took that stock with a view to distribution as well as a controlling person.

Mr. BENNETT. Suppose you just bought it as an investment?

Mr. WOODSIDE. If I bought it as an investment and that made me a controlling person, when I sold it, if I sold it through an underwriter for distribution to the public, it would have to be registered or would have to qualify under regulation A.

Mr. BENNETT. You do not do it when an issue is exempt from regulation by private placement.

If I float an issue and place it privately, and then some individual acquires a controlling interest in that stock, does he then have to register?

Mr. WOODSIDE. Yes, sir. Everything I have said has been in relation to a public offering.

Mr. BENNETT. The bank that took it under private placement can sell it without registering, can it not?

Mr. WOODSIDE. The private placement you are thinking of, I believe, is either the debt issue or the preferred stock issue, which is placed with a few banks or insurance companies. They are of a type of security that doesn't have much appeal to the public generally. They are usually taken for investment, and because they don't ordinarily have much appeal to the private investors, they are retained as investments and it is seldom you find a privately placed issue where the purchasers are banks and insurance companies reselling them in any short period of time following the initial offering of them. Mr. KLEIN. Would they have to register or come under the exemption?

Mr. WOODSIDE. If they took them for investment purposes and they were banks and insurance companies not in the investment banking business, we would probably not raise any question unless the circumstances make it look suspicious that there was an evasion of the statute. Mr. KLEIN. That is because it would appear when they originally took it, they probably took it with the intention of subsequently selling?

Mr. WOODSIDE. Yes.

Mr. BENNETT. Did we not have that?

Mr. WOODSIDE. It is very seldom that a block of controlling stock is the subject of a private placement. It happens once in a while. Mr. BENNETT. To what extent is regulation A used for bail out? Mr. WOODSIDE. I have some figures on that. I am sorry, I don't have any overall, comprehensive, quantitative figures on the regulation A cases generally. That is something that we would have developed out of our review out of these cases during the past few months if we had been able to get to it; but we do have some figures that I think perhaps are fairly indicative of the frequency with which the security being sold is sold for the account of someone other than the issuing company.

Mr. BENNETT. Is bail out used quite extensively under regulation A?

Mr. WOODSIDE. That is what I am trying to answer.

Mr. BENNETT. Is it or is it not?

Mr. WOODSIDE. I would say not.

In table 2

Mr. BENNETT. What is the justification for it?

Mr. WOODSIDE. The justification

Mr. BENNETT. You say it is not used extensively?

Mr. WOODSIDE. I don't think it is significant in the overall picture. Mr. BENNETT. What is the justification for this bail out?

Mr. WOODSIDE. The basis for it is, one, it frequently occurs that an estate will have a block of stock which may be a controlling block where they wish to sell a portion of that for tax purposes, and the Commission reognized that very problem when it revised these rules and provided that an estate might use the exemption. I think it is for a period of 2 years, and if it was an estate, it could use the entire amount of the exemption, $300,000, but I think also the rules require there must be some representation that that wouldn't interfere with any financing by the issuer.

Then the Commission also made the exemption available for the sale by the individual stockholders or controlling person, but limited it so that the exemption couldn't be used up by those persons.

There are any number of situations where a person controlling a corporation may need to raise money for tax or other purposes, and it was felt that a reasonable use of the exemption should be permitted for that purpose.

Mr. BENNETT. That is up to a hundred thousand dollars a year? Mr. WOODSIDE. For any one person.

Mr. BENNETT. I notice both the National Securities Dealers Association and the Investment Bankers regard that as an important feature of this exempt procedure, and I do not attribute to them any ulterior motives in their position, but I am wondering about this. Suppose an individual is the controlling stockholder in X corporation and he wants to unload his securities. Something is not right with the company, and he has some inside information about the things that are not going right, which would be revealed by an audit if it were filed; it would be revealed under registration proceedings.

He doesn't want it revealed because it would depress the value of his stock.

So he files under regulation A and files sketchy information about the situation and then he unloads the stock on the public.

Is that kind of a situation possible?

Mr. WOODSIDE. It is possible for an individual stockholder to sell up to a hundred thousand dollars of his securities to the public under regulation A if the company files the offering circular and the letter of notification with the Commission and supplies the same sort of information the company would furnish if the company were selling the securities itself.

Mr. BENNETT. Well, you mean under regulation A?

Mr. WOODSIDE. Yes, sir.

Mr. BENNETT. You do not require them to file anything more than what is required under regulations A; is that right?

I will put it this way: Section 11 of the 1933 act does not apply? Mr. WOODSIDE. That is right; it does not apply to that offering. Mr. BENNETT. If an individual is dishonest and he is the controlling stockholder in a firm and wants to unload his stock for reasons best known to him but for reasons which he does not want the public to know, he can do it under this procedure.

Mr. WOODSIDE. That is correct, under the present rules.

Mr. BENNETT. If there is something wrong with the company and an audit would disclose it, he does not have to file a certified financial statement. He can come in under this exempt procedure and unload a hundred thousand each year or have some of his family unload some for him and thus circumvent the statute; would that be possible? Mr. WOODSIDE. That could happen.

Mr. BENNETT. Has it happened?

Mr. WOODSIDE. I don't know.

Mr. BENNETT. Your data on this situation are apparently inadequate at the moment, but could your furnish the committee for the record rather complete information on the operation of this bailout practice.

Mr. WOODSIDE. I can give you the figures we have now, and I think perhaps you would be interested.

Mr. BENNETT. You say they are incomplete?
Mr. WOODSIDE. I say they are not comprehensive.

Mr. BENNETT. And will you later supply us with some comprehensive figures for the record inasmuch as our hearings will not be closed at this time?.

Mr. WOODSIDE. I do not know. I can't estimate when we could do it, Mr. Bennett.

We have managed to review, I guess, close to 400 of the regulation A cases for this 20-month period. I don't know when we will get over the rest of them.

Mr. BENNETT. Will you give us the information you have now and will you make an effort to supply us the fill-in for the gaps?

Mr. WOODSIDE. We will do the best we can.

Mr. SCHENCK. Before you answer that, will you yield for a question?

Mr. BENNETT. Yes.

Mr. SCHENCK. If you discovered that there were need to change your regulations and tighten this up, do you now have the authority to do that or do you need more legislative authority?

Mr. WOODSIDE. I think we have ample authority under section 3 (b) to revise the rules from time to time and to classify issues and issuers to meet abuses.

I think also, however, that it would not be consistent with the theory of the statute to try to convert the 3 (b) into a blue-sky statute within the Securities Act in the sense that the Commission would undertake the job of passing on the merits or qualifying issues.

Mr. BENNETT. That is what you are trying to do, in effect, under this escrow, is it not? That is the proposed new regulation?

Mr. WOODSIDE. I don't think so.

Mr. BENNETT. You are moving in that direction.

Mr. WOODSIDE. Perhaps slightly.

Mr. BENNETT. I am not criticizing you, but I believe you are moving in that direction.

Mr. WOODSIDE. No, we are not trying to tell anybody how to set up their company, how they shall issue their stock, or how they shall pay promoters or other people for services. All this is designed to do is make sure when a company goes to the public representing that this is our program, that the securities aren't sold on the assumption that that program will be carried out when in fact it won't be, because not enough of the money is raised.

Mr. BENNETT. That is what we discussed this morning.

After the money is raised, your authority ceases?

Mr. WOODSIDE. Our authority ceases, assuming there was no fraud in the sale of the securities, no violation of the rules.

Mr. BENNETT. Go ahead.

Mr. WOODSIDE. Table 2 of of the tables already submitted for the record shows that for this 20-month period that we referred to, there were 358 mining-company issues under regulation A for a total aggregate offering price of $64 million roughly.

Of that 358 issues, 8 were for securities to be sold for the account of persons other than the issuer, and the dollar amount was $713,000. That is 8 out of 358 cases. I don't know what the percentage is. It is about 22 percent.

In the oil and gas cases we looked at, there were 31 issues for a total public offering price of $612 million. Three of those 31 were for the account of persons other than the issuer, for a total dollar amount of $15,000.

Now, in 1954, Chairman Demmler sent a letter to the committee. Mr. BENNETT. Are you obtaining that information from data you have put in the record? Mr. WOODSIDE. Yes, sir.

These tables we submitted yesterday.

Mr. BENNETT. Will you refer to the tables, please?

Mr. WOODSIDE. First is table 2 and the second is table 12.

Then on April 1, 1954, in a letter addressed to Mr. Bennett from Ralph Demmler, Chairman of the Commission

Mr. BENNETT. What date?

Mr. WOODSIDE. April 1, 1954-we furnished you with some information for 806 issues filed under regulation A for the period from April 1 to December 31, 1953.

Of the 806 issues

Mr. BENNETT. Would you mind putting that entire letter in the record?

Mr. WOODSIDE. I would be glad to get this reproduced for the record. This is the only copy I have.

(The letter referred to is as follows:)

Hon. JOHN B. BENNETT,

SECURITIES AND EXCHANGE COMMISSION,

House of Representatives, Washington, D. C.

April 1, 1954.

DEAR CONGRESSMAN BENNETT: In accordance with your request, I am forwarding herewith certain statistical information regarding the use of regulation A under the Securities Act of 1933. The attached figures give the results of offerings under the regulation for the months of May, June, and July 1953. The enclosed figures also show the number of registered offerings during the same period. We call your attention to the fact that during this period the present regulation A requiring the use of an offering circular, was in effect.

I think that I can fairly say that the liabilities and responsibilities under sections 12 and 17 of the Securities Act, as well as under rule X-16B-5 of the Securities Exchange Act, which generally speaking encompass the antifraud provisions of the securities acts, together with the Commission's existing requirements under regulation A for the use of an offering circular, containing basic information regarding the issuer and the security offered, which is subjected to examination and review by the Commission's staff, afford investors very substantial protections and at the same time have facilitated resort to the securities markets and the general public by legitimate small enterprises. The attached figures indicate that almost one-half the number of filings and dollar amounts of the offerings were made by companies designated as promotional companies, that is, companies which had been recently organized and which as yet had not attained actual operations or production.

As you know, the statute originally provided that the Commission might, subject to appropriate terms and conditions, exempt issues from the registration provisions in amounts not to exceed $100,000. Legislative reports commenting on the section indicated quite clearly that the purpose of the exemption was to leave to the discretion of the Commission the extent to which offerings of this amount should be regulated by the Federal Government, having in mind the limited character of these offerings.

These reports made it quite clear that the Congress established in the statute standards of responsibility which in principle could with propriety have been given universal application in the securities field. The reports also made clear the policy considerations which prompted carving out certain exemptions from the registration provisions of section 5 and, therefore, from the liability provisions of section 11 for certain types of transactions and securities as enumerated in sections 3 and 4 of the act.