the time of its delivery. In the circumstances, no objection was raised to the delivery of the speech at the analysts' meeting. However, since printed copies of the speech might be received by a wider audience, it was suggested that printed copies of the speech and the supporting data not be made available at the meeting nor be transmitted to other persons.

EXAMPLE No. 7

Two weeks prior to the filing of a registration statement the president of the issuer had delivered, before a society of security analysts, a prepared address which had been booked several months previously. In his speech the president discussed the company's operations and expansion program, its sales and earnings. The speech contained a forecast of sales and referred to the issuer's proposal to file with the Commission later in the month a registration statement with respect to a proposed offering of convertible subordinated debentures. Copies of the speech had been distributed to approximately 4,000 security analysts.

The Commission denied acceleration of the registration statement and requested that the registrant distribute copies of its final prospectus to each member of the group which had received a copy of the speech.

EXAMPLE No. 8

A registration statement had become effective for the purpose of competitive bidding. Prior to the opening of the bids, it was learned that an investment banking member of one of the bidding groups had published a brochure discussing the prospects of the company and forecasting a rise in the market price of its stock. It appeared that neither the company nor other members of the bidding group had received advance information as to the publication of the brochure. In the circumstances, counsel for the proposed underwriters' group was advised that publication and distribution of the brochure must be deemed to contravene the provisions of section 5 of the Securities Act

if the firm publishing it was a member of the underwriting or selling group. This group was the successful bidder. However, the firm publishing the brochure was not included either as an underwriter or as a member of the selling group.

EXAMPLE No. 9

An issuer was about to file a registration statement for a proposed offering on behalf of a controlling person. The timing of the issue was fixed in accommodation to the controlling person. It appeared, however, that registration would coincide with the time when the company normally distributed its annual report to security holders and others. In recognition of the problem posed, inquiry was made whether such publication and distribution of the report at such time would create any problems. The issuer was advised that, if the annual report was of the character and content normally published by the company and did not contain material designed to assist in the proposed offering, no question would be raised.

EXAMPLE No. 10

A report concerning a registrant had been prepared by an engineering firm for use by prospective underwriters. The report contained a 5-year projection of earnings. It appeared that, in addition to the distribution of the report among prospective underwriters, copies of the report had been made available, after the filing of a registration statement but before it became effective, to broker-dealers, to salesmen who would be engaged in the offering and sale of the securities and to certain investors. One broker-dealer firm had made available to salesmen excerpts from the report. The Commission advised the persons responsible for the distribution of the report that in its view distribution of the report to persons other than to persons bona fide concerned with the question of considering and undertaking an underwriting commitment, contravened the provisions of section 5.

SECURITIES ACT OF 1933

The Food Industry Alliance has submitted to the Commission memoranda urging that trading stamps are "securities" within the definition of that term in section 2(1) of the Securities Act of 1933 and therefore subject to the registration provisions of the Act. Opposing views have been submitted by Sperry & Hutchinson, an established trading stamp company. The trading stamps referred to are the ordinary ones which are sold to retail merchants, who give these stamps to their customers who, in turn, may redeem them for cash or merchandise.

The General Counsel has advised the Commission that it is his view that such stamps are not securities within the meaning of the Act. The Commission concurs in this conclusion.

The Food Industry's basic argument is that an "evidence of indebtedness" is included in the statute's definition of a security, and that a trading stamp is an "evidence of indebtedness." However, the same argument could be made as to streetcar tokens, meal tickets, Christmas

gift certificates, box tops, railroad or theatre tickets and others too numerous to mention. The legislative history and other provisions of the statute indicate that the Congress did not intend to include such items within the scope of the statute.

The Food Industry also suggests that trading stamps could be used as a method of corporate financing and thereby become subject to the Act. With respect to the established trading stamp companies, no information to indicate the existence of such practices has been furnished. If such a situation is presented in a particular case, the Commission will consider the applicability of the statute to the facts of that case.

The Commission emphasizes that this release is concerned only with trading stamps redeemable in cash or merchandise. If they are redeemable in securities, then the stamps are also securities since such stamp would be a "certificate of interest or participation in, temporary or interim certificate for... or warrant or right to subscribe to or purchase" a security.

SECURITIES ACT OF 1933

Questions are presented to the Securities and Exchange Commission from time to time as to the application of the Federal securities laws to offerings of whole or fractional interests in mortgages or deeds of trust under arrangements which provide for a variety of services to the investor. In the opinion of the Commission such an arrangement frequently

constitutes an "investment contract," which is a "security" within the meaning of the Federal securities laws. The public offering and sale of these investment contracts may invoke the registration provisions of the Securities Act of 1933 and other provisions of the Federal securities laws. It should be emphasized, in this connection, that exemptions from regis

tration provided by section 4(1)1 of the Securities Act of 1933 and Regulation A-R2 thereunder, usually relied upon for the underlying mortgage and deed of trust notes, would not be available for a public offering of the investment contracts. Recently the Commission has obtained injunction against sellers who failed to register such investment contracts offered through nationwide advertising.3

Among the more common services and other attributes of the arrangements, offered in relation to the mortgages or deeds of trust, which have come to the attention of the Commission and which in the opinion of the Commission may give rise to the creation of "investment contracts" within the meaning of the securities laws are:

(a) Complete investigation and placing service.

(b) Servicing collection, payments, fore-
closure, etc.

(c) Implied or express guarantee against
loss at any time or providing a
market for the underlying security.
(d) Making advances of funds to protect
the security of the investment.
(e) Acceptance of small uniform or con-
tinuous investments.

1 Now section 4(1), 4(2) and 4(3), as amended Aug. 20, 1964. * Regulation A-R was recended on Dec. 8, 1960 (Securities Act Release No. 4305). See Rule 234 under the Securities Act of 1933. 1 See S.E.C. v. Mortgage Clubs, Inc., D. Mass. Civ. Act. No. 57-385-N, Litigation Release No. 1106 and S.E.C. v. Backers Discount and Finance, Inc., D.N.J. C.A. No. 14-58, Litigation Release No. 1200.

The wider the range of services offered and the more the investor must rely on the promoter or third party, the clearer it becomes that there is an investment contract. While there may be circumstances under which one or more of these elements are present without constituting an investment contract, it is the position of the Commission that each of them has a bearing on whether the investor is relying "solely on the efforts of the promoter or third party" to use the investor's money and through these efforts to return a profit to the investor-the essential test of an investment contract. S.E.C. v. W. J. Howey Co., 328 U.S. 293, 299 (1946). There the Supreme Court stated that the term "investment contract" should be construed "so as to afford the investing public a full measure of protection" and cautioned "that form [must be] disregarded for substance and emphasis placed upon economic reality."

Neither the fact that the service arrangements are offered in connection with a mortgage or deed of trust nor that the purchaser looks solely to his own mortgage or deed of trust for income or profits will obviate the requirements for registration. In the Howey case, as appears from the facts stated in the court of Appeals opinion (151 F. 2d 314), land, bearing orange trees, was sold in connection with a contract by the selling corporation to service and cultivate the land. Specific lots with trees were deeded to the purchasers who were required to pay for replacement of trees or special servicing on their individual lots if required. The purchased looked for income to the fruitage of his individual grove and the purchaser's income was in no way dependent upon the purchase or development of tracts other than his own. No one was required to accept the service offered by the company and the sales were made to persons who had personally inspected the land. However, even though the contract involved a sale of land and the profits were on an individual basis, the contract was deemed to be a security.

Various other types of land contracts have been held to be securities. S.E.C. v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) (individual

oil leasehold interests); S.E.C. v. Tung Corp., 32 F. Supp. 371; and S.E.C. v. Bailey, 41 F. Supp. 647 (land bearing tung trees to be developed by seller). See also Prohaska v. Hennermiller Development Co., 256 Ill. App. 331 (farm land to be cultivated by vendor).

In In re National Resources Corporation, 8 S.E.C. 635, 637, the Commission stated that "... transactions which in form appear to involve nothing more than the sale of real estate, chattels, or services have been held to be investment contracts where in substance they involve the laying out of money by the investor on the assumption and expectation that the investment will return a profit without any active effort on his part, but rather as the result of the efforts of someone else."

It should also be noted that persons engaged in the business of buying and selling mortgage or trust notes would ordinarily be brokers or dealers, or both, within the meaning of the Securities Exchange Act of 1934, and absent an exemption would be required to be registered as such with the Commission under the provisions of section 15 of the Act. Rule 15a-1 would not provide an exemption for such a

broker or dealer who is offering investment contracts of the type referred to above. Moreover, such a broker or dealer usually would be subejct to the Commission's Rule 15c3-1 whether or not he is registered. A broker or dealer subject to this rule could not use the mails or Federal instrumentalities to effect a transaction in a non-exempt security otherwise than on a national securities exchange if his "aggregate indebtedness" exceeds 20 times his "net capital" as those terms are defined in the rule.

In addition to all of the foregoing, it should be emphasized that the anti-fraud provisions of the Acts and regulations administered by the Commission (including specifically section 17(a) of the Securities Act of 1933 and Rules 10b-5 and 15c1-2 under the Securities Exchange Act of 1934) would apply to advertisements, literature, and any other statements and representations made in connection with the offer or sale of any of the securities referred to herein.

Persons engaging in this type of business should consult with the nearest regional office of the Commission or with the headquarters office in Washington, D.C.

SECURITIES ACT OF 1933

Rule 133, as proposed in this release, was adopted with modifications on July 16, 1959, Release No. 4115.

On April 8, 1957 (Securities Exchange Act Release No. 5483), in its Findings and Opinion in the Matter of Great Sweet Grass Oils Limited and Kroy Oils Limited, and on October 10, 1957 (in Securities Act Release No. 3846), the Commission discussed the scope and limitations of Rule 133. In substance, the Commis

1 Affirmed sub nom. Great Sweet Grass Oils Limited et al. v. S.E.C. (June 24, 1958) CCH Par. 90865: another appeal pending, Kroy Oils Limited v. S.E.C. (C.A.D.C. No. 13920).

sion indicated in these releases that (1) Rule 133, where applicable, merely provides that registration of the securities, and presentation of a prospectus to the security holders, is not required in connection with the submission of a plan of merger or other transaction specified in the rule and the receipt of securities in consumation of the plan, (2) this does not mean that the securities issued in such a plan are "free" securities which need not be registered insofar as subsequent offers and sales of such securities are concerned; that is, that registration

would be required for any subsequent offer and sales unless such activity were limited to casual sales by noncontrolling security holders which might fairly be described as trading transactions not involving a distribution or unless another exemption were available, and (3) Rule 133 provides no exemption from the registration and prospectus requirements of the Act with respect to any public distribution of the securities received by a security holder who might be deemed to be statutory underwriter.

Reference was also made to the opinion of the United States District Court for the Southern District of New York in S.E.C. v. MicroMoisture Controls, Inc. (Civil No. 116–190, January 23, 1957)1 that Rule 133 is not applicable to an exchange of assets for stock which is "but a step in the major activity of selling the stock"; that is, where the transaction is part of a plan to use stockholders as a conduit for distributing a substantial amount of the securities to the public.

At the direction of the Commission, the staff has been engaged in a comprehensive review and re-examination of all relevant legislative and other statutory materials, prior Commission and staff actions, and the points of view and arguments expressed by those who appeared at the Commission's public hearing on the 1956 proposal, or who otherwise submitted comments to the Commission, or who have expressed themselves in various publications. Based upon the foregoing, the staff has recommended that the Commission abandon the 1956 proposal for revision of Rule 133, that the Commission restate the purpose and effect of Rule 133, and that the Commission adopt rules designed to clarify the applications and limitations of the rule.

After careful study of the voluminous materials submitted to the Commission in connection with the staff recommendations, the Commission has determined to publish for comment certain proposed rules submitted by the staff which are designed to implement these

1 This opinion was issued in connection with the issuance of a preliminary injunction. On March 31, 1958, the court issued its Findings of Fact and Conclusions of Law supporting the entry of a permanent injunction upon the ground that the stock sold to the public was the stock of persons in a conrol relationship with the issuer and that certain of the defendants acted as underwriters in the sale of such stock. Appeal pending. Micro-Moisture Controls. Inc. et al., v. S.E.C. (C.A. 2 No. 35242).

recommendations in order that the Commission may reach its final conclusion after consideration of the views of all persons having an interest in the matter. The staff recommendations are:

I. We recommend that Rule 133 be retained in its present form or in substantially its present form for the purpose of reflecting the present position of the Commission that registration is not required for the submission by a corporation to a vote of its stockholders of any of the plans, agreements or proposals therein described or for the vote of stockholders thereon or for the authorization, modification, issuance and delivery of securities pursuant thereto, all subject to the conditions and under the circumstances therein described.

II. We recommend that the Commission announce in a public release its opinion that the fact that a security has been acquired by a stockholder in a transaction to which Rule 133 is applicable does not make that security exempt from any provisions of the Act which would otherwise be applicable for purposes of any transactions by such stockholder in such security; and promulgate rules which define the circumstances under which distribution of securities by such stockholders may not be effected without compliance with the provisions of section 5 of the Act, generally in accordance with the following:

(a) Define the term "underwriter" to include any constituent corporation other than an issuer and any person who controlled, was controlled by, or was under common control with such constituent corporation and who acquired securities in a Rule 133 transaction with a view to the distribution thereof. Exclude from the term "distribution," for purpose of this rule, public offerings of securities coming out of a Rule 133 transaction by or on behalf of a person so defined to be an underwriter in amounts not exceeding a limit to be set which attempts to distinguish between transactions of a trading character and transactions which have the characteristics of a distribution.

(b) Define the term "underwriter" to include any person who, pursuant to any contract, arrangement or understanding with the issuer (or any person who controls, is con