sons. In view of the number of beneficial owners required, it appears unlikely that the scope of the offering could be so limited as to make available the exemption provided in the second clause of section 4(1)1 of the Securities Act of 1933 for transactions by an issuer not involving a public offering. Thus, consideration should be given to section 5 of that Act which requires that, unless an exemption is available, a registration statement must be filed before a public offering of securities may be made by any means of transportation or communication in interstate commerce or by use of the mails and that such statement must become effective before any sales may be made by such jurisdictional means. Whether any of the exemptions from section 5 contained in sections 3 and 4 would be available would depend on the facts and circumstances of each case. In this regard it should be noted that the exemption from the registration of securities under the Securities Act of 1933 provided by section 3(a) (11) of that Act for certain intrastate offerings is not available to an investment company registered or required to be registered under the Investment Company Act of 1940.

A real estate investment trust, depending upon the nature of its investment portfolio and the nature of the securities it issues, may come within the definition of an investment company as contained in section 3 (a) of the Investment Company Act of 1940, in which event, absent an available exemption or exception, registration of the trust under that Act would be required. One exception from the requirements of the Act which may be applicable to a real estate investment trust is that contained in section 3(c) (6) (C) of the 1940 Act for a company primarily engaged in the business of "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" and not "engaged in the business of issuing face-amount certificates of the installment type or periodic payment plan certificates."

Thus, in determining the applicability of the exception contained in section 3 (c) (6) (C),

1 Second clause of section 4(1) is now section 4(2), as amended Aug. 20, 1964.

the character of the trust's assets must be considered. In this respect, no question would be raised where a real estate investment trust invested exclusively in fee interests in real estate or mortgages or liens secured by real estate. A trust, however, which also invested to a substantial extent in other real estate investment trusts (as is permitted by the amendment) or in companies engaged in the real estate business or in other securities might not qualify for this exception. Questions in this respect can be determined only on the basis of a consideration of the facts and circumstances in each case.

The other question to be considered in determining the availability of the section 3(c) (6) (C) exemption is the nature of the securities issued by the trust. A face-amount certificate of the installment type is defined in the Investment Company Act of 1940 as "any certificate, investment contract, or other security which represents an obligation on the part of its issuer to pay a stated sum or sums at a fixed or determinable date or dates more than 24 months after the date of issuance, in consideration of the payment of periodic installments of a stated or determinable amount...." A periodic payment plan certificate is defined as "(A) any certificate, investment contract, or other security providing for a series of periodic payments by the holder, and representing an undivided interest in certain specified securities or in a unit or fund of securities purchased wholly or partly with the proceeds of such payments, and (B) any security the issuer of which is also issuing securities of the character described in Clause (A) and the holder of which has substantially the same rights and privileges as those which the holder of securities of the character described in Clause (A) have upon completing the periodic payments for which such securities provide."

Consideration should also be given to whether the broker-dealer registration and other regulatory provisions of the Securities Exchange Act of 1934 are applicable to the real estate investment trust and those who sell its securities.

Copies of the amendment to the Internal

Revenue Code may be obtained for 10 cents from the Superintendent of Documents, U.S.

SECURITIES ACT OF 1933

Government Printing Office, Washington, D. C. 20402.

The Securities and Exchange Commission has received numerous inquiries concerning section 3 (a) (3) of the Securities Act of 1933. This section exempts from the registration and prospectus requirements of section 5 of that Act:

Any note, draft, bill of exchange, or bankers' acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding 9 months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited;

The legislative history of the Act makes clear that section 3(a)(3) applies only to prime quality negotiable commercial paper of a type not ordinarily purchased by the general public, that is, paper issued to facilitate well recognized types of current operational business requirements and of a type eligible for discounting by Federal Reserve banks. Thus the Senate Report on the Securities Act of 1933 explained the purpose of section 3 (a) (3) as follows:

Notes, drafts, bills of exchange, and bankers' acceptances which are commercial paper and arise out of current commercial, agricultural, or industrial transactions, and which are not intended to be marketed to the public, are exempted. . . It is not intended under the bill to require the registration of short-term commercial paper which, as is the usual practice, is made to mature in a few months and ordinarily is not advertised for sale to the general public. (S. Rep. No. 47 on S. 875, 73rd Cong., 1st Sess. (1933), pp. 3-4)

The House Report on the Act stated:

Paragraph (3) exempts short-term paper of the type available for discount at a Federal Reserve bank and of a type which is rarely bought by private investors. (H. R. Rep. No. 85, 73rd

Cong., 1st Sess. (1933), p. 15. See also H. R. Rep. 4314, 73rd Cong., 1st Sess., pp. 179-83; S. Rep. 875, 73rd Cong., 1st Sess., pp. 94-95, 120.) In this connection, it should be noted that some years prior to the enactment of the Securities Act of 1933, the Board of Governors of the Federal Reserve System promulgated Regulation A (12 CFR 201), which governs advances and discounts by Federal Reserve banks.1 Relevant parts of subsection (a) of Section 3 of Regulation A, in substance, set forth that a Federal Reserve bank may discount for a member bank a negotiable note, draft or bill of exchange, bearing the endorsement of a member bank, which has been issued, or the proceeds of which are to be used in producing, purchasing, carrying or marketing goods or in meeting current operating expenses of a commercial, agricultural or industrial business, and which is not to be used for permanent or fixed investment, such as land, buildings, or machinery, nor for speculative transactions or transactions in securities (except direct obligations of the United States government), and which has a maturity not exceeding 90 days (except agricultural paper, which may have a maturity of up to 9 months). In light of this background, the staff of the Commission has interpreted section 3 (a) (3) to exclude as not satisfying the 9-month maturity standard, obligations payable on demand or having provision for automatic "roll over." Furthermore, the current transactions standard is not satisfied where the proceeds are to be used for the discharge of existing indebt

1 This action was taken pursuant to the authority granted by section 4 of the Federal Reserve Act (12 U.S.C. 301) as well as by other sections of that Act. Section 3 of this regulation, in the first seven of its subsections, sets out the type of paper that qualifies for this type of discounting. Subsection (a) of section 3 states the prerequisites for discounting in general terms, while subsections (b) through (g) list and describe specific types of paper that qualify. These subsections as revised effective February 15, 1955, and as now in effect, have not been changed substantially since the enactment of the Securities Act.

restriction on trading activity. This amendment was not intended to detract from its essential character as a transaction exemption."

"Issue" concept

A basic condition of the exemption is that the entire issue of securities be offered and sold exclusively to residents of the state in question. Consequently, an offer to a nonresident which is considered a part of the intrastate issue will render the exemption unavailable to the entire offering.

Whether an offering is "a part of an issue," that is, whether it is an integrated part of an offering previously made or proposed to be made, is a question of fact and depends essentially upon whether the offerings are a related part of a plan or program. Unity Gold Corporation, 3 S.E.C. 618, 625 (1938); Peoples Securities Company, Securities Exchange Act Release No. 6176, Feb. 10, 1960. Thus, the exemption should not be relied upon in combination with another exemption for the different parts of a single issue where a part is offered or sold to nonresidents.

The determination of what constitutes an "issue" is not governed by state law. Shaw v. U.S., 131 F. 2d 476,480 (C.A. 9, 1942). Any one or more of the following factors may be determinative of the question of integration: (1) are the offerings part of a single plan of financing; (2) do the offerings involve issuance of the same class of security; (3) are the offerings made at or about the same time; (4) is the same type of consideration to be received, and (5) are the offerings made for the same general purpose.

Moreover, since the exemption is designed to cover only those security distributions, which, as a whole, are essentially local in character, it is clear that the phrase "sold only to persons resident" as used in section 3 (a) (11) cannot refer merely to the initial sales by the 1 H. R. Report No. 1838, 73rd Cong., 2d Sess. (1934), p. 40. * See Report of the Securities and Exchange Commission to the Committee on Interstate and Foreign Commerce, dated August 7, 1941, on Proposals for Amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934 where in referring to sections 3(a)(1), 3(a) ((9), 3(a) (10), 3(a)(11) and 3(b) of the Securities Act of 1933, it was said: ". . . Since these are in reality transaction exemptions, the Commission proposes and representatives of the securities' industry agree that they should be redesignated as transaction exemptions and transferred to section 4..." (p. 24).

issuing corporation to its underwriters, or even the subsequent resales by the underwriters to distributing dealers. To give effect to the fundamental purpose of the exemption, it is necessary that the entire issue of securities shall be offered and sold to, and come to rest only in the hands of residents within the state. If any part of the issue is offered or sold to a nonresident, the exemption is unavailable not only for the securities so sold, but for all securities forming a part of the issue, including those sold to residents. Securities Act Release No. 201 (1934); Brooklyn Manhattan Transit Corporation; 1 S.E.C. 147 (1935); S.E.C. v. Hillsborough Investment Corp., 173 F Supp. 86 (D.N.H. 1958); Hillsborough Investment Corp. v. S.E.C., 276 F. 2d 665 (C.A. 1, 1960); S.E.C. v. Los Angeles Trust Deed & Mortgage Exchange, et al., 186 F. Supp. 830, 871 (S.D. Cal., 1960), aff'd 285 F. 2d 162 (C.A. 9, 1960). It is incumbent upon the issuer, underwriter, dealers and other persons connected with the offering to make sure that it does not become an interstate distribution through resales. It is understood to be customary for such persons to obtain assurances that purchases are not made with a view to resale to nonresidents. Doing business within the State

In view of the local character of the section 3(a) (11) exemption, the requirement that the issuer be doing business in the State can only be satisfied by the performance of substantial operational activities in the state of incorporation. The doing business requirement is not met by functions in the particular state such as bookkeeping, stock record and similar activities or by offering securities in the state. Thus, the exemptions would be unavailable to an offering by a company made in the state of its incorporation of undivided fractional oil and gas interests located in other states even though the company conducted other business in the state of its incorporation. While the person creating the fractional interests is technically the "issuer" as defined in section 2(4) of the Act, the purchaser of such security obtains no interest in the issuer's separate business within the state. Similarly, an intrastate exemption would not be available to a "local"

mortgage company offering interests in out-ofstate mortgages which are sold under circumstances to constitute them investment contracts. Also, the same position has been taken of a sale of an interest, by a real estate syndicate organized in one state to the residents of that state, in property acquired under a sale and leaseback arrangement with another corporation organized and engaged in business in another state.

If the proceeds of the offering are to be used primarily for the purpose of a new business conducted outside of the state of incorporation and unrelated to some incidental business locally conducted, the exemption should not be relied upon. S.E.C. v. Truckee Showboat, Inc., 157 F. Supp. 824 (S.D. Cal. 1957). So also, a section 3 (a) (11) exemption should not be relied upon for each of a series of corporations organized in different states where there is in fact and purpose a single business enterprise or financial venture whether or not it is planned to merge or consolidate the various corporations at a later date. S.E.C. v. Los Angeles Trust Deed & Mortgage Exchange et al., 186 F. Supp. 830, 871 (S.D. Cal. 1960), aff'd 285 F. 2d 162 (C.A. 9, 1960).

Residence within the state

Section 3 (a) (11) requires that the entire issue be confined to a single state in which the issuer, the offerees and the purchasers are residents. Mere presence in the state is not sufficient to constitute residence as in the case of military personnel at a military post. S.E.C. v. Capital Funds, Inc. No. A46-60, D. Alaska, 1960. The mere obtaining of formal representations of residence and agreements not to resell to nonresidents or agreements that sales are void if the purchaser is a nonresident should not be relied upon without more as establishing the availability of the exemption.

An offering may be so large that its success as a local offering appears doubtful from the outset. Also, reliance should not be placed on the exemption for an issue which includes warrants for the purchase of another security unless there can be assurance that the warrants will be exercised only by residents. With respect to convertible securities, a section.

3(a) (9) exemption may be available for the conversion.

A secondary offering by a controlling person in the issuer's state of incorporation may be made in reliance on a section 3 (a) (11) exemption provided the exemption would be available to the issuer for a primary offering in that state. It is not essential that the controlling person be a resident of the issuer's state of incorporation.

Resales

From these general principles it follows that if during the course of distribution any underwriter, any distributing dealer (whether or not a member of the formal selling or distributing group), or any dealer or other person purchasing securities from a distributing dealer for resale were to offer or sell such securities to a nonresident, the exemption would be defeated. In other words, section 3 (a) (11) contemplates that the exemption is applicable only if the entire issue is distributed pursuant to the statutory conditions. Consequently, any offers or sales to a nonresident in connection with the distribution of the issue would destroy the exemption as to all securities which are a part of that issue, including those sold to residents regardless of whether such sales are made directly to nonresidents or indirectly through residents who as part of the distribution thereafter sell to nonresidents. It would furthermore be immaterial that sales to nonresidents are made without use of the mails or instruments of interstate commerce. Any such sales of part of the issue to nonresidents, however few, would not be in compliance with the conditions of section 3 (a) (11), and would render the exemption unavailable for the entire offering including the sales to residents. Petersen Engine Co., Inc., 2 S.E.C. 893,903 (1937); Professional Investors, 37 S.E.C. 173, 175 (1956); Universal Service, 37 S.E.C. 559, 563564 (1957); S.E.C. v. Hillsborough Investment Corp., 173 F. Supp. 86 (D.N.H. 1958); Hillsborough Investment Corp. v. S.E.C. 276 F. 2d 665 (C.A. 1, 1960).

This is not to suggest, however, that securities which have actually come to rest in the hands of resident investors, such as persons