SECURITIES ACT OF 1933

In view of recent comments in the press concerning the rights and obligations of, and limitations on, dealers in connection with distributions of registered securities, the Commission takes this opportunity to explain the operation of section 5 of the Securities Act of 1933 with particular reference to the limitations upon, and responsibilities of, underwriters and dealers in the offer and sale of an issue of securities prior to and after the filing of a registration statement.

The discussion below assumes that the offering is not exempt from the registration requirements of the Act and, unless otherwise stated, that the mails or facilities of interstate or foreign commerce are used.

The period before the filing of a registration statement

Section 5 of the Securities Act prohibits both offers to sell and offers to buy a security before a registration statement is filed. Section 2(3) of the Act, however, exempts preliminary negotiations or agreements between the issuer or other person on whose behalf the distribution is to be made and any underwriter or among underwriters. Thus, negotiation of the financing can proceed during this period but neither the issuer nor the underwriter may offer the security either to investors or to dealers, and dealers are prohibited from offering to buy the securities during this period.1 Consequently, not only may no steps be taken to form a selling group but also dealers may not seek inclusion in the selling group prior to the filing.

It should be borne in mind that publicity about an issuer, its securities or the proposed offering prior to the filing of a registration statement may constitute an illegal offer to sell. Thus, announcement of the underwriter's identity should be avoided during this period. Experience shows that such announcements are

very likely to lead to illegal offers to buy. This subject will not be further discussed in this release since it has been extensively considered elsewhere.2

These principles, however, are not intended to restrict the normal communications between an issuer and its stockholders or the announcement to the public generally of information with respect to important business and financial developments. Such announcements are required in the listing agreements used by stock exchanges, and the Commission is sensitive to the importance of encouraging this type of communication. In recognition of this requirement of certain stock exchanges, the Commission adopted Rule 135, which permits a brief announcement of proposed rights offerings, proposed exchange offerings, and proposed offerings to employees as not constituting an offer of a security for the purposes of section 5 of the Act.

The period after the filing and before the effective date

After the registration statement is filed, and before its effective date, offers to sell the securities are permitted but no written offer may be made except by means of a statutory prospectus. For this purpose the statutory prospectus includes the preliminary prospectus provided for in Rule 433 as well as the summary prospectus provided for in Rules 434 and 434A. In addition the so-called "tombstone"

1 The reason for this provision was stated in the House Report on the bill as originally enacted as follows:

"... Otherwise, the underwriter... could accept them in the order of their priority and thus bring pressure upon dealers, who wish to avail themselves of a particular security offering, to rush their orders to buy without adequate consideration of the nature of the security being offered." H. R. Report No. 85, 73rd Cong., 1st Sess. (1933), p. 11.

See Securities Act Release No. 3844 (1957); Carl M. Loeb, Rhoades & Co., 38 S.E.C. 843 (1959); First Maine Corporation, 38 S.E.C. 882 (1959).

advertisement permitted by Rule 134 may be

used.

During the period after the filing of a registration statement, the freedom of an underwriter or dealer expecting to participate in the distribution, to communicate with his customers is limited only by the anti-fraud provisions of the Securities Act and the Securities Exchange Act, and by the fact that written offering material other than a statutory prospectus to tombstone advertisement may not be used. In other words, during this period "free writing" is illegal. The dealer, therefore, can orally solicit indications of interest or offers to buy and may discuss the securities with his customers and advise them whether or not in his opinion the securities are desirable or suitable for them. In this connection a dealer proposing to discuss an issue of securities with his customers should obtain copies of the preliminary prospectus in order to have a reliable source of information. This is particularly important where he proposes to recommended the securities, or where information concerning them has not been generally available. The corollary of the dealer's obligation to secure the copy is the obligation of the issuer and managing underwriters to make it readily available. Rule 460 Provides That as a condition to acceleration of the effective date of a registration statement, the Commission will consider whether the persons making the offering have taken reasonable steps to make the information contained in the

registration statement available to dealers who may participate in the distribution.

It is a principal purpose of the so-called "waiting period" between the filing date and the effective date to enable dealers and, through them, investors to become acquainted with the information contained in the registration statement and to arrive at an unhurried decision concerning the merits of the securities. Consistently with this purpose, no contracts of sale can be made during this period, the purchase price may not be paid or received and offers to buy may be cancelled. The period after the effective date

When the registration statement becomes effective oral offerings may continue and sales may be made and consummated. A copy of the final statutory prospectus must be delivered in connection with any written offer or confirmation or upon delivery of the security, whichever first occurs. Supplemental sales literature ("free writing") may be used if it is accompanied or preceded by a prospectus. However, care must be taken to see that all such material is at the time of use not false or misleading under the standards of section 17(a) of the Act. If the offering continues over an extended period, the prospectus should be current under the standards of section 10(a) (3). All dealers trading in the registered security must continue to employ the prospectus for the period referred to in section 4.

SECURITIES ACT OF 1933

As part of the program to reduce the United States balance of payments deficit and protect United States gold reserves, a Presidential Task Force on Promoting Increased Foreign Investment in United States Corporate Secu

rities and Increased Foreign Financing for United States Corporations Operating Abroad was appointed in October 1963. This Task Force was charged with developing programs for the increased foreign marketing of

domestic securities, with particular emphasis on the securities of United States companies operating abroad, for a review of governmental and private activities adversely affecting such financing, and for an appraisal of the various barriers to such financing remaining in major foreign capital markets. The report submitted to the President by the Task Force on April 27, 1964, contained a number of specific recommendations for actions by both the private sector and the Government. Included in the latter were recommendations that the Securities and Exchange Commission publish a release setting forth its position regarding the applicability of the registration requirements of the Securities Act of 1933 to securities offered by domestic issuers to foreign purchasers, including dealers, and the application of the broker-dealer registration requirements of the Securities Exchange Act of 1934 to foreign underwriters participating in distributions of securities exclusively to nonresidents of the United States. The Commission is publishing this release to implement these Task Force recommendations.

I. The applicability of the Securities Act of 1933 to offerings of securities outside of the United States

The registration requirements of the Securities Act apply to any offer or sale of a security involving interstate commerce or use of the mails unless an exemption is available. Since "interstate commerce" is defined in section 2(7) of the Act to include "trade or commerce in securities or any transportation or communication relating thereto... between any foreign country and any state, territory, or the District of Columbia," this might be construed to encompass virtually any offering of securities made by a United States corporation to foreign investors. However, the Commission has traditionally taken the position that the registration requirements of section 5 of the Act are primarily intended to protect American investors. Accordingly, the Commission has not taken any action for failure to register securities of United States corporations distributed abroad to foreign nationals, even though use

of jurisdictional means may be involved in the offering. It is assumed in these situations that the distribution is to be effected in a manner which will result in the securities coming to rest abroad. On the other hand, a distribution of securities by a United States corporation, through the facilities of Canadian Stock Exchanges may be expected to flow into the hands of American investors may therefore be subject to registration. Similarly, a public offering specifically directed toward American nationals abroad, including servicemen, would be regarded as subject to registration. Apart from such situations, however, it is immaterial whether the offering originates from within or outside of the United States, whether domestic or foreign broker-dealers are involved and whether the actual mechanics of the distribution are effected within the United States, so long as the offering is made under circumstances reasonably designed to preclude distribution or redistribution of the securities within, or to nationals of, the United States.

Active trading in the United States of the securities subject to the offering during or shortly after the distribution abroad may raise a question whether a portion of the distribution was in fact being made by means of such trading. However, absent such a situation, if a distribution of securities by a United States corporation is made abroad without registration in reliance upon the foregoing interpretation of the Act, dealers may trade in other securities of the same class in the United States without regard to the time limitations of the dealer's exemption in section 4(1).1

The Task Force also suggests that the Commission's statement extend to simultaneous private placements in this country of a security being offered abroad. This specifically concerns the application of the exemption from registration provided by the second clause of section 4(1) of the Act for "transactions by an issuer not involving any public offering,' the requirements for which were discussed in detail in Securities Act Release No. 4552. Gen

1 Now section 4(3), as amended Aug. 20, 1964.

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

erally, transactions otherwise meeting the requirements of this exemption need not be integrated with simultaneous offerings being made abroad and, therefore, are not subject to the registration requirements of the Act solely because a foreign offering is being made concurrently with the American private placement which otherwise meets the standards of the exemption.

II. The applicability of Section 15(a) of the Securities Exchange Act of 1934 to foreign underwriters

Generally speaking, section 15 (a) of the Securities Exchange Act of 1934 makes it unlawful for any broker or dealer to use the mails or instrumentalities of interstate commerce, including commerce between the United States and any foreign country, to engage in securities transactions otherwise than on a national securities exchange unless he is registered with the Commission. However, if a foreign brokerdealer, patricipating as an underwriter in a distribution of American securities being made abroad, or being made both abroad and in the United States, limits his activities to (1) tak

ing down securities which he sells outside the jurisdiction of the United States to persons other than American nationals, and (2) participating solely through his membership in the underwriting syndicate in activities of the syndicate in the United States such as sales to selling group members, stabilizing, over-allotment, and group sales, which activities are carried out for the syndicate by a managing underwriter or underwriters who are registered with the Commission, then the Commission will generally raise no objection if the foreign broker-dealer performs these limited functions without registration as a brokerdealer under section 15 of the Act.

If a foreign broker-dealer limits his securities activities in areas subject to the jurisdiction of the United States in the manner described above, then he could participate in any number of such distributions, assuming that he does not engage in other activities which require registration. Such other activities would include either selling securities into the United States or purchasing securities in the United States for sale to American investors abroad.

stone" advertisements in the case of certain mutual funds which charge no sales load and employ no salesmen. In an appendix to your memorandum you set forth 22 examples of the type of statements you feel should be permitted in tombstone advertisements of no-load funds. These include statements concerning the funds' organization, selling methods, investments and performance.

You submit that mutual funds which do not employ salesmen to distribute their securities operate at a competitive disadvantage and must necessarily rely almost exclusively on tombstone advertisements to attract prospective investors, asserting that the present restrictions of Rule 134 do not permit these funds to portray adequately to the public the nature of the particular fund and the advantages of its method of selling.

Since it appears that several of the items contained in the appendix are permissible under Rule 134 as presently in effect, it may be appropriate to clarify briefly our interpretation of the scope of tombstone advertising as applied to your examples.

The policy underlying the limitations of Rule 134 was stated in Securities Act Release No. 3535, dated March 10, 1955, in announcing the proposal to adopt this rule:

It is clear, however, that such communications are intended to be limited to announcements identifying the existence of a public offering and the availability of a prospectus and they are not to be selling literature of any kind. [emphasis supplied]

In my opinion, section 2(10) (b) and Rule 134 must be interpreted to prevent the inclusion in tombstone advertising of language intended to present a selling argument as opposed to the clear identification of an offering.

In the case of mutual funds, a general indication of the type of fund, the type of its portfolio and the manner in which its securities are offered to the public would appear to be within the purview of the section and the rule. Identification of the fund as a "no-load" fund, reference to the fact that the fund has no loading or sales charge or that it employs no salesmen would fall within the scope of Rule 134. Thus, the statements in the appendix,

designed only to identify the nature of the fund and the manner in which its shares are sold, would, if not misleading and if not unduly repetitious or argumentative, comply with the rule:

Get the facts on a no-load fund.

100 percent of your money is invested-none goes to pay salesmen.

All your invested dollars purchase shares. Nothing is subtracted to pay salesmen.

No loading charge-no sales charge-no salesmen will call.

We have no salesmen. You pay no loading charge or commission.

A brief identification of the fund's policy, such as, "An investment in this fund includes diversification and participation in a broad list of companies, both U.S. and foreign." or "When you invest in this fund, you get investment diversification and professional management for your investment dollars." would be permissible, assuming the accuracy of such statements. However, a listing of the fund's portfolio or the identification of companies whose securities represent the largest holdings in its portfolio would exceed the limitations of Rule 134.

It would be permissible, in my opinion, to present in a tombstone advertisement a listing of the industry components of the fund portfolio, provided such a list is not misleading in the light of the relative amounts of the portfolio investment in such industries. In this regard, it should be emphasized that the use of such a list of industry components is permissible only as a means of fairly identifying the fund's investment policy. The use of larger type or other typographical or printing devices to emphasize some of the components would be inconsistent with the policy underlying Rule 134. The use of photographs is also beyond the scope of Rule 134. There would, however, be no objection to the use of the established trademark of the investment company. Nor will objection be made to a statement as to when the fund started in business or a simple announcement to special groups, such as, "The fund invites the attention of pension and retirement funds."

While the naming of the investment adviser