I. Securities Act of 1933, as amended.... - Suits to enjoin enforcement of the Securities Act- Miscellaneous injunction proceedings.--. THIRD ANNUAL REPORT OF THE SECURITIES WASHINGTON, D. C. Section 23 (b) of the Securities Exchange Act of 1934 and Section 23 of the Public Utility Holding Company Act of 1935 provide that the Securities and Exchange Commission shall submit annually a report to the Congress covering the work of the Commission for the preceding year and such information, data, and recommendations for further legislation as it may find advisable. The following report, made pursuant to these provisions, covers the fiscal year ended June 30, 1937, FUNCTIONS OF THE COMMISSION The Securities and Exchange Commission is responsible for the administration and enforcement of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Public Utility Holding Company Act of 1935. In general, it may be stated that the Securities Act of 1933 is designed to require a complete and accurate disclosure of the material facts concerning securities offered for sale or sold in interstate commerce or by the use of the mails, and to prevent fraud in the sale of securities; the Securities Exchange Act of 1934 is designed to provide for regulation of trading upon cattal semities exchanges and in the over-the-counter markets; and the Public Utility Holding Company Act of 1935 is designed to prode for the regulation of gas and electric utility holding company After description of the purposes and the objectives sought in the Jassige of these em&mments, together with detailed statements of the fotics of the TEMONs disons of the Commission, may be found to the first and semad annual reports of the Commission. Staff Officers: Bane, Baldwin B., Director of Registration Division Blough, Carman G., Chief Accountant Brassor, Francis P., Secretary of the Commission Gilman, Wm. C.,3 Director of the Public Utilities Division Gourrich, Paul P., Director of Research Division Katz, Milton, Executive Assistant to the Chairman Neff, Harold H., Director of the Division of Forms and Regula- Saperstein, David, Director of Trading and Exchange Division Allred, Oran H., Fort Worth Regional Office Kennedy, W. McNeill, Chicago Regional Office REGISTRATION OF SECURITIES UNDER THE SECURITIES ACT OF 1933 Under the Securities Act of 1933, as amended, with certain exceptions, securities may not be publicly offered for sale or sold in interstate commerce or through the mails unless a registration statement has been filed with the Commission and is effective. A prospectus, containing the more material ultimate facts set forth in the registration statement, is also required to be filed as part of the registration statement. The law provides that a copy of the prospectus to be used in connection with the sale of registered securities must be given to every person to whom the securities are offered for sale and to every purchaser at or before the time of the sale. The registration statement serves a two-fold purpose: (1) it discloses to investors material facts concerning an issue of securities that is offered for sale to the public, and (2) it stands as a record of the representations made at the time the securities were sold, and thus, if any such representation should be false, simplifies the problem of proof in * In September 1937, Mr. Gilman resigned; Mr. C. Roy Smith was appointed Director of the Public Utillties Division, and Mr. W. J. Kenney was appointed Chief of the Oil and Gas Unit. To September 30, 1937. any legal proceedings which may result. The statement must be filed on the particular form prescribed by the Commission as appropriate to the type of the security proposed to be offered and each form provides for the submission of information essential to a fair disclosure of material facts relative to the issuer and the securities offered for sale. With certain exceptions, the Act provides for the lapse of a period of twenty days after filing before the registration statement becomes effective. This provision gives the investors a reasonable period of time in which to look into the facts concerning the issue and the issuer before the issue is offered for sale, and, in addition, allows the Commission to make an examination of the statement for omissions, inaccuracies, and untruths. If the examination of the statement discloses deficiencies, but nevertheless indicates a sincere and honest effort to comply with the requirements, the registrant is so advised. The deficiencies may be corrected by the filing of amendments. If, on the other hand, the examination reveals that the registration statement includes untrue statements or omissions of material facts in intentional or reckless disregard of the standard of disclosure prescribed by the Act, stop order proceedings may be instituted immediately. The Commission is empowered also to refuse registration in those instances where the information given is incomplete or inaccurate on its face and to undertake investigations involving examination of the issuer, underwriters, or any other person for the purpose of determining whether a stop order should issue. Further, the Commission may suspend registration after a registration statement becomes effective if it develops that the information furnished in the statement is untrue or misleading in any material particulars. Neither the fact that a registration statement for a security has been filed or is in effect, nor the fact that a stop order is not in effect with respect to that particular statement, can be treated as an indication that the Commission considers the registration statement to be true and accurate on its face or that it does not contain an untrue statement of fact or omits to state a material fact, or be held to mean that the Commission has in any way passed upon the merits of, or given approval to, the security. To represent otherwise is made a criminal act by the statute. The annual reports filed with the Commission pursuant to the provisions of Section 15 (d) of the Securities Exchange Act of 1934, as amended, by issuers having securities registered under the Securities Act of 1933, are examined and analyzed in the same manner as regis tration statements. For the purpose of giving some indication of the nature of disclosures made as a result of examinations, a few typical cases are briefly summarized below. A company engaged in the business of creating and selling to the public a class of securities known as investment contracts sought to register $10,000,000 face amount of certificates to be offered under a socalled investment trust accumulation plan. These contracts provided for either a lump sum payment or monthly installment payments on the part of the purchaser, the net proceeds being used for the purchase of shares of an underlying investment trust which were to be deposited with a trustee, who was to hold them for the account of certificate holders. The plan of investment thus involved a trust upon a trust with two sets of loading or service charges, one on the underlying trust shares and the other on the investment certificates. The certificates to be issued under the periodic or installment investment plans were stated on the face thereof and in the prospectus as having a "maturity value" of $2,000 for each $1,200 agreed to be paid by the investor. The prospectus did not disclose the fact that this figure of $2,000 was purely arbitrary, representing nothing more than the sum which the investor would obtain only when, as, and if the value of the underlying trust shares purchased with the funds paid in, less the charges and reductions, had reached $2,000. The investor had no assurance that the so-called "maturity value" would ever be reached. In fact, by reason of the substantial charges deducted from the $1,200 paid in by the investor, amounting to approximately $200, the attainment of the stated "maturity value" would require a total appreciation of almost 100% of the market value of the underlying securities. This element of contingency was artfully concealed and the use of this term, appearing in the prospectus no less than twenty times, indicated an endeavor to import to the concept of "maturity value" a specious reality for apparently no purpose other than to mislead prospective investors. The prospectus, further, in connection with an elaborate recital of the routine duties of the trustee under the plan, gave unwarranted prominence to the name of the trustee, which was a well-known financial institution, in what appeared to be an unjustified attempt to trade on its reputation. In consequence of such misleading representations and the failure of the prospectus in certain other respects to set forth clearly the information required to be furnished, the Commission instituted stop-order proceedings. The registrant subsequently amended its registration statement and prospectus, eliminating all reference to "maturity value" and otherwise revising the prospectus in keeping with the requirements of full and fair disclosure of the material facts relating to the investment plan. A registration statement filed by a bottling company in connection with a proposed public offering of common stock contained a balance sheet of the issuer which included among its assets franchise rights at a stated valuation of $2,500,000. It appearing from information contained in the registration statement that the valuation ascribed to the franchise rights was excessive, the Commission proceeded to a |