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pending the effectiveness of the registration statement. Among the deficiencies found to exist are those described below.

The prospectus failed to contain an adequate and accurate statement with respect to the volume of the registrant's production, the amount of sales to the customers listed in the prospectus, the registrant's competitive position in the industry and the nature of its sales and distribution arrangements. The financial statements included in the prospectus were not prepared in accordance with the Commission's requirements and good accounting practice. For example, sales returns were not shown as a deduction from sales but were treated as purchases of raw material. The income statement showed a net profit from operations for a 4-month period of over $17,000 whereas, if it had been properly prepared, it would have shown a substantial loss.

The prospectus failed to disclose that the compensation of the underwriter included the difference between the exercise price of the 36,000 warrants which the underwriter was to receive and the market price of the stock. The prospectus was also misleading in stating that the underwriter was to pay 1 cent for each warrant, whereas it does not appear that any arrangement was made for such payment, in addition, the prospectus failed to state the possible adverse effect upon the registrant and its security holders of the granting of warrants to the underwriter and to certain other persons, and to state adequately and accurately the purposes for which proceeds from the sale of the securities were to be used.

The Commission issued a stop order suspending the registration statement shortly after the end of the fiscal year.? Subsequently, the registrant amended the registration statement to make appropriate disclosure in accordance with the Commission's decision and the Commission lifted its stop order, thus permitting the registration statement to become effective.

Managed Funds Incorporated.—The registrant, an open-end management type investment company registered under the Investment Company Act of 1940, was organized under the laws of Delaware in 1946. The promoters were Hilton H. Slayton, Hovey E. Slayton, and Thomas W. Ruth. Hilton Slayton was president and a director, and Hovey Slayton was a vice president and a director, of the registrant. The registrant filed a registration statement under the Securities Act of 1933 in 1954 and subsequently registered additional securities by amendment as permitted by section 24(e) of the Investment Company Act. The Commission instituted proceedings under the Securities Act to determine whether a stop order should issue suspending the effectiveness of the registration statement.

. Securities Act Release No. 4116 (July 17, 1959). & Securities Act Release No. 4120 (July 24, 1959).

The proceedings developed the fact that although Slayton Associates, Inc., all of the voting stock of which was owned by Hilton and Hovey Slayton, was under contract with the registrant to act as its investment advisor and had been paid for such services, it had entered into a contract with Stephen M. Jaquith, a registered representative of a brokerage firm, under which Jaquith was to perform the services of investment advisor for the registrant. For his services, Jaquith and his firm received substantial compensation in the form of commissions on securities transactions. A portion of these commissions were, at the direction of Hilton Slayton, credited to two other individual's, one his brother-in-law and the other a director of the reg. istrant and the Slayton's former attorney. This contract with Jaquith was not disclosed in the registration statement nor had it been approved by the stockholders of the registrant as required by the Investment Company Act.

The record showed that the board of directors gave scant attention to the management of the registrant; made no effort to be informed concerning registrant's policies and whether such policies were being followed; made no decisions concerning purchases and sales of portfolio securities and generally permitted the registrant to be managed by the Slaytons without consultation with or approval by the board as a whole. None of this was disclosed in the registration statement. The prospectus represented that the operations of the registrant were under the supervision and direction of its board of directors and failed to point out that the Slaytons were assuming the functions of the board of directors in directing the operations of the registrant.

The prospectus represented that the principal objective of the registrant was capital growth, that such investment policy would result in normal turnover of portfolio securities and that dividends would be paid quarterly based on the receipt of income or profits on securities held. These representations were materially misleading since the registrant did not follow the stated policies but instead followed the policy of investment for the purpose of providing a flow of cash to its stockholders at a high uniform rate and engaged in a policy of excessive portfolio turnover.

The prospectus was also misleading in failing to disclose that the registrant's policy of realizing capital gains for the purpose of making quarterly distributions to shareholders was deleterious to the position of the shareholders in several respects. First, it required a high rate of portfolio turnover which resulted in the payment of large amounts of brokerage commissions and the payment of higher prices on the repurchase of identical securities immediately after their sale. Second, it further reduced the invested capital of shareholders who reinvested their distributions, since a sales load was charged on such reinvestment. Third, it did not take into consideration whether proper management would require the sale of securities in which net unrealized depreciation existed and thus avoid making distributions which were taxable to shareholders. Fourth, as noted above, the policy of distributing capital gains quarterly was not consistent with the objective of capital growth of the portfolio.

It was registrant's policy to place a portion of the orders for transactions in portfolio securities with broker-dealers who sold its shares. Reciprocal business in the volume of eight or nine million dollars was directed to approximately 36 dealers for the fiscal year ended November 30, 1958. The Commission held that the prospectus should have disclosed that brokerage transactions were directed to broker-dealers who had sold shares of the registrant. In addition, the prospectus should have disclosed that obligations for merchandise and services rendered to the registrant's underwriters and investment advisors were being satisfied by directing to the suppliers brokerage commissions on transactions in the portfolio securities of the registrant. These disclosures should have accompanied the statements in the prospectus of the amount of sales load reallowed to dealers to make these statements not misleading.

On the basis of the Commission's findings, a stop order was entered shortly after the end of the fiscal year suspending the effectiveness of the registration statement."

Mon-0-Co Oil Corporation.-Registrant, a Montana corporation, was organized in 1940 and engaged in the acquisition of oil and gas leases and exploration for oil and gas. It filed a notification and offering circular under regulation A in March 1957 for the purpose of obtaining an exemption from registration with respect to an offering to its stockholders, pursuant to preemptive rights, of 4,000 stock units, each unit consisting of one share of class A stock and 24 shares of class B stock at $75 per unit and an offering of 14,474 stock units in exchange for certain working interests held by public investors. The Commission thereafter temporarily suspended the exemption. In July 1957, the registrant filed a registration statement covering the same offering plus an additional offering of 4,000 stock units to the stockholders. Prior to the effective date of the registration statement, the Commission instituted stop order proceedings which were consolidated with proceedings to determine whether the order suspending the regulation A exemption should be vacated or made permanent.

The Commission determined that the regulation A exemption should be permanently suspended, on the grounds, among other things, that the offering circular contained false and misleading statements of material facts and that the amount of the offering exceeded the maximum amount of $300,000 permitted for offerings under regulation A. With respect to the stop order proceedings, the Commission found

• Securities Act Release No. 4122 (July 30, 1959).

that the geologist's report included in the prospectus contained an excessive estimate of recoverable reserves of oil, and that the registration statement was also materially deficient in the description of the registrant's other properties, in stating the total estimated expenses of the offering and in stating the purposes for which the proceeds were to be used. It also found that the material in the prospectus was poorly organized and that much of the information contained in it was not presented in clear and understandable fashion. Material relating to the same subject matter was scattered throughout various sections of the prospectus, with the result that the ordinary investor would have great difficulty in ascertaining the essential elements of the registrant's business and the merits of the proposed offering without referring to numerous portions of the prospectus and making independent calculations and conclusions as to the facts. The speculative features of the offering were not accurately and adequately disclosed, and there were a number of other deficiencies in the regis. tration statement.

The Commission refused to permit the registration statement to be withdrawn and issued a stop order suspending its effectiveness. 10

Texas Glass Manufacturing Corporation.—The registrant, a Texas corporation, was organized in 1952 to engage in the manufacture of window and heavy sheet crystal glass. The company's only property consisted of a plant site in Bryan, Tex., donated by that city and the deed for which was held in escrow contingent upon the execution of a contract to construct a plant. The registrant filed a registration statement in 1957 covering a proposed public offering of 2,700,000 shares of its $1 par value common stock at $2 per share, plus 300,000 shares subject to certain options at $1 per share. Amendments were subsequently filed which, among other things, changed the number of shares being registered. The Commission instituted stop order proceedings with respect to the registration statement in July 1957.

The Commission found that the registration statement contained many deficiencies, some of which were highly material and some of which, while relatively less important, were indicative of a general lack of care in the preparation of the registration statement. Thus, the registration statement contained materially misleading statements with respect to the company's stage of development, the kind of glass which it proposed to manufacture, the processes to be used in manufacturing glass, the source of raw materials and the nature of the market for the registrant's products. For example, it was stated that the company would produce its glass on machines and by methods that are unique and less time consuming, whereas it appeared that the machines and methods proposed to be used are those commonly known and employed by the glass industry.

10 Securities Act Release No. 4024 (Feb. 4, 1959).

The registration statement indicated that certain previous sales of the company's stock were exempt from registration under section 3(a)(11) of the act, whereas it appeared that no exemption was available and that there was a contingent liability on the part of the company for such sales which liability was not reflected in the company's financial statements. The prospectus also indicated that 80 percent of the proceeds from the sale of the stock would be placed in an escrow fund to be returned to investors should the company fail to raise enough funds to carry out its plans, but no further information was given with respect to the nature of any escrow agreement or the circumstances under which such fund would be returned to investors. The prospectus also set forth statements with respect to costs applicable to plant construction contracts without indicating that such contracts had not yet been executed. The registration statement also included hypothetical figures purporting to show production costs and revenues for the proposed plant and setting forth a substantial figure as the annual net profit, even though the company had not yet engaged in any business. There were also other deficiencies in the disclosures provided in the registration statement.

In view of the numerous and serious deficiencies in the registration statement the Commission issued a stop order suspending the effectiveness of the registration statement.11

EXAMINATIONS AND INVESTIGATIONS

The Commission is authorized by section 8(e) of the act to make an examination in order to determine whether a stop order proceeding should be instituted under section 8(d). For this purpose the Commission is empowered to subpoena witnesses and require the production of pertinent documents. Six such examinations were initiated during the 1959 fiscal year. None were pending from the previous fiscal year. In two cases the examinations led to stop order proceedings under section 8(d). Four examinations were pending at the close of the fiscal year.

The Commission is also authorized by section 20(a) of the act to make an investigation to determine whether any provisions of the act or of any rule or regulation prescribed thereunder have been or are about to be violated. Investigations are instituted under this section as an expeditious means of determining whether a registration statement is false or misleading or omits to state any material fact. The following table indicates the number of such investigations with which the Commission was concerned during the fiscal year.

a

11 Securities Act Release No. 3984 (Oct. 31, 1938).

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