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-O-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 10 Securities Act Release No. 4024 (Feb. 4, 1959). machines and methods proposed to be used are those commonly known and employed by the glass industry. 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. "Securities Act Release No. 3984 (Oct. 31, 1958). Investigations pending at the beginning of the fiscal year__. Investigations initiated during the fiscal year-- Investigations in which stop order proceedings were authorized during the fiscal year--- Other investigations closed during the fiscal year... Investigations pending at the end of the fiscal year....... EXEMPTION FROM REGISTRATION OF SMALL ISSUES Under section 3(b) of the Securities Act, the Commission is empowered to exempt, by rules and regulations and subject to such terms and conditions as it may prescribe therein, any class of securities from registration under the act, if it finds that the enforcement of the registration provisions of the act with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering. The statute imposes a maximum limitation of $300,000 upon the size of the issues which may be exempted by the Commission in the exercise of this power. Acting under this authority the Commission has adopted the following exemptive regulations: Regulation A: General exemption for United States and Canadian issues up to $300,000. Regulation A-M : Special exemption for assessable shares of stock of mining companies up to $100,000. Regulation A-R: Special exemption for first lien notes up to $100,000. Regulation B: Exemption for fractional undivided interests in oil or gas rights up to $100,000. Regulation B-T: Exemption for interests in oil royalty trusts or similar types of trusts or unincorporated association up to $100,000. Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize amount of assessment thereon, up to $300,000. Under section 3 (c) of the Securities Act, which was added by section 307 (a) of the Small Business Investment Act of 1958, the Commission is authorized to adopt rules and regulations exempting securities issued by a company which is operating or proposes to operate as a small business investment company under the Small Business Investment Act. During the fiscal year the Commission, acting pursuant to this authority, adopted a new regulation E, which 12 Adopted July 30, 1959, Securities Act Release No. 4121. exempts upon certain terms and conditions limited amounts of securities, not in excess of $300,000, issued by any small business investment company which has received a license or a notice to proceed from the Small Business Administration. This regulation is substantially similar to the one provided by regulation A under section 3(b) of the act. Exemption from registration under section 3 (b) or 3(c) of the act does not carry any exemption from the civil liabilities for false and misleading statements imposed by section 12 (2) or from the criminal liabilities for fraud imposed by section 17 of the act. Exempt Offerings Under Regulation A The Commission's regulation A permits a company to obtain not exceeding $300,000 (including underwriting commissions) of needed capital in any 1 year from a public offering of its securities without registration if the company complies with the regulation. Regulation A requires the filing of a notification with the appropriate regional office of the Commission, supplying basic information about the company, certain exhibits, and except in the case of a company with an earnings history which is making an offering not in excess of $50,000, an offering circular which is required to be used in offering the securities. During the 1959 fiscal year, 854 notifications were filed under regulation A, covering proposed offerings of $170,241,400, compared with 732 notifications covering proposed offerings of $133,889,109 in the 1958 fiscal year. Included in the 1959 total were 42 notifications covering stock offerings of $9,460,253 with respect to companies engaged in the exploratory oil and gas business and 59 notifications covering offerings of $11,314,184 by mining companies. The following table sets forth various features of the regulation A offerings during the past 3 fiscal years: |