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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 :
Most of the offerings which were underwritten were made by commercial underwriters, who participated in 251 offerings in 1959, 185 offerings in 1958, and 252 offerings in 1957. The remaining cases where commissions were paid were handled by officers, directors, or other persons not regularly engaged in the securities business. Suspension of Exemption
Regulation A provides for the suspension of an exemption thereunder where, in general, the exemption is sought for securities for which the regulation provides no exemption or where the offering is not made in accordance with the terms and conditions of the regulation or in accordance with prescribed disclosure standards. Following the issuance of a temporary suspension order by the Commission, the respondents may request a hearing to determine whether the temporary suspension should be vacated or made permanent. If no hearing is requested within 30 days after the entry of the temporary suspension order, and none is ordered by the Commission on its own motion, the temporary suspension order becomes permanent.
During the 1959 fiscal year, temporary suspension orders were issued in 87 cases as compared with 88 in the 1958 fiscal year. Of the 87 orders, 2 were later vacated. Requests for hearing were made in 26 cases. In 11 of such cases the requests were later withdrawn, and as of June 30, 1959, the proceedings in the remaining 15 cases were still pendingThe names of the companies involved in the orders issued during the 1959 fiscal year are set forth in table 7 of the appendix.
As indicated in the 24th annual report, 11 cases were pending as of June 30, 1958, in which a hearing was requested after a temporary suspension order had been issued. In four of such cases the issuers withdrew their hearing requests and consented to the entry of permanent suspension orders and in three cases permanent suspension orders were entered by the Commission after hearings. The remaining four cases were pending on June 30, 1959.
Certain of the above cases are summarized below to illustrate the misrepresentations and other noncompliance with the regulation which led to the issuance of suspension orders.
Brookridge Development Corporation.—The temporary suspension order alleged that the terms and conditions of regulation A were not complied with in that the notification failed to disclose all sales of unregistered securities by the issuer or any principal security holder within one year prior to filing. It was asserted, moreover, that the amount of securities proposed to be offered and the amount sold during the past year in violation of section 5 of the act would exceed the regulation A $300,000 limitation. It was also alleged that the offering circular was materially misleading in failing to disclose:
13 Shortly after the end of the fiscal year, the suspension orders in three of these cases were made permanent.
(1) Options to which officers of the issuer were entitled; (2) security holdings of the officers and directors; and (3) the effect of the underwriter's participation in the market on the price of the issuer's securities. In addition, the offering circular was alleged to be materially misleading in its inclusion of $176,478.86 described as “Investment in Subsidiaries" in the December 31, 1958, consolidated balance sheet, and by the inclusion in the consolidated income statement of dividends received from subsidiaries. The Commission's order further averred that the use of the offering circular without appropriate disclosure would be in violation of section 17 of the Securities Act of 1933. The issuer requested a hearing, but this request was subsequently withdrawn and the suspension order became permanent with the lapse of time.
Empire Oil Corporation.—The order temporarily suspending the regulation A exemption alleged that the terms and conditions of regulation A had not been complied with in that escrow arrangements for certain shares had not been made with an independent escrow agent and information was not supplied as to the issuer's predecessors and affiliates. Moreover, it was asserted, the offering circular was materially misleading in failing to disclose information with respect to the offering of securities for additional properties, the net production of crude oil and natural gas, estimated oil reserves, and existing or threatened litigation against the issuer. Also, the offering circular was alleged to be materially misleading in its use of appraisal valuations. Violation of section 17 of the Securities Act, in addition, was asserted. No hearing was requested, and the suspension order became permanent with the lapse of time.
Florida National Development Corporation.—The temporary suspension order alleged that the regulation A terms and conditions had not been complied with in that, among other things, the $300,000 ceiling was exceeded and the issuer failed to disclose that one MacElrod was a promoter or predecessor, or both, of the issuer. The issuer's offering circular was averred to be false and misleading in its failure to disclose: (1) the exact amount paid for the issuer's properties and whether such properties were acquired by the issuer in arms-length transactions; (2) the facts surrounding certain brokerage commissions; (3) the circumstances concerning a $759,660 mortgage and note; and (4) the status of an option on 1,860 acres of land. Further, the financial statements included in the offering circular were materially misleading. The temporary suspension order also asserted violation of section 17 of the Securities Act. No hearing was requested and the temporary suspension order became permanent with the lapse of time.
Gob Shops of America.—The Commission temporarily suspended the regulation A exemption because it had reason to believe that the issuer's notification failed to comply with the terms and conditions of regulation A and that the offering circular contained false and misleading statements concerning the market and the market price of the stock and the underwriter's activities in the maintenance, domination and control of the market and market price of the stock. A hearing was held at the issuer's request. The issuer moved to dismiss the proceedings on the ground that its withdrawal had become effective and in the alternative requested that withdrawal be permitted, asserting that its failings involved “inadvertent and empty infractions of technical rules or mistaken acts." The Commission held that there was no right under the circumstances to withdrawal of a notification and denied the motion to dismiss. The Commission concluded that the omission to state that the price of the stock was artificially inflated and that the market was not free and open was a serious deficiency. Accordingly, the issuer's request for withdrawal was denied and a permanent suspension order was entered by the Commission. 14
Inspiration Lead Company, Inc.—The temporary suspension order alleged numerous deficiencies in the issuer's offering circular concerning, among other things, the issuer's past operations, ore reserves, mining costs, and assets. A hearing was held pursuant to the issuer's request. At the hearing the issuer conceded that the offering circular was inadequate and incomplete in a number of respects, but asserted that the deficiencies were the result of inadvertence and mistake and asked that it be permited to withdraw its filing for the purpose of revision and correction. The Commission, however, found the deficiencies and omissions to be serious and extensive. It stated, “We have previously indicated that an opportunity to amend a deficient filing cannot be permitted to impair the required standards of careful and honest filings or to encourage a practice of irresponsible or deliberate submission of inadequate material to be followed by correction of deficiencies found by our staff in its examination.” The Commission concluded that there was not such a showing of good faith or other mitigating circumstances in connection with the deficiencies as to justify a further opportunity to present an adequate filing in lieu of a permanent suspension. The issuer's request for withdrawal was denied and an order was issued permanently sus. pending the exemption.15
Macinar, Inc.—The order of temporary suspension in this case alleged that the notification failed to disclose that Automatic Table Co. was an affiliate of the issuer; that it failed to disclose securities sold by Paul Gaston, an affiliate; and that the $300,000 regulation A ceiling would have been exceeded by the offering. It was also averred that the offering circular contained untrue statements of material facts
14 Securities Act Release No. 4075 (May 6, 1959). 15 Securities Act Release No. 4076 (May 7, 1959).