without the aid of underwriters. At that time its liabilities were in excess of its assets and its shares had a book value of minus 30 cents per share. This book value would have increased to 55 cents per share if all of the shares covered by the registration statement had been sold at the proposed offering price. Purchasers would therefore have suffered a substantial immediate dilution, the benefit of which would have inured entirely to the existing stockholders. The cover page of the prospectus stated that the shares were being offered as a speculation and referred the reader to a section headed "The Company," which summarized the registrant's poor financial history and stated that it was then insolvent, but which made no reference to the dilution aspects of the offering, to the fact that there was no D-10B in existence, or to the history of the registrant's dealings with the Defense Department. Elsewhere in the prospectus a passing reference was made to the registrant's unsuccessful efforts to secure military markets for its helicopters. But neither the nature of those efforts, which had in fact been strenuous and persistent, nor the Department's adverse action with respect to them was disclosed. The prospectus spoke of the D-10B as though it were an existing helicopter and claimed that it was superior to other helicopters without ever disclosing that it had never been flown, tested or even assembled in prototype form. The prospectus claimed that the registrant's hingeless rotor system was superior to other devices, stated that it was the "only fully developed and proven helicopter design concept" that did not involve the use of hinges, and implied that the system was protected by an elaborate patent structure. It did not disclose the fact that the system had never been subjected to normal day to day usage and made no mention of the fact that two of the registrant's competitors were developing hingeless rotor systems, something that the registrant's patents did not preclude them from doing. Moreover, during the course of the stop order proceedings the registrant conceded that hingelessness was not in itself meaningful and that the discussion of hingelessness in the prospectus was incomplete. The Commission issued a stop order that suspended the effectiveness of the registration statement. It found that there was no adequate factual foundation for the registrant's claims with respect to the merits of the D-10B and its hingeless rotor system. The failure to disclose the facts that the Department of Defense had found registrant's hingeless rotor system to be devoid of any special merit was held a material omission. The registrant argued that it was under no duty to disclose the Defense Department findings because the persons who made them were biased and incompetent and because it did Securities Act Release No. 4594 (March 27, 1963). not intend to sell to the military. The Commission disagreed, holding that: "Irrespective of the correctness of the Department's conclusions, they constitute a determination by the technical staff and responsible authorities of the largest single purchaser of helicopters that for their purposes registrant's rotor system has no special merit. Such determination was a significant adverse factor, and the failure to disclose it rendered the prospectus misleading." The Commission also found, among other deficiencies, that the prospectus "presented an incomplete and distorted portrayal of the complex of risk elements involved," that "it was essential that the speculative aspects of registrant's business and the dilution aspects of the offering be set forth and described concisely and lucidly at the very outset of the prospectus under an appropriate caption directing attention to the fact that special risks are present," and that neither the heading "The Company" used in the body of the prospectus nor the statement on its cover page that the securities were offered as a speculation was sufficient to serve that purpose. Registrant argued that the registration statement against which the proceeding was directed was a mere "preliminary filing," which it had always intended to amend, contended that the proceeding had been prematurely brought since no letter of comment had been sent by the Commission's staff, and asked the Commission to deem the registration statement to have been superseded by an amended registration statement filed while the hearings were in progress. The Commission held that registrant's "preliminary filing" concept had no statutory basis, that "registrants are under a duty to make every effort to see to it that their initial filings measure up to the standards prescribed by the Act," and that letters of comment were merely informal administrative aids "developed. . . for the purpose of assisting those registrants who have conscientiously attempted to comply with the Act," which are "not generally employed where the deficiencies appear to stem from careless disregard of the statutes and rules or a deliberate attempt to conceal or mislead or where the Commission deems formal proceedings necessary in the public interest." With respect to the assertedly curative amendment that had been filed after the institution of the proceeding, the Commission pointed out that it considers such amendments only when it is of the opinion that such consideration will be in the best interests of investors and of the public. It concluded that this was not such a case in view of the serious character of the deficiencies, the large amount of the registrant's stock outstanding and held by approximately 8,000 public investors, the fact that the misleading information in the registration statement had been a matter of public record on which investors might have relied, and the further facts that the registrant had done nothing to advise its stockholders and investors generally of the misleading character of the information in the registration statement, and that the amendment was itself misleading and inadequate. 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 examine witnesses and require the production of pertinent documents. The Commission is also authorized by Section 20 (a) of the Act to make an investigation to determine whether any provision of the Act or of any rule or regulation prescribed thereunder has been or is about to be violated. In appropriate cases, 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 examinations and investigations with which the Commission was concerned during the fiscal year: Investigations pending at beginning of fiscal year.. Investigations closed during the fiscal year.. Investigations pending at the close of the fiscal year.. 27 20 20 EXEMPTION FROM REGISTRATION OF SMALL ISSUES The Commission is authorized under Section 3 (b) of the Securities Act to exempt, by its 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 rules and regulations: Rule 234: Exemption of first lien notes. Rule 235: Exemption of securities of cooperative housing corporations. Rule 236: Exemption of shares offered in connection with certain transactions. Regulation A: General exemption for United States and Canadian issues up to $300,000. Regulation B: Exemption for fractional undivided interests in oil or gas rights up to $100,000. Regulation F: Exemption for assessments on assessable stock and for assessable stock offered or sold to realize the amount of assessment thereon. 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. Acting pursuant to this authority, the Commission has adopted a Regulation E which exempts upon certain terms and conditions limited amounts of securities issued by any small business investment company which is registered under the Investment Company Act of 1940. This regulation is substantially similar to the one provided by Regulation A adopted 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 upon any person by Section 12(2) or from the criminal liabilities for fraud imposed upon any person by Section 17 of the Act. Exempt Offerings Under Regulation A The general exemption under Section 3 (b) is embodied in Regulation A, Rules 251-263 under the Act, which permits a company to obtain needed capital not in excess of $300,000 (including underwriting commissions) in any 1 year from a public offering of its securities without registration, if the company complies with certain requirements. Secondary offerings by control persons are limited under the regula tion to $100,000 in a year for any one such person, but a total of $300,000 for all such persons and the issuer. Regulation A requires that the issuer file a notification supplying basic information about the company, certain exhibits, and an offering circular which must be used in offering the securities. However, in the case of a company with an earnings history which is making an offering not in excess of $50,000 an offering circular need not be used. A notification is filed with the Regional Office of the Commission in the region in which the company has its principal place of business. During the 1963 fiscal year, 517 notifications were filed under Regulation A, covering proposed offerings of $101,040,982, compared with 1,065 notifications covering proposed offerings of $237,238,600 in the 1962 fiscal year. Included in the 1963 total were 34 notifications covering stock offerings of $3,819,980 with respect to companies engaged in the exploratory oil and gas business, 21 notifications covering offerings of $5,035,410 by mining companies and 16 notifications covering offerings of $3,414,548 by companies featuring new inventions, products or processes. The following table sets forth various features of the Regulation A offerings during the past 3 fiscal years: 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 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 1963 fiscal year, temporary suspension orders were issued in 53 cases, which, added to the 31 cases pending at the beginning of the year, resulted in a total of 84 cases for disposition. Of these, the temporary suspension order was vacated in 2 cases and became permanent in 55 in 27 by lapse of time, in 20 by withdrawal of the request for hearing, and in 8 after hearing. Thus, there were 27 cases pending at the end of the fiscal year. : One of the cases disposed of during the year is summarized below to illustrate the type of misrepresentations and other noncompliance with the regulation which led to the issuance of suspension orders. 717-943-64 |