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an underwriter was in connection with two proposed offerings neither of which involved securities of real estate investment companies. One of these offerings was deregistered shortly after the registration statement became effective. In the other offering, made pursuant to a claimed exemption from registration under Regulation A under the Act, the firm acted together with co-underwriters and sold 30,000 shares at $2 per share. The Commission held that the limited experience of the underwriter was a material factor bearing on the success of the offering and that the failure to disclose it was a material omission.
The Commission's opinion stated that the underwriter's investigation of registrant's business was so limited in nature that he did not exercise the degree of care necessary for and required of an underwriter to satisfy himself as to the accuracy and adequacy of the prospectus. His investigation consisted of (1) visits to two of the registrant's three tracts of land, (2) an examination of a list of registrant's stockholders and (3) the obtaining of a credit report on the registrant's president. As to all other matters in connection with the registration statement, the underwriter apparently relied only on representations of the registrant's management. The Commission referred to a report, which preceded the passage of the Act, in which the Congress recognized that the high standards of honesty, care and competence required of fiduciaries were responsibilities assumed by reputable investment bankers. The Commission also cited various provisions in the Securities Act and the Securities Exchange Act which imposed upon underwriters a responsibility to conform to those standards upon pain of severe civil liability or revocation of broker-dealer registration.
Doman Helicopters, Inc.—The registrant was organized in 1945 for the purpose of developing certain inventions in the field of helicopter rotor construction. It had never engaged in any substantial manufacturing activity and had never earned a profit. Its financial history had been marked by continual difficulties and by the repeated conversion of creditors' rights into common stock positions. Its future plans were predicated on a proposed helicopter to be called the D10B, which was intended to be a variant of an earlier model, two prototypes of which had been sold to and tested by the Defense Department. After testing these earlier prototypes and after making an extensive study of the registrant's rotor system, the Department of Defense had found "no significant advantages in the Doman rotor system over other types."
On April 19, 1962, registrant filed a registration statement with respect to 681,971 shares of its common stock to be offered to the public
* H. Rept. No. 85, 73d Cong., 1st Sess. (1933) at p. 5.
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
6 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: In vestigations pending at beginning of fiscal year..
27 Investigations initiated during the fiscal year..
In vestigations closed during the fiscal year...
In vestigations pending at the close of the fiscal year...
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.
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 regulation 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