designated for new money purposes, including plant, equipment and working capital, 3 percent for retirement of securities, and 14 percent for all other purposes including purchases of securities. As compared with the 1964 fiscal period, funds for new money purposes and retirement of securities declined slightly while funds for other purposes showed a moderate rise.

REGISTRATION STATEMENTS FILED

During the 1965 fiscal year, 1,376 registration statements were filed for offerings of securities aggregating $19.1 billion, as compared with 1,192 registration statements filed during the 1964 fiscal year for offerings amounting to $18.6 billion. This represents an increase of 15.4 percent in the number of statements filed and 3 percent in the dollar amount involved. Filings by companies that had not previously filed registration statements totaled 458, representing 33 percent of the total. Corresponding figures for the 1964 and 1963 fiscal years were 322, or 27 percent, and 357, or 31 percent, respectively.

Since the effective date of the Securities Act and through June 30, 1965, a total of 25,422 registration statements has been filed by 11,643 different issuers covering proposed offerings of securities aggregating over $277 billion. Particulars regarding the disposition of these statements are summarized in the following table:

Number and disposition of registration statements filed

• Includes 167 registration statements covering proposed offerings totaling $5,617,389,958 filed by investment companies under Section 24 (e) (1) of the Investment Company Act of 1940 which permits registration by amendment to a previously effective registration statement.

Excludes 3 registration statements that became effective during the year but were subsequently withdrawn; these statements are included in the 82 statements with drawn during the year.

Excludes 1 registration statement that became effective prior to July 1, 1964, which was placed under stop order during the year, and 12 registration statements effective prior to July 1, 1964, which were withdrawn during the year; these statements are reflected under stop orders and withdrawn, respectively.

During the 1965 fiscal year, 82 registration statements were withdrawn. The reasons assigned by the various registrants for requesting withdrawal are shown in the following table:

Reason for withdrawal request

Number of Percent of statements total withdrawn withdrawn

1. Withdrawal requested after receipt of letter of comment.

2. Registrant was advised that stop-order proceedings would be instituted if statement not withdrawn.

3. After stop-order proceedings.

4. Change in financing plans.

5. Change in market conditions.

6. Financing obtained elsewhere..

7. Registrant unable to negotiate acceptable agreement with underwriter. 8. Filing to be made on proper form.

9. New registration statement to be filed.

Total..

STOP ORDER PROCEEDINGS

Section 8(d) of the Act provides that, if it appears to the Commission at any time that a registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may institute proceedings to determine whether a stop order suspending the effectiveness of the registration statement should be issued. Where such an order is issued, the offering cannot lawfully be made, or continued if it has already begun, until the registration statement has been amended to cure the deficiencies and the Commission has lifted the stop order.

At the beginning of the 1965 fiscal year, four stop order proceedings were pending. Three additional proceedings were instituted during the year, six were terminated (four through issuance of stop orders,* one through dismissal, subject to distribution of the Commission's opinion, and one through withdrawal of the registration statement pursuant to an offer of settlement "), and one was pending at the end of the year. For the first time, stop orders were issued pursuant to delegated authority (by the Director of the Office of Opinions and Review) in those instances where the registrants concerned consented to the issuance of such orders."

* Clinton Engines Corporation, Securities Act Release No. 4724 (September 28, 1964), discussed at p. 32, infra; White Caps Gold Mining Company, Securities Act Release No. 4774 (March 29, 1964); Cetron Electronics Corporation, Securities Act Release No. 4780 (May 11, 1965); Hercules Mines Company of Nevada, Securities Act Release No. 4787 (June 28, 1965).

Franchard Corporation (formerly Glickman Corporation), Securities Act Release No. 4710 (July 31, 1964), discussed at pp. 30-32, infra.

6

Shasta Minerals & Chemical Company, Securities Act Release No. 4741 (November 24, 1964).

7 White Caps Gold Mining Company, Cetron Electronics Corporation, and Hercules Mines Company of Nevada, all supra.

8

Franchard Corporation (formerly Glickman Corporation) These proceedings raised issues as to the adequacy of three registration statements (all of which had become effective) filed by a large cash flow real estate company and of a series of post-effective amendments to one of those statements. The Commission found the registration statements materially false and misleading because of their failure to disclose that large sums had been transferred from registrant to its controlling stockholder and chief executive officer for use in his own business ventures and that such controlling person had pledged his holdings in registrant as collateral for high-interest loans from unconventional sources, which loans had placed him in a strained financial position, had created a likelihood of a shift in control, and had also given rise to potential conflicts between his interests and those of the other shareholders. In its discussion of these matters the Commission pointed out that all of registrant's public offerings had been predicated on its controlling person's reputed expertise as an investor in and manager of real property. Although the diversion of registrant's funds was known only to the controlling person and one subordinate, the Commission held that regardless of the diligence which may have been exercised in the preparation of a registration statement, such statement was materially false and misleading whenever it failed-for whatever reason-to meet the statutory standard of disclosure.

In holding that the controlling person's pledges should have been disclosed, the Commission rejected registrant's contentions that such disclosure would have been an unwarranted intrusion into his personal affairs and was in any event not called for by the registration forms under the Securities Act. The Commission pointed out that an insider of a corporation that is asking the public for funds cannot keep private those of his personal affairs that impinge significantly on the affairs of the company. The Commission disposed of the second contention by observing that its registration forms are not exhaustive enumerations of every item that might possibly be material in the special circumstances of a particular offering and by pointing out that Rule 408 under the Securities Act requires the disclosure of all material information that may be necessary to keep the required statements from being misleading.

As to one important issue, however, the Commission agreed with the registrant and rejected the staff's charges. The staff contended that registrant's filings should have disclosed that its directors had failed to exercise the necessary diligence with respect to the day-to-day operations of the company. While noting that it had required disclosure concerning directors' performance where there was a virtual abdication of responsibility or where affirmative representations had been 8 Securities Act Release No. 4710 (July 31, 1964).

made regarding such performance, the Commission held that, in view of the diverse and uncertain standards applicable, "to generally require information in Securities Act prospectuses as to whether directors have performed their duties in accordance with the standards of responsibility required of them under state law would stretch disclosure beyond the limitations contemplated by the statutory scheme and necessitated by considerations of administrative practicality."

"9

The Commission considered the deficiencies in registrant's effective filings extremely serious, but did not issue a stop order. In its view the distribution of copies of its opinion to all of registrant's past and present stockholders, as registrant proposed, was sufficient under the circumstances to give adequate public notice of the deficiencies in the filings. Among the factors that led the Commission to this conclusion. were the departure of the wrongdoing chief executive, the transfer of his controlling shares to a management that had made a substantial investment in registrant's securities, had made voluntary remedial disclosures to the Commission's staff and to registrant's stockholders, and had filed post-effective amendments which represented a bona fide effort to remedy the deficiencies in the effective filings, and the unusually extensive publicity that had already been given to such deficiencies.

The Commission refused however to declare the post-effective amendments effective. It found some of those amendments deficient because of their failure to state clearly that registrant's cash distributions to its stockholders would exceed the cash derived from its operations, and it found all of them deficient because of the absence of a lucid disclosure of the complex of risk elements peculiar to cash flow real estate securities. Among the risk elements that were in the Commission's view inadequately presented were: (1) the adverse leverage effect of the high ratio of debt to equity capital characteristic of cash flow real estate companies; (2) the ambiguity of the phrase "cash derived from operations," which should, the Commission held, be precisely defined so as to make it clear whether extraordinary non-recurring receipts were or were not included therein; and (3) the limited duration of the tax advantages derived from the cash flow system and their eventual transformation into tax disadvantages. The format of

In a decision rendered subsequent to the end of the fiscal year (Imperial Financial Services, Inc., Securities Exchange Act Release No. 7684 (August 26, 1965)), the Commission noted that while its decision in Franchard had rejected a standard of requiring on a routine basis in prospectuses an evaluation of directors' performances, it had recognized that there were areas where disclosure might be necessary as to activities of directors which do not comply with applicable standards. The Commission went on to hold that the prospectuses of an investment company which failed to disclose that unaffiliated directors were not informed of material transactions were materially misleading.

the post-effective amendments was also found objectionable. The Commission pointed out that each non-effective post-effective amendment consisted of a prospectus that had been rendered obsolete by lapse of time and by numerous material changes in registrant's affairs, and of a lengthy supplement thereto, concluded that this "obscure and uncoordinated presentation" was inadequate and misleading, and held that a thorough-going revision that would "give investors the clear, comprehensive picture of the registrant's business and affairs contemplated by the Securities Act" was necessary.

Clinton Engines Corporation 10-Here a registration statement that had become effective in 1960 was found seriously deficient because: (1) The unaudited financial material therein was materially deceptive by reason of a substantial inventory overstatement which led to material overstatements of earnings and assets, distorted the historical operating record, and "had the effect of presenting the financially straitened registrant in a wholly illusory picture of incipient prosperity"; (2) the discussion of the causes of registrant's low profit margins concealed significant adverse factors; and (3) a suggestion that significant improvements in efficiency could be effected by a program to be financed out of the registrant's future earnings was highly misleading since the prospectus failed to point out that such improvements would have required a massive program of capital investment that had not even been formulated and could not be financed without the sale of long-term debt or equity securities as to the successful flotation of which there was no assurance. The Commission concluded that deficiencies of such seriousness required the issuance of a stop order. Registrant's assertion that the issuance of a stop order would have an adverse effect on it was held insufficient in view of the fact that registrant had never taken adequate steps to bring the deficiencies in its registration statement to the attention of investors and of the demonstrated effectiveness of stop orders in achieving that result.

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), and in connection therewith 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 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 10 Securities Act Release No. 4724 (September 28, 1964).