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For purposes of this recommendation and the following one, the term “unregistered distribution” should be defined to include the sale by any broker-dealer, as principal (including any planned reduction of inventory or “workout”) or as agent, of any block of securities of such size as to require an underwriting or selling group and/or receipt or payment of compensation exceeding normal compensation for routine (nonblock) transactions in similar securities, unless the block is sold to fewer than 25 purchasers and/or at an aggregate price of (say) $300,000 or less.
2. Any broker-dealer participating in an unregistered distribution as principal or as agent should be required to advise each customer in his confirmation of the substance of the matters to be set forth in the notification, and at the time of solicitation as to appropriate portions thereof.
3. Reference is made to the recommendations in part B of this chapter as to clarification of the application of rule 10b_6 in respect of unregistered distributions and otherwise.
PART D. THE INTRASTATE EXEMPTION
The intrastate exemption reflects a congressional decision to relieve from the registration process local offerings which can be regulated locally and which ordinarily are not of substantial national concern. The exemption serves its intended purpose well, when availed of, as it ordinarily is, for small offerings by small businessmen in their home communities. Even in such offerings, investors are entitled to Federal protection against fraudulent practices.
The exemption may, however, be available for public offerings of substantial magnitude, and it is in this area that troublesome problems arise. Reflecting its purpose, the conditions and limitations of the exemption are not weli adapted to substantial public offerings, and the likelihood of inadvertent violation of the Securities Act of 1933 in the course of a substantial public offering is high, even where reasonable precautions appear to have been taken. Such violations may expose issuers and underwriters to substantial liabilities, as well as creating possible regulatory difficulties for registered broker-dealers.
While reliable information is not available as to the extent to which the intrastate exemption is availed of for public offerings, the records of the Commission, financial manuals and other sources indicate that sizable public offerings in reliance upon the intrastate exemption are not infrequent. While undoubtedly many of these offerings are entirely legitimate, there is a significant potential for fraud in such relatively unsupervised distributions, and it appears that fraudulent promoters have exploited this potential. The absence of prompt notice to the Commission of such public offerings greatly complicates its efforts to protect the public against fraud. Ă requirement that notice be given would also provide useful information as to the significance of this type of financing, and provide a basis for determining whether legislation establishing further controls of such offerings is needed.
The Special Study concludes and recommends:
1. Issuers or controlling persons of issuers (in cases of secondary offerings) who propose to make substantial public offerings in reliance upon the exemption from registration provided by section 3(a)(11) of the Securities Act should be required to file with the Commission an advance notice of such offerings. Such notification, on a prescribed form, would include information with respect to the principal business or businesses of the issuer and their location, the amount, purpose and place of offering of the securities and identification of the person on whose behalf the offering is made, a description of the manner in which the offer or sale is to be accomplished, and disclosure of any recent or proposed offerings by the issuer other than that set forth in the notification. Filing of such notification would not be a condition to the availability of the exemption, but any failure to file would be subject to the usual penalties for violation of the Commission's regulations.
PART E. REAL ESTATE SECURITIES
The recent spectacular expansion of public participation in real estate securities has created new problems and intensified existing ones. The principal problems relate to the speculative nature of some of the real estate securities being offered the public, the extent of compensation and other direct and indirect benefits reserved to the promoters of such securities, and the manner in which such securities are sold to the public.
Further study is necessary to determine whether the Commission's power to compel disclosure is adequate to deal with the problems presented by speculative offerings, promoters' benefits, insider transactions and cash flow distributions. The complexity of the problems as well as the specialized use of familiar terms and the high degree of risk of some of the offerings, all make disclosure especially important both in the original offering to prospective purchasers and, on a continuing basis, to the owners of the securities.
At least as much as in other parts of the securities industry, selling practices need improvement. The absence of an effective self-regulatory securities association with jurisdiction over the industry and the lack of adequate qualifications, training and supervision of many of the salesmen engaged in the business are matters of concern.
A special problem relating to real estate securities involves the extensive reliance by their offerors on the intrastate exemption from Federal registration. For further discussion of this subject, see part D above.
The Special Study concludes and recommends:
1. The Commission should propose to the Congress that section 15A of the Exchange Act be amended to provide that all distributors of and dealers in real estate securities in interstate commerce shall be required to be members of a registered securities association having such rules relating to the business in real estate securities carried on by its members as shall appear to the Commission to be necessary or appropriate in the public interest or for the protection of investors. Also, all individuals engaged in selling or distributing real estate securities should be subject to the registration requirements recommended generally in chapter II for persons engaged in selling or distributing securities.
2. The Commission should further study the problems of speculative offerings, promoters' benefits, insider transactions, distributions, and the information furnished to security holders, and the adequacy of its power to deal with such problems.
PART F. INTEGRATION WITH PREVIOUS FILINGS
The continuous reporting requirements of sections 13, 14, and 16 of the Exchange Act operate, or can and should be made to operate, to provide a reservoir of reliable, reasonably current, publicly available data about an issuer. Certain of the study's recommendations in chapter IX are aimed at assuring the sufficiency, reliability, and the widest possible dissemination of such data and recommendations in chapter III seek to insure its use by broker-dealers and investment advisers. As a general principle filed information, if prepared and reviewed with appropriate care, ought to have as much validity and utility in connection with sales and purchases amounting to a "distribution” as it has in connection with sales and purchases in the trading markets, subject to appropriate supplementation to cover recent developments and the distribution itself. In tandem with accomplishing other recommendations to strengthen Exchange Act reporting requirements and procedures, it should be possible to achieve closer integration of these with Securities Act registration requirements and procedures, with the aim of improving the total disclosure result and at the same time expediting and simplifying the Securities Act registration process in appropriate cases.
The Special Study concludes and recommends:
On the assumption of and in harmony with the carrying out of recommendations in chapter IX for extending and strengthening Exchange Act reporting requirements and wider dissemination and use of filed reports, the Commission, in consultation with industry representatives, should seek to develop a program for closer integration of disclosure requirements of the Securities Act and the Exchange Act, a possible outline of which is as follows:
1. A registered public offering of securities of any issuer (with exceptions as may be provided under rules of the Commission) already subject to the continuous reporting requirements of sections 13, 14, and 16 of the Exchange Act, by reason of having a class of stock registered on a national securities exchange or a class of “OTC listed” stock (see ch. IX), should be permitted under a special “short-form” registration statement and prospectus. Such short-form registration statement or prospectus should be required to contain data concerning price and spread; underwriting arrangements; if a primary offering, the proposed use of proceeds, or if a secondary, the reasons for selling; capitalization; summary of earnings; recent developments in business and other material occurrences not previously reported; financial statements; and a specific reference to previously filed material fulfilling other requirements of the appropriate registration form, with a representation and consent that such material shall be deemed part of the present registration statement and prospectus for all purposes of sections 11 and 12 of the Securities Act.
2. To the extent, if any, that present reporting requirements (forms 8-K, 9-K, and 10-K) or proxy soliciting requirements may be inadequate to assure an adequate reservoir of reliable information on a current basis, these inadequacies should be appropriately corrected entirely apart from the present recommendations. Also, to the extent practicable, examining procedures now followed in connection with prospectuses and proxy statements should be made applicable to annual and other reports.
3. The waiting period between filing and effective date should be kept to a minimum for short-form filings. The 40-day period during which all dealers are required to deliver prospectuses should be eliminated in the case of short-form filings, without limiting the obligation of any dealer in respect of securities constituting some or all of an unsold allotment to or subscription by such dealer as a participant in the distribution.
[Part A (Basic Components of Trading Markets) contains general introductory material for chapters VI, VII, and VIII, and includes discussions of the nature of participants in trading markets, of the two general types of trading markets in the United States, and of “multiple
trading” in securities on various markets. [Part B (Basic Concepts and Standards Relevant to Trading Markets) sets forth the statutory and nonstatutory criteria for evaluating trading markets and discusses the possibility that there may
be some degree of conflict among them. Part B also considers the concept of "depth” in trading markets.
[Part C (Practices in Foreign Securities Markets) discusses, for purposes of comparison, certain characteristics of foreign securities markets, with emphasis on the London Stock Exchange.]