A STUDY OF THE ECONOMIC AND LEGAL ASPECTS OF THE PROPOSED FEDERAL
SECURITIES ACT
Title: Securities act : hearings ... Seventy-third Congress, first
session, on S. 875, a bill to provide for the furnishing of
information and the supervision of traffic in investment
securities in interstate commerce. March 31 to April 8, 1933.
Author: United States.
Publisher: Washington, U.S. Govt. Print. Off., 1933.
Appendix : "A Study of the Economic and Legal Aspects of the Proposed Federal Securities Act,"
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APPENDIX
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A STUDY OF THE ECONOMIC AND LEGAL ASPECTS OF THE PROPOSED FEDERAL
SECURITIES ACT
.(Prepared in the Department of Commerce.)
BIBLIOGRAPHY
Ashby, Forrest Bee, The Economic Effect of Blue Sky Laws (1926).
Berle and Means, The Modern Corporation and Private Property.
Bonbright and Means, The Holding Company.
Bowen, Charles H., Jr., How Blue Sky Laws Work, American Bankers Associa-
tion Journal, December 1930.
Brandeis, Louis D., Other Peoples Money.
Bureau of Securities, New York, 1932 report.
Chase, Stuart, A New Deal, The Enemy of Prosperity, Harper's, November 1930.
Colorado, Securities Act of 1923; Fraudulent Practices Act of 1931.
Commercial & Financial Chronicle, monthly statements.
Congressional Record:
March 13, 1932, page 6219, United States Senator Hiram Johnson.
March 15, 1932, United States Senator Hiram Johnson, Résumé of Foreign
Loans.
May 23, 1932, page 11262, Congressman David A. Reed of New York.
Consolidated Companies Act of 1929 (England), 19 and 20 George V, Chitty
Annual Statutes, 1928–29, page 557, part II.
Corpus Juris, Contracts, sections 52 and 581.
Cowan, Leonard L., Manual of Securities Laws and Service.
Coyle, David Cushman, Business versus Finance.
Dawson, Mitchell, American Mercury, March 1932, page 354.
Directors Must Direct, Printer's Ink, February 5, 1931.
Dewing, A. S., Financial Policy of Corporations.
Durand, E. Dana, Introduction of American Industry and Commerce.
Federal Digest, Commerce, sections 40 and 66 to 68, inclusive. -
Finlayson's Report of the Case of Twycross v. Grant, London, 1877.
Flynn, John T., Investment Trusts Gone Wrong.
Frankfurter, Felix, The Publie and Its Government.
Gay, Edwin F., The Great Depression, Foreign Affairs, July 1932.
Groseclose, Elgin E., Annalist, March 20, 1931.
Helton, Roy, Sold Out to the Future, Harper's, July 1932.
Investment Bankers Association, Report of Convention, October 1932.
Kansas, Session Laws of, 1911, chapter 133.
Lawson, Thomas W., Frenzied Finance.
London Financial News, May 18, 1932, The Law and Holding Companies.
Maryland, Annotated Code of General Laws of, article 32-A, sections 11 to 14.
McCoy, Joseph S., The United States Legion of Capitalists, American Bankers
Journal, February 1927, pages 559,560, 626-628.
Mead, Edward S., Corporation Finance."
Means, Gardiner C., The Diffusion of Stock Ownership in the United States,
Quarterly Journal of Economics, August 1930, pages 561-600.
Michigan, Public Acts, 915, page 63; Act 20, Public Act, 1923.
National Petroleum News, January 7, 1931, Liability of Directors.
New Jersey, Laws of 1920, chapter 234; Laws of 1927, chapter 79.
New York General Business Law, article 23–A (secs. 352–359g) as amended in
1921, 1923, 1925, 1926, 1927, and 1928. Dealer Licensing Law in 1932 (July).
Ohio, Code of, 1916, volume 2, sections 6373–1 to 6373–24.
Osgood, Roy C., The Trend of Blue Sky Laws. Investment Banking, December
28, 1932.
Public Documents, 1485 and 1836, Capital Issues Committee Report to Sixty-
fifth Congress, December 2, 1918.
Reed and Washburn, Blue Sky Laws.
312
313 (#325) ############################################
SECURITIES ACT
313
Ripley, William Z., Main Street and Wall Street, The Modern Corporation and
Private Property, Our Corporate Revolution and Its Perils." New York
Times, July 24, 1932.
Sackett, Hon. F. M., Exploitations of Finance Which Call for New Line of
Legislative Defense, Trust Companies, November 1929.
Sherrod, J., Scapegoats.
South Dakota Laws, 1915, chapter 275.
Statistical Abstract, 1931, page 295.
Statutes 19 and 20, George V, chapter 23.
Stoddard, William L., Financial Racketeering, page 199.
Thompson, Hon. Huston, Federal Trade Commissioner, American Bar Associa-
tion Journal, 9:57, March 1923.
Uniform Sale of Securities Act, National Conference of Commissioners on
Uniform State Laws.
Wharton on Criminal Law and Procedure, ninth edition, section 31.
World's Work, March 1919.
ACTS AND HEARINGS
H.R. 188 (Taylor bill). Hearings before the Committee on the Judiciary,
Sixty-sixth Congress, first session.
H.R. 2789. Regulation of Stock Ownership in Railroads. page XLIX, testimony
of Interstate Commerce Commissioner Jos. Eastman.
H.R. 7215 (67th Cong., 1st sess.; Denison bill). Hearings before Committee on
Interstate Commerce. Paul V. Keyser, attorney for Investment Bankers
Association; Hon. Clarence F. Lea of California; Letters from security com-
missioners of 38 States reprinted in hearings.
H.R. 8932 (Sabath bill).
H.R. 9065 (Bowman bill; 72a Cong., 1st sess.; S. Rept. 412). Hearings before
Committee on the District of Columbia on the Prevention of Fraud in the
Sale of Securities in the District of Columbia.
H.R. 9447. H.R. 12898 (LaGuardia bills).
H.R. 12603 (Volstead bill; 66th Cong., 2d sess.). Hearings pursuant to S.Res. 19,
Seventy-second Congress, first session. (Foreign bonds.)
H.Res. 57, H.Res. 59, H.R. 348, H.R. 4604, H.R. 4639, H.R. 4642, H.R. 11509,
H.R. 11510. Bills relating to short selling of securities and commodities and
bucket-shop transactions introduced during the first session of the Seventy-
second Congress.
FOREIGN LOANS
Walter H. C. Laves, National and International Control of Foreign Investments,
American Political Science Review, August, 1931.
George W. Edwards, Government Control of Foreign Investments, American
Economic Review, December 1928.
H. Feis, Europe, the World's Banker, 1870–1914.
J. Viner, International Finance and Balance of Power Diplomacy, Southwestern
Political and Social Science Quarterly (IX-1); Political Aspects of International
Finance, Journal of Business, I, 141.
B. Williams, Capital Embargoes, Political Science Quarterly, June 1928.
Walter H. C. Laves, German Government Influence on Foreign Investments.
L. H. Jenks, Migration of British Capital to 1875.
E. M. Borchard, Diplomatic Protection of Citizens Abroad.
C. K. Hobson, Export of Capital.
H. Lowenfeld, All About Investments.
Arthur N. Young, Department of State and Foreign Loans, New York Times,
August 27, 1924.
John Foster Dulles, Our Foreign Loan Policy, Foreign Affairs, October 1926,
page 34.
TABLE OF CASES
Alabama and New Orleans Transport Co. v. Doyle, 210 Fed. 173.
Alpha Portland Cement Co. v. Commonwealth, 268 U.S. 203.
American Steel & Wire Co. v. Speed, 192 U.S. 500.
Binderup v. Pathe Exchange, 263 U.S. 291.
Blue Sky cases—Hall v. Geiger-Jones, Caldwell v. Sioux Falls Stock Yards Co.,
Merrick v. Halsey, 242 U.S. 539-568.
Book Co. v. Pigg, 217 U.S. 91; 30 Sup.Ct. 481; 54 L.Ed. 578; 27 L.R.A. 493; 18
Ann. Cas. 1105.
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SECURITIES ACT
Bowditch v. New England Mutual Insurance Co., 141 Mass. 292.
Bracey v. Darst, 218 Fed. 282.
Brennan v. Titusville, 153 U.S. 289.
Broom case-Rearick v. Penn., 203 U.S. 507.
Brown v. Maryland, 12 Wheat. 419; 6 L.Ed. 678.
Browning v. Waycross, 233 U.S. 16.
Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559.
Cashin v. Pliter, 168 Mich. 386.
Chy Lung v. Freeman, 92 U.S. 275; 23 L.Ed. 550.
Clark Distilling Co. v. Western Maryland Railroad, 242 U.S. 311.
Coffey v. United States, 116 U.S. 436.
Compton Co., Wm. R. v. Allen, 216 Fed. 537.
Crenshaw v. Arkansas, 227 U.S. 150.
Dickerson v. Northern' Trust Co., 176 U.S. 181.
Duke v. Olson, 240 Ill. App. 198.
Edward v. Ioor, 205 Mich. 617.
Ex parte Hoffstot, 180 Fed. 240; affirmed 218 U.S. 665.
Ex parte C. H. Taylor, 66 South, 292.
Gibbons v. Ogden, 9 Wheat. 1; 6 L.Ed. 23.
Grain case-Shafer v. Farmer's Grain Co., 268 U.S. 189.
Hall v. Geiger-Jones, 242 U.S. 539; 230 Fed. 233.
Hanover National Bank v. Moyses, 186 U.S. 181.
Hosiery case--Real Silk Mills v. Portland, 268 U.S. 325.
Hyatt v. People, 188 U.S. 691; affirming 172 N.Y. 176.
Ice case-Knickerbocker Ice Co. v. Stewart, 253 U.S. 149.
Insurance case--Paul v. Virginia, 8 Wall. 168 (decided in 1868).
In re Rahrer, 140 U.S. 545.
In re Suchow's Estate (Wis.) 212 N.W. 280.
Jones v. Leonard, 50 Iowa, 106.
Knickerbocker Ice Co. v. Stewart, 253 U.S. 149.
Lemke v. Farmer's Grain Co., 258 U.S. 50.
Lightning Rod case-Browning v. Waycross, 233 U.S. 16.
Lottery cases—188 U.S. 321; 23 Sup.Čt., 321; 47 L.Ed. 492.
Mail Order Cases—Ex parte Hoffstot, 180 Fed. 240; affirmed 218 U.S. 665;
Hyatt v. People, 188 U.S. 691; 172 N.Y. 176.
Merrick v. Halsey & Co., 242 U.S. 568.
Original Package CaseIn re Rahrer, 140 U.S. 545.
Pandolfo v. U.Š., 286 U.S. 8.
Paul v. Virginia, 8 Wall., 168 (decided in 1868).
Public Utilities Commission of Rhode Island v. Attleboro Steam & Electric Co.,
273 U.S. 83.
Railroad Co. v. Husen, 95 U.S. 465; 24 L. Ed. 527.
Real Silk Mills v. Portland, 268 U.S. 325.
Rearick v. Penn, 203 U.S. 507.
Robbins v. Shelby Taxing District, 120 U.S. 489.
Savings Bank of San Diego v. Burns, 104 Cal. 473.
Shafer v. Farmer's Grain Co., 268 U.S. 189.
Stafford v. Wallace, 258 U.S. 495.
Stock Quotations case Western Union Tel. Co. v. Foster, 247 U.S. 105.
Stone v. United States, 167 U.S. 178.
Telegraph cases:
Telegraph Co. v. Pendleton, 122 U.S. 347; 7 Sup. Ct. 1126; 30 L. Ed. 1187.
Telegraph Co. v. Telegraph Co., 92 U.S. 1; 96 U.S. 1; 24 L. Ed. 708.
Telegraph Co. v. Texas, 105 U.S. 460.
Textbook case-- Book Co. v. Pigg, 217 U.S. 91; 30 Sup. Ct. 481; 54 L. Ed. 678;
27 L.R.A. 493; 18 Ann. Cas. 1105.
United States v. Donaldson-Shultz Co., 148 Fed. 581.
Weeks v. United States, 245 U.S. 618.
West v. Kansas Co., 221 U.S. 229; 31 Sup. Ct. 564; 55 L. Ed. 716; 35 L.R.A. (N.
S.) 1193.
l'estern Union Telegraph Co. v. Foster, 247 U.S. 105.
White, Potter & Page Mfg. Co. v. Pettes Importing Co., 30 Fed. 864.
Wilkes v. Dinsman, 7 How. 89.
Wire Co. case-- American Steel & Wire Co. v. Speed, 192 U.S. 500.
Woodruff v. Parkham, 8 Wall. 123.
Youngstown Sheet & Tube v. Bethlehem Steel Co.
--
--
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INTRODUCTION
The American people have enjoyed a degree of well-being and comfort un-
known in history before; their material advantages and wealth have steadily
increased throughout the history of the country. The per capita wealth of the
average American increased from $514 in 1860, at the beginning of the Civil War,
to $2,918 in 1922, four years after the end of the World War, while the best avail-
able estimate indicates an annual income of $3,000 for every family in the United
States. Both the income and wealth of the American people have been reduced
since October 1929, when the decline in the price of stocks brought forcibly to the
attention of a wide public the reaction in business and industry which added the
United States to that large group of countries in the throes of an economic
depression even though the economic advantage of the American people continues
unchallenged.
Since the Biblical days of Job times of depression have been considered especi-
ally appropriate for reflection and readjustment. If the present depths of misery
and economic losses are to be counterbalanced by improvements, epoch-making
developments may well be expected. The people generally, both in the United
States and throughout the world, have suffered through no fault of their own.
They had no part in bringing about the depression which is usually ascribed
primarily to the World War.3 Their only mistake might be said to be a too literal
adoption of the principle of free spending and investing.
The wide distribution of wealth in the United States has resulted in a large
number of investors among the people. The days of restricted ownership of stock
are gone forever, many corporations counting their stockholders in the hundreds
of thousands and bankers and promoters offering their securities to the general
public. There are more than 800,000 individual owners of stocks of the 160
class I railroads of the United States.
In the 13 years from 1919 to 1931, $50,000,000,000 o worth of new stocks and
bonds were issued in the United States, of which nearly twenty billions were
stocks. Unfortunately, a considerable portion of this $50,000,000,000 was
invested in securities of little intrinsic value and in some cases of no value
whatever.
Since the World War, partly as a result of the wide distribution of bonds
among people who had never owned securities before, the number of question-
able stock and bond issues has increased markedly. In a report made to Con-
gress under date of December 2, 1918, the Capital Issues Committee of the
Federal Government stated:
“At no time has the obligation been so definitely placed upon the Government
to protect its public from financial exploitations by reckless or unscrupulous
promoters. The field has been greatly enlarged by the wide distribution of
Liberty bonds, and the purveyor of stocks and bonds is no longer put to the
necessity of seeking out a select list of prospective purchasers with money to
invest. He now has the entire American public, and the transaction becomes
one of persuasion to trade a Government bond bearing a low rate of interest
for stocks or bonds baited with promise of high rate of return and prospect of
sudden riches."
Because of the wide extent of the operations of swindlers who were urging the
holders of Liberty bonds to exchange them for worthless securities, President
Wilson recommended in his message to Congress on August 8, 1919, the passage
of a Federal Securities Act which had been proposed by the Capital Issues |
Committee:
“May I not add that there is a bill now pending before Congress which, if
passed, would do much to stop speculation and to prevent the fraudulent methods
of promotion by which our people are annually fleeced of many millions of hard-
earned money.”
1 E. Dana Durand, Introduction of American Industry and Commerce.
2 Statistical Abstract, 1931, p. 295.
• Edwin F. Gay, The Great Depression, Foreign Affairs, July 1932.
4 American Telephone & Telegraph Co. stock is owned by 665,000 individuals; General Motors Corpora-
tion stock by 263,528; United States Steel stock by 187,409. According to the New York Times of July 7,
1932, “In the first official classification which it has made of its common-stock holders, the United States
Steel Corporation showed, in a statement issued yesterday, that 80,309 of its 187,409 holders of common
stock own less than 10 shares each."--Regulation of Stock Ownership in Railroads, U.S.H.R. 2789, p.
XLIX.
The United States Legion of Capitalists, by Joseph S. McCoy. American Bankers Journal, February
1927, pp. 559-560, 626-628.
The Diffusion of Stock Ownership in the United States, Gardiner C. Means, Quarterly Journal of Econ.
omics, August 1930, pp. 561-600.
o Commercial and Financial Chronicle, Monthly Statements.
6 Capital Issues Committee Report to Congress Dec. 2, 1918, Public Document No. 1485.
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SECURITIES ACT
The author of a recent book entitled “Financial Racketeering" 7 writes as
follows:
“A 5-foot bookshelf could without great labor be filled with scandalous volumes
if some bold writer should essay to docket and report the cases of all the financial
swindles which occurred in the United States in, for example, the last 5 calendar
years.”
In a statement before the Committee on the Judiciary of the United States
House of Representatives, recommending the passage of a Federal blue sky law of
which he was the author, Congressman E. T. Taylor, of Colorado, said: 8
“During the war and ever since, there has been a deluge of mushroom, get-
rich-quick corporations organized all over the country for the purpose principally
of selling stock. Nearly every State has produced some of them. * * *
I learned that something like $500,000,000 of the wildest kind of speculation
stock was being flooded over the country every year, and a very large part of it
utterly worthless. From every State I think, except California, when these
commissions (blue sky) expressed an opinion they urged the passage of a Federal
law, and stated the reasons why the State laws were insufficient.”
The report of the United States Senate Committee on the District of Columbia
on the Prevention of Fraud in Promotion or Sale of Securities in the District of
Columbia, contained the following statement: 9
"The subcommittee developed the fact that within the past 6 or 7 years there
have been issued in or sold from the District a great quantity of these securities,
largely consisting of mortgage bonds or notes, in an amount approximating
$100,000,000-a very considerable portion of which are of highly dubious value,
and in some cases utterly worthless.
“Many of these securities have been distributed to women as safe investments
for insurance and savings funds, and to a large class of people who have no
detailed knowledge of investment principles.
“The subcommittee discovered in such sales gross misrepresentation of values
and concealment of essential facts, as to value amounting to fraud, criminal in
character.
“In many instances, investors were induced to exchange hard-earned savings
of a lifetime for ‘securities' which were not worth the paper on which they
were engraved or printed.”
In discussing a blue sky law for the District of Columbia, Congressman Daniel
A. Reed, of New York, made the following statement in the House of Represen-
tatives: 10
“A group of financial bandits, actuated by selfish motives and with no regard
for the welfare of the Nation have driven the public into a frenzy of fear and
despair for no other purpose than to profit by it. Recent disclosures in financial
circles have shaken public confidence to its very foundations. The financial
pirates, who have fleeced the public out of billions of dollars, now hope to obscure
their iniquities by directing public attention elsewhere."
Estimates of the amount of questionable securities sold to the American public
each year vary considerably because of the difficulty of collecting accurate sta-
tistics. It is evident, however, that a considerable percentage of new capital
issues are fraudulent.
The entrance of the general public, untrained in business principles and per-
plexed by the magnitude of modern business organizations, into the investment
field has brought about some complications of a major character. “Public policy
demands that the savings of the poor be secure, because in hard times these
savings are the first line of defense against destitution, doles, communist propa-
ganda and many other painful and dangerous effects.” 11
The doctrine of caveat emptor (let the buyer beware) of the old common law
is not applicable to modern conditions.12 Both the Federal and State Govern-
ments protect the public from the unscrupulous by regulating the sale of many
articles. As indicated by the common law, from time immemorial, persons with
funds to invest were considered capable of determining the soundness of business
ventures but recent developments in the field of business have been so rapid and
so gigantic that even persons trained in one field are incapable of determining
values in a related business. Even trained accountants are unable to determine,
without detailed investigation, the intrinsic value of securities of corporations
7 William L. Stoddard, p. 199.
• Hearing before the Committee on the Judiciary, U.S. House of Representatives, 68th Cong., 1st sess., on
H.R. 188, p. 7.
S.Rept. 412.
10 Congressional Record, May 23, 1932, p. 11262.
11 The Irrepressible Conflict. d. 28. David C. Coyle.
12 London Fiancial News, May 18, 1932, The Law and Folding Companies.
317 (#329) ############################################
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317
whose property and activities extend into many States and foreign countries.
Numerous court decisions have emphasized the need for clear, simple financial
statements which may be understood by the layman.13 Banks and bond houses
offering securities to the public have felt the need of protecting themselves against
loss by including in their advertisements of securities that, while they believe the
statements of the issuing company to be correct, they do not guarantee their
accuracy. 14
Nearly all of the States of the Union have passed laws regulating the sale of
securities.15 These laws have resulted in the suppression of many fraudulent
securities and have saved the public untold sums of money. There are many
differences in the laws, however, and until some general Federal law is enacted
unscrupulous persons may continue their dishonest practices in one State or
another. 16
The rapid growth of investment trusts, industrial holding companies, and
similar financial supercorporations has accentuated the need for some Federal
legislation of a general character which, while in no way interfering with sound
honest financing of business enterprises, will protect the investing public.17
Although such protection will require legislation somewhat divergent from laws
now on the statute books there is ample precedence for such a measure.18
The enactment of the Sherman Act to prevent agreements in restraint of trade
by gigantic corporations, the various transportation acts to hold in check the
railroad systems of the country and secure equality of benefits to all users, the
regulation of banks and savings institutions by such measures as the McFadden
Act limiting branches to the municipal homes of parent corporations, the regu-
lation of public utilities, all have had to be added to the law to meet changing
conditions. 19 According to two recent writers, 20 the translation of perhaps two
thirds of the industrial wealth of the country from individual ownership to
ownership by the large, publicly financed corporations vitally changes the lives
of property owners, the lives of workers, and the methods of property tenure.
LEGAL ASPECTS OF BLUE SKY LAWS
Early abuses of corporate privileges.-The abuse of the privileges and immunities
created by incorporation, in using them to mulct an uninformed public through
the sale of shares in enterprises of little or no value, is by no means of recent origin
though the methods employed have undergone considerable change and the
magnitude of the operations has increased many times. As early as 1720 the
prospectus of the South Sea boom in England advertised a company organized
"for carrying on an undertaking of great advantage but nobody to know what
it is ".21 More than 200 years later, supposedly sophisticated Americans are
wasting billions of dollars in the purchase of shares in enterprises with no more
information concerning the important facts than those earlier British “investors"
had concerning the South Sea project.
13 "I am further of opinion that directors, shareholders, and incidentally, courts, should have a clear.
explicit presentation of the accounting facts relating to a corporation in form and language, which in accord.
ance with common sense, will enable the ordinary reader without hiring a technical interpreter, to determine
the actual state cfthe company's business, prospects, and value."-Common Pleas Judge David G. Jenkins,
Youngstown, Ohio; Youngstoun Sheet & Tube Co. v. Bethlehem Steel Co. National Petroleum News,
Jan. 7, 1931.
14 Senator Hiram Johnson, Congressional Record, Mar. 15, 1932.
16 Manual of Securities Laws and Service, Leonard L. Cowan. Uniform Sales of Securities Act drafted
by National Conference on State Laws. Seo prefatory note, p. 3. Blue Sky Laws, Reed and Washburn.
16 Congressman E. T. Taylor, of Colorado: Hearings before the Committee on the Judiciary on H R ,
188, proposed Federal blue sky law, p. 7.
17 The investment trust and those kindred financial organizations usually grouped under that head-
holding and finance and security companies of all sorts-are reaching out in all directions for the posession
of industrial and financial securities and they will, unless checked, take American industry out of the
hands of its industrial leaders and put it into the hands of promotors.-John T. Flynn, Investment Trusts
one Wrong, p. 11. Regulation of Stock Ownership in Railroads, H.Rept. 2789, p. 10, testimony of
Interstate Commerce Commissioner Joseph B. Eastman.
18 Felix Frankfurter, The Public and its Government, pp. 49-51.
19 F. M. Sackett, Senator from Kentucky, Exploitations of Finance Which Call for New Line of Legis-
lative Defense, Trust Companies, November 1929.
30 Berle and Means, The Modern Corporation and Private Property.
21 Finlason's Report of the Case of Twycross v. Grant, published in London during 1877, contains the
following interesting comments: “When, half a century ago, the principle of association was largely applied
to commercial enterprises, it became, as all good things are liable to be, grossly and lamentably abused, and
the first fault was excess. * * * 'However absurd', observes the historian, 'many of these schemes
were, the shares of some rose to enormous premiums, especially in foreign mines,' *
• People had so much money they did not know what to do with it and so fell an easy prey to artful
schemes.' * * * It seems incredible, but such was the fatuity of a reformed Parliament in dealing with
such subjects, the Joint Stock Companies Act positively allowed a company to be formed, registered, and
incorporated by the mere subscription of seven persons for a single share each". Blue Sky Laws. R. R.
Reed, p.1.
169692—33 -21
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319
the law of one of the three States involved.35 These decisions definitely estab-
lished the basic constitutionality of State blue sky law provisions generally and
overruled the objections on which the earlier contrary opinions of the lower courts
had been based. The decisions were unanimous, excepting Mr. Justice McRey-
nolds, who did not deliver an opinion.36 No further cases involving the basic
principles of blue sky laws have yet reached the Supreme Court.
TYPES OF BLUE SKY LAWS
Within the few years following these decisions, all States with the exception
of Delaware and Nevada, that had not already enacted legislation of this type
placed blue sky laws upon their statute books.37 These enactments, although
differing considerably in details, followed to a large extent the precedent of
earlier acts and, with one notable exception,38 may be divided, according to their
basic provisions, into two major types. Although several authors have attempted
to classify the legislation of the various States in different ways, the analysis
adopted by Forrest B. Ashby in his pamphlet entitled “Economic Effects of
Blue Sky Laws" 39 appears to be the least confusing. This analysis divides
American securities statutes into two major groups as follows:
I. Laws that provide for the punishment of fraud in the sale of securities.
II. Laws that attempt to regulate the sale of all but exempted securities.
Fraud laws. The blue sky laws of New York, 40 New Jersey,41 Maryland,42 and
Delaware 43 are examples of the type of law that becomes operative only when
evidence has been presented that a fraud has been, or is about to be, committed.44
This class of statute empowers the attorney general or other official of the State
to investigate, with authority to subpena witnesses and records, whenever it
shall appear that any individual or organization has engaged in, or is about to
engage in, fraudulent practices in the sale of securities. A temporary restraining
order may, in his discretion, be issued against the further sale of the securities
involved and, if the results of the investigation appear to warrant such action,
the order may be made permanent. Criminal actions may also be brought against
fraudulent issuers and dealers when the investigation develops sufficient evidence
of an indictable offense. This type of statutes, known as “fraud" laws, are classi-
fied as one of the two major groups, not because they are numerous 45 but because
the methods they employ differ widely from the characteristic provisions of the
statutes of other States which attempt to regulate the sale of securities regardless
of whether or not evidence of fraud has been presented.
Regulatory laws.—The group of laws which are intended to regulate the sale or
issue of securities, prior to their being sold or issued, comprise by far the greater
part of the blue-sky legislation in the United States. 46 Basically, the regulatory
type of statute makes it unlawful to issue or sell securities without first obtaining
the State's permission. Without further qualification, however, such a provision
would place Government bonds in the same category as worthless or highly spec-
ulative stock issues, would apply to a private owner of bonds who wishes to sell as
well as to the bucket-shop operator, and would in a number of ways unwarrantably
hamper the normal course of legitimate business. For these reasons it has been
necessary to make numerous exemptions and to devise methods of procedure
35 It is of interest in this connection that Mr. George W. Wickersham, Mr. Robert R. Reed, and Mr.
Charles K. Allen were permitted by the court to file briefs as amici curiae (friends of the court), on behalf
of the Investment Bankers Association of America, contesting the validity of these statutes, although the
association had no direct pecuniary interest in these particular proceedings. Idem.
36 The finality with which these opinions were accepted by opponents of this class of legislation is well
indicated in a letter which Mr. Robert R. Reed wrote to his clients, the Investment Bankers Association,
concerning the legal effect of the court's decisions. In it he said:
“The net result is (that) the decision and opinion have undoubtedly been fully considered by the court
and express its final position, not only as to these statutes, but probably as to a great many similar statutes,
actual and possible.
"The most important conclusion which can be drawn with reasonable certainty is that no typical blue
sky law, as applied to the business of dealing in securities, violates the Federal Constitution, either the
fourteenth amendment or the interstate commerce clause."
Reed and Washburn, Blue Sky Laws, p. 259a.
37 Idem X1.
38 Colorado.
39 The Economic Effect of Blue Sky Laws. Forrest Bee Ashby, Philadelphia 1926.
40 New York General Business Law, art. 23– (A) (secs. 352-359g), as amended in 1921, 1923, 1925, 1926,
1927, and 1928. New York added a “dealer licensing" law July 1, 1932.
41 New Jersey, Laws of 1920, ch. 234; Laws of 1927, ch. 79.
42 Annotated Code of General Public Laws of Maryland, art. 32 (A), s cs. 11-14.
43 Revised Code of Delaware, No. 3845 (A), sec. 2 (A), ch. 117.
41 Colorado, in 1931, supplemented its Securities Act of 1923 with a Fraudulent Practices Act.
45 New York, New Jersey, Maryland, and Delaware.
16 Forty-two States, including Connecticut, which regulates oil and mining issues only. Economic
Effects of Blue Sky Laws (Ashby).
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321
(h) Short-term negotiable paper.
(i) Capital stock of domestic trust companies.
(j) Securities listed on approved stock exchanges.53
TRANSACTIONS
(a) Judicial sales.
(6) Sales of mortgages in liquidation of debts.
(c) Bona fide isolated transactions by individuals.
(d) Distribution of stock dividends to stock holders.
(e) Purchases for investment, and not for resale, by banks, investment and
insurance companies.
(1) Subscriptions to capital stock, necessary for incorporation by the incor-
porators.
Action on applications.—The extent of the investigation made by State au-
thorities upon receipt of an application for permission, when required, to sell
designated securities within the State, necessarily depends upon a variety of
circumstances. At the outset, the amount of information which the issuer of
securities is required to submit, varies in different States, either under the statute
itself or under authorized regulations, and the effectiveness with which the statutes
are administered frequently differs because of the comparative qualifications or
zeal of the officials charged with the law's enforcement.
Ordinarily, a prescribed application form, which is usually under oath and
requires certain basic information, must be filed, accompanied by various docu-
ments, including the articles of incorporation and bylaws, financial statement
and property appraisals, abstracts of title covering real estate, insurance carried,
samples of advertising matter, organization expenses, commissions paid, and a
number of other items that, in the opinion of the legislators or enforcement
officials, are needed for an intelligent investigation of the merits of the issue
concerned.54 After the application and supporting documents have been filed
and examined, the State is ordinarily empowered to require still further informa-
tion if this appears to be desirable. In the event the State officials refuse to
permit the sale of a designated issue, the applicant may appeal to the courts for
redress. In no instance is the State's permit to sell securities to be construed
as an official endorsement of those securities and some States 55 refuse to give the
applicant any documentary evidence, whatever, such as a receipt, that the sale
of an issue has been permitted. This refusal is made on the theory that such
evidence might be wrongfully used to induce prospective purchasers to believe
that the State had officially endorsed the merits of a project.
In addition to the usual provisions of the typical blue-sky law described in the
foregoing paragraphs, the laws of many States also include special provisions to
cover situations that the legislators feel are not adequately covered by the usual
statute. The securities commissions of some States, for example, control the sale
of real estate issues based on property located without the State 56 and the
Michigan statute also includes control of transactions in real property located
within the State. Some commissions require that applicants deposit promoters'
stock in escrow until the corporations are firmly established, limit the commis-
sions that may be paid, require bonds of dealers and issuers, and evaluate patents
or other property exchanged for corporate stock. A few States continue their
supervision far past the promotional period,57 and the Michigan commission some-
times insists on countersigning all checks drawn by corporations whose prospects
are based on new inventions. There is also a fairly recent tendency to include a
provision for temporary approval of issues pending investigation and final report 58
or for registration of the issue by notification.59
Penal and civil liabilities.— Violators of blue-sky laws are ordinarily subject
to both a civil action on the part of a dissatisfied purchaser of securities and a
penalty in criminal proceedings instituted by the State. Many statutes specifi-
cally declare that all contracts or sales made in violation of their terms shall
be void but, even in the absence of such a provision, contracts in violation of
the terms of the statute would doubtless be considered illegal by most courts
because of the penal feature, and for this reason void or voidable.60 Although
63 Not in Michigan law, but found in many others.
54 A detailed list of the usual requirements may be found on p. 21 of Ashby's Economic Effect of Blue
Sky Laws.
55 Illinois, for example.
56 Ohio, Wisconsin, Iowa, Mississippi, New Mexico, and others.
87 Illinois, Wisconsin, and Michigan.
58 Illinois, Georgia, Wisconsin, and Missouri. Economic Effect of Blue Sky Laws, Ashby.
59 Indiana, Minnesota, Utah, and West Virginia.
60 Edward v. loor, 205 Mich. 617. Blue Sky Laws, Reed & Washburn, p. XIX.
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322
SECURITIES ACT
it is a general rule of the common law that an illegal contract, if executory,
cannot be enforced and if executed cannot be complained of by either party,
yet “if the illegality results from a statute directed against only one party and
designed for the protection of the other party, the latter may enforce an exec-
utory contract and obtain relief from the executed transaction.” 61 There
appears to be little or no doubt that a dissatisfied purchaser of securities, sold
to him in violation of a securities law containing a penal clause, can maintain
an action to nullify the contract of sale and recover the purchase price, even
though the statute contains no clause specifically declaring such contracts void
or voidable. Prosecutions under the penal provisions of blue-sky laws, which
vary considerably in severity and usually provide for both fine and imprison-
ment, are instituted by the appropriate State officers 62 and it is well settled law
that trial or conviction under the penal clause constitutes no bar to the civil
action and that acquittal on the criminal charge is not evidence of innocence
in a civil proceeding. 63
Summary.—Summarizing the foregoing broad analysis of American blue-sky
laws, they may be classified as follows:
1. Fraud laws, such as exist in three States, and which are not set in motion
until evidence is presented that fraud in the sale of securities has been or is about
to be committed.
II. Regulatory laws, existing in 43 States, which attempt to regulate the traffic
in securities by forbidding their sale until an application has been filed and per-
mission granted by the State. This type of laws may be further classified as
follows:
(a) Dealer licensing laws, which seek to exercise the desired control through
dealers, by requiring that they obtain licenses under which they are held responsi-
ble for fraud or gross negligence in their transactions.
(6) Specific issue permit laws, which prohibit the sale of any security unless a
permit has been granted by the State for the sale of each specific issue. Such
permits are granted only after the applicant has filed more or less detailed in-
formation concerning the issue offered. This group of regulatory laws may be
further subdivided, in accordance with their classification of securities, as
follows:
(1) Speculative laws which treat all securities as either “speculative” or “non-
speculative" and apply the provisions of the statutes to speculative issues only.
(2) The typical blue-sky laws that divide securities into several different
groups, exempting the sounder issues and applying the regulations to others.
Some transactions also, such as judicial sales, isolated sales by individuals, and
sales to satisfy mortgages are usually exempted.
In addition, some statutes contain certain special clauses such as those providing
for temporary permits pending investigation, registration by notification, require-
ments that promoters deposit stock or file bonds until the corporation is well
established and other measures, intended to facilitate the sale of legitimate
securities or to restrain fraudulent or speculative issues. These features are
usually supplemental to the characteristic provisions of this type of statute.
The law of Colorado, which differs widely from all other American securities
legislation, will be described in connection with the proposed Federal law.
LIMITATION OF STATE LAWS
There is no way of estimating even approximately the actual savings to Ameri-
can investors as a result of the various blue-sky laws. Reports from State enforce-
ment officers cover only those applications filed for permission to sell such securi-
ties as the applicants believe have sufficient merit to pass inspection. Naturally,
there can be no record of the far greater number of projects which never material-
ized because of the exactions of these laws or for which no applications were filed
because of possible evasions discovered by clever promoters and shrewd attorneys.
It has already been stated that there is a great difference in the effectiveness of the
legislation in the various States and in the qualifications and zeal of the enforce-
ment officers, and promoters quickly discovered and took advantage of these dif-
ferences by operating in States where the statute or its enforcement was lax and
01 Blue Sky Laws, Reed & Washburn, p. XXI. Bowditch v. New England Mut. Ins. Co., 141 Mass.
292; Sav. Bank of San Diego y. Burns, 104 Cal. 473; Cashin v. Pliter, 168 Mich. 386.
62 Securities Commission, Attorney General, Superintendent of Banking, Secretary of State, etc.
63 Stone v. U.S., 167 U.S. 178; Coffey v. U.S., 116 U.S. 436; Wilkes v. Dinsman, 7 How. 89; U.S. v. Donald-
son-Schultz Co., 148 Fed. 581, and many others. See Corpus Juris, judgments.
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SECURITIES ACT
323
avoided those that presented too great danger of criminal prosecutions.64 More-
over, “Few commissions even record the prosecutions undertaken by their offices
and, in all States, county or district attorneys prosecute independently."65
Such records as have become available, however, show conclusively the bene-
ficial results of this type of legislation.66 As might be expected, enforcement
officers have found that the greatest activity occurs within a comparatively
short period after the law becomes effective. During the first year of the oper-
ation of the blue-sky law in Pennsylvania (1923–24), 1,436 applications for
dealers' registrations were filed, of which only 761 were in effect at the end of
the period.87 The Railroad Commission of Wisconsin charged with the enforce-
ment of that State's securities act, reported in 1926 that the total number of
dealers in low-grade securities was only 50 percent of the number operating in
1919, when the law became effective, and that the amount of money invested
in their wares had decreased 75 percent, although the number of dealers in high-
grade securities had increased.68 The chief of the securities division of the
State of Ohio reported in 1924 that “During the past 2 years (1923–24)
* hundreds of hearings have been called as a result of which hundreds
of thousands of dollars have been restored to defrauded purchasers of stocks
and bonds.” During the same period permits to sell issues valued at $95,000,000
were granted and refused for issues valued at $898,000,000.88
Where State laws fail.--Similar reports are available from many other States
showing that this type of legislation has saved or recovered for American investors
millions of dollars that would otherwise have been lost in worthless securities
yet, notwithstanding these protective State laws, there has never been a period
in history when the public has been so grossly mulcted of accumulated savings
by shrewd and conscienceless “securities” manipulators as during recent years.
The failure of State laws to cover all situations arises from a number of factors
which may be summarized as follows:
(a) Lack of protective securities legislation in one State and in all the Terri-
tories, including the District of Columbia, and inadequate legislation in others.
(6) Lack of uniformity in the laws of the various States.
(c) Willingness of victims to “compound” the offense or accept a compromise.
(d) Evasions possible by conducting sales on an interstate basis.
The lack of adequate protective laws and the existence of too liberal corpora-
tion legislation in some jurisdictions not only furnishes fertile fields for promoters
and dealers but, what is far more important, offers the fraudulent promoter a
legal haven from which to direct his operations in other States. The seriousness
of this factor has been emphasized in numerous proceedings both before the courts
and in hearings before Congress where the methods of organizing corporations
with no tangible prospects in one State and selling its stock to a credulous
public in other States are explained in detail.69 The fraudulent promoter first
decides upon the branch of industry in which his embryo corporation shall
ostensibly engage and the choice, if well made, will depend on the public fancy
at the moment. Just after the war oil and mining companies were the most
popular, but industrial projects later came into favor. More recently, invest-
ment trust companies and major real-estate operations have been the most
successful from the promoter's viewpoint. The World's Work in its March
1919 issue published a list of more than 1,000 so-called “oil, mining, and industrial
companies" that had no legitimate prospects and that were organized solely for
the purpose of selling stock. After having decided on the basis for his appeal to
the public, the promoter selects for incorporation a State in which it is possible
to organize a company with nothing or little more substantial than a large
authorized issue of capital stock.
64 Before the enactment of blue-sky legislation in Massachusetts in 1921 a special commission
ointed
to investigate sales of securities, submitted a report which included the following statement: “ * it
cannot be said that the Massachusetts policy of allowing anyone to deal in securities subject only to the re-
straint of the criminal statutes is either efficient or tolerable. * * Fraudulent promoters driven out o
other States and countries, flock to Massachusetts." H.R. 721 5, 67th Cong., 1st sess.
66 Economic Effects of Blue Sky Laws. F. B. Ashby, p. 39.
68 “Forty-one States have enacted securities laws, and it has resulted in a wonderful saving to the people.
If you could confer with the securities officials of those States that have enacted comprehensive laws on
the subject, you would find that in the course of a short time they have driven from those States any
number of these itinerant, fraudulent promoters, and they have saved the people of those States millions
of dollars.” Hon. Edward E. Denison, Congressman from Illinois before Committee on Interstate and
Foreign Commerce, Hearings on H. R. 7215, 66th Cong. Ist sess.
67 Economic Effects of Blue Sky Laws. F. B. Ashby, p. 36.
68 Idem.
69 Pandolfo v. U.W., 286 U.S. 8; Congressman Denison, of Illinois, in hearing on H.R. 7215, 67th Cong.,
1st sess.; Hon, Huston Thompson, Federal Trade Commission in hearings on H.R. 188, 66th Cong.,
1st sess.; Paul V. Keyser, attorney for Investment Bankers Association, in hearing before Committee
Interstate and Foreign Commerce on H.R. 7215.
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324
SECURITIES ACT
A high-powered selling campaign is then begun in other States, either through
the mails or by agents, or both, care usually being taken to avoid violating the
“blue sky” laws of those States having effective statutes. Often such States are
avoided altogether. It is a comparatively easy matter, as will be explained
hereafter, to arrange that the sale, as a matter of law, actually takes place outside
the State where the customer resides and for this reason outside the jurisdiction
of its laws.70
In several States, however, such subterfuges are not necessary inasmuch as
there is no securities legislation whatever or such legislation as exists is inadequate.
There is no legislation covering the sale of securities in the District of Columbia,
for example, and a report of the District Committee of the Senate covering an
investigation made early in 1932 shows an unrestrained sale of millions of dollars,
worth of securities on the basis of gross misrepresentation by the issuers.71 Similar
situations exist in all of the Territories and, through ineffective legislation, in
many of the States.
The varying requirements of the statutes of different States also interfere with
the full effectiveness of State legislation. Each State, naturally, desires to attract
capital and to persuade industries to locate within its borders. For this reason
the legislatures of some States deliberately enact lenient statutes as an induce-
ment to outside industry while others fear that strict laws governing flotations
of capital stock and securities will drive industry to more liberal States.
The pressing need of uniform “blue sky' legislation throughout the States has
been appreciated by the legal profession for a number of years and in 1922 the
National Conference of Commissioners on Uniform State Laws began the prepa-
ration of such an act, the fourth draft of which was finally adopted at the asso-
ciation's fortieth annual conference, August 11-16, 1930. This proposed uniform
law was also approved by the American Bar Association at its meeting in Chicago,
August 20–22, 1930.72 None of the States has yet adopted this act, but it largely
follows the precedent of the typical “blue sky" legislation already existing in many
jurisdictions. If this proposed draft could be enacted in each of the 48 States
and all Federal Territories it would do much to correct some of the evils that
exist at present, but such concerted action is highly improbable and the refusal
of a single State to adopt the measure would substantially offset the action of
the other 47 by leaving open to the promoter a base of operations.
One of the greatest obstacles in the way of more effective enforcement of pro-
tective security laws is the willingness of victims to foreign prosecution upon the
promoter or dealer agreeing to refund part of the purchase price. It often
happens that after the prosecuting attorney has prepared a satisfactory case
against a fraudulent promoter or dealer, the prosecuting witness accepts a refund
and the case fails for lack of sufficient evidence.73 This is known as “compound-
ing” and the practice is so prevalent that many of the more cautious and syste-
matic of the fraudulent manipulators set aside insurance funds for placating the
more dangerous of the defrauded investors. Maj. Morgan K. Harris, of the
bureau for the investigation of financial frauds of New York City, has stated that
many “swindlers put aside from one tenth to one third of the money they get to
reimburse persons who demand an adjustment.”74 Although this practice greatly
interferes with the effective enforcement of the “blue sky' laws and both prose-
cuting attorneys and the courts object to being used as collection agencies,
many believe it more practical to accept the situation philosophically and en-
deavor to force the promoters to return to their victims the largest amounts
possible.
“In the Chicago district alone $3,626,990 was recovered for investors during
1930, according to the report of L. P. Holt and H. S. Weinberg, assistant State's
attorneys. And during the same period the fraud prevention bureau of the
attorney general's office of the State of New York obtained restitution of approxi-
mately $3,250,000 for the victims of bucketeers.” 75
These statistics from only two States serve to indicate that many thousands of
fraudulent promoters and dealers escape well-deserved criminal prosecutions
annually through refunding a small part of their loot to a few of the more indig-
nant or insistent victims.
70 Duke v. Olson, 240 III. App. 198; in re Suchow's estate (Wis.), 212 N.W. 280.
71 Report No. 412 on hearing before Senate Committee on the District of Columbia, 72d Cong., 1st sess.
73 Uniform Sales of Securities Act. Published by National Conference of Commissioners on Uniform
State Laws, John H. Voorhees, secretary, Sioux Falls, S.Dak.
73 Economic Effect of Blue Sky Laws, F. B. Ashby, p. 47. Mitchell Dawson in American Mercury,
March 1932, p. 353.
74 Mitchell Dawson in American Mercury, March 1932, p. 354.
78 Idem.
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SECURITIES AOT
325
The most effective and widely used method of evading the provisions of State
“blue sky” laws consists in operating across State lines. The Supreme Court
definitely established the constitutionality of this type of legislation in the three
cases already cited 78 on January 22, 1917, and the study of methods for avoiding
its provisions was begun almost immediately.77
Since that date, the technique of the methods employed has greatly improved
and their legal position has been assured. The procedure is not complicated
and the legal immunities are beyond question. A sale of securities, just as any other
contract, must consist of an offer and acceptance; until an offer is accepted
there is no sale 78 and the sale is legally made at the place where acceptance is
given.79 These principles have long been undisputed law. It is a simple matter
for promoters in New York selling their securities in other States to provide that
sales are not to become effective until acceptance by mail or telegram from their
office. Their literature merely advertises their wares and makes no offer to sell,
in fact usually it states that:
“A sale upon an offer made to us to purchase securities is effective upon our
acceptance by mail or telegram sent by our office." 80
In this manner the sale by mail, telegraph, or telephone to a customer in
Illinois, for example, is actually made in New York and violates no law of Illinois
or of any other outside State where the promoter or dealer has been able to ob-
tain clients.81 The act is committed in New York and is, for this reason, not
subject to the jurisdiction of any other State. Even if the dealer in New York
offers securities by mail to the customer in Illinois who completes the contract
in the latter State by accepting by a letter deposited in the mails there, the dealer
could not be extradited to Illinois inasmuch as he has not “fled” from the justice
of that State although he has committed an offense against it.82 This and similar
methods of taking advantage of State boundaries are constantly being extensively
and successfully used to evade the provisions of State blue sky laws.
Many States have endeavored to correct this evil by including various regula-
tions in their statutes, but statements from the majority of the State security
commissions indicate that they are powerless or nearly so in the matter of inter-
state transactions and that a supplemental Federal law is needed to stop this
gap through which is being wasted hundreds of millions of dollars of public
savings--our soundest reserves—that might otherwise be diverted to substantial
industrial development.83
FEDERAL LEGISLATION HERETOFORE PROPOSED
The need of Federal legislation relating to the sale of investment securities to
supplement and strengthen State laws has long been widely recognized by those
who have given the subject more than casual consideration. Immediately after
the termination of the World War, and inspired by a deluge of fraudulent pro-
moters and their success in exchanging the worthless securities of resourceless
projects for Liberty bonds and the public's savings, a number of bills were
introduced in Congress, particularly between 1918 and 1921.84 Of these, three
are of special interest, both because of the exhaustive consideration they received
76 Hall v. Geiger-Jones, Caldwell v. Siour Falls Stock Yards Co., and Merrick v. Halsey, supra.
17 On the following 6th of February, or 15 days later, Reed and McCook. attorneys for the Investment
Bankers Association, wrote their clients concerning the possibility of evading the effect of these laws by
making their sales of securities between States. The following comments appear in that letter:
“The only safe interpretation to put upon this phase of the opinion (interstate sales) is that the State may
prohibit and make criminal a particular act, i.e., an offering or sale, effected within the State' whether or
not it is initiated outside of the State * * * We should also repeat, for such comfort as it may carry,
what the writer said in the opinion of his former firm:
“'On this question we should also add parenthetically that, under the peculiar language of our Federal
Constitution and statute, a person outside of the State who commits a crime within the State cannot be
extradited for the purpose of prosecution and punishment within the State where the crime was com.
mitted. Only "a person charged with crime who shall flee from justice” is subject to extradition.'".
Blue Sky Laws, Reed & Washburn, p. 265a, citing I.B.A. Bulletin of July 31, 1913; Wharton on Criminal
Law and Procedure, ninth ed., sec. 31; Jones v. Leonard, 50 Iowa, 106; Hyatt v. People, 188 U.S. 691, affirm-
.Y. 176; Er parte Hoffstot, 180 Fed. 240, affirmed 218 U.S. 665.
78 Corpus Juris-Contracts, sec. 52 and cases there cited.
78 Corpus Juris-Contracts, sec. 581 and cases there cited.
80 Blue Sky Laws, Reed & Washburn, p. XXII.
81 Hearings before the Judiciary Committee on H.R. 188, 66th Cong., 1st sess. Hearings before Commit-
tee on Interstate and Foreign Commerce on H.R. 7215, 67th Cong., 1st sess. Blue Sky Laws, Reed &
Washburn, p. XXII; In re Suchow's estate, 212 N.W. 280 (Wis.); Duke v. Olsen, 240 Ill. App. 198.
$2 Wharton on Criminal Law and Procedure, ninth ed., sec. 31; Hyatt v. People, 188 U.S. 691, affirming
172 U.S. 176; ex parte Hoffstot, 180 Fed. 240, affirmed 218 U.S. 665.
93 See letters from State securities officials pp. 50-62, hearings before Committee on Interstate and Foreign
Commerce on H.R. 7215, 67th Cong., 1st sess., and those appearing pp. 8–12, hearings before the Committee
on the Judiciary on H.R. !88, 66th Cong., 1st sess.
84 Paul V. Keyser, attorney for Investment Bankers Association in hearing before Committee on Inter-
state and Foreign Commerce on H.R. 7215, 67th Cong., 1st sess.
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SECURITIES ACT
and because they represent three distinct proposals for accomplishing the desired
results.
The Denison bill.—The so-called Denison bill, introduced on various occasions
by the Honorable Edward E. Denison of Illinois, was referred to the Committee
on Interstate and Foreign Commerce of the House which held extensive hearings
during the first session of the Sixty-seventh Congress.85 This bill, in substance,
provided that it should be unlawful to use the United States mails or the agencies
of interstate commerce to defeat the purpose of the various State blue sky laws.
Under this proposed statute, the sale in any State of securities through the mails
or in interstate commerce, not in accordance with the laws of that State would
constitute a Federal offense. In the words of the author:
“They (the States) now find themselves up against a serious proposition,
because the promoters go over States lines and organize companies, or they go
wherever they can safely and conveniently operate and organize companies and
get out lurid circulars promising tremendous returns. They literally flood the
mails with them and send them into the States where they cannot go themselves,
because they cannot qualify. They take advantage of the United States mails
and of the agencies of interstate commerce, such as the telephone or telegraph
companies, and flood the people of those States with ingenious and plausible
promises of fabulous wealth. They are getting the people's money notwithstand-
ing the State laws, and the States are powerless because they cannot extradite
for that offense. The result of it is that the State laws are being evaded and
nullified. The laws of the States are being violated, but the States are powerless
to reach the guilty ones.
"Now I think that the Federal Government ought to cooperate with the State
to the extent of not permitting those agencies over which the Federal Govern-
ment has exclusive control to be used to nullify the State laws and that is what
this bill does. If you will read the bill you will find that it complements and fits
in with the State laws. It simply provides that the United States mails, of which,
of course, Congress has exclusive control, and the agencies of interstate commerce,
over which Congress has exclusive control under the Constitution, shall not be
lawfully used to violate the State laws or to circumvent, evade, or nullify the
State laws." 86
Representatives of private interests 87 did not question in this hearing the power
of Congress to regulate the interstate sale of securities under the Interstate
Commerce clause of the Constitution. They did, however, question the authority
of Congress to delegate, in effect, its authority to regulate interstate commerce
to the States by a law declaring that whatever securities the States designated as
unlawful should be unlawful in the mails or in interstate commerce,88 and cited
the Supreme Court's decision in the Knickerbocker Ice Co. case in support of
their contention.89 That case tested the validity of a Federal law providing that
State workmen's compensation acts could be enforced in suits in connection with
admiralty matters before the Federal courts. The court held that the act was
unconstitutional as an authorized delegation of the Federal Government's juris.
diction in admiralty matters, but the opinion expressly distinguished this decision
from the court's ruling under the Webb-Kenyon Act 90 and under the National
Bankruptcy Act.91
In the Ice Co. case the court held that Congress did not have authority to
delegate to the States its exclusive power to enact admiralty legislation, because
of the peculiar character of admiralty jurisdiction which from earliest times has
been a part of the law of nations. In the Rahrer case arising under the Webb-
Kenyon Act, the court upheld the constitutionality of an act of Congress, com-
monly known as the “original package” law, providing that intoxicating beverages
should not be exempt from State prohibition laws by reason of the fact that they
entered the State in interstate commerce. In the Hanover Bank case, the
Supreme Court upheld the validity of an act which had been attacked on the
ground that Congress had inserted in the National Bankruptcy Act a provision
that the exemptions of State bankruptcy laws should be recognized in bankruptcy
proceedings under the national law.
Mr. Denison submitted letters from the appropriate officials of 38 States
recommending the enactment of Federal blue sky legislation and the bill, after
B6 Idem.
86 Idem, pp. 27-28.
87 Attorneys for the Investment Bankers Association.
88 Idem, p. 8.
80 Idem, p. 12; Knickerbocker Ice Co. v. Stewart, 253, U.S., 149.
00 In re Rahrer, 140 U.S. 545.
91 Hanover National Bank v. Moyses, 186 U.S., 181.
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327
being favorably reported by the committee, was passed almost unanimously by
the House. In the Senate, however, it was referred to the Committee on the
Judiciary and never reported out.
The Volstead bill.—The so-called Volstead Act was introduced by the Hon.
Andrew Volstead during the Sixty-sixth Congress and referred to the House
Committee on the Judiciary.92 This act followed the precedent of the “fraud"
laws enacted by New York, New Jersey, and Maryland. It proposed to empower
the Attorney General to investigate, whenever evidence should be submitted
that fraudulent practices in the sale of securities had been engaged in or were
about to be engaged in, and to issue a stop order if the result of the investigation
justified such action. This type of laws has been described as “one that locks
the door after the horse is gone." 93 The bill, which was favored by the attor-
neys for the Investment Bankers' Association, 94 was referred to the Committee
on the Judiciary but not reported out.
The Taylor bill. The Taylor bill, introduced by the Honorable Edward T.
Taylor of Colorado, was a distinct departure from other American legislation on
this subject.95 It developed as a result of the activities of the Capital Issues Com-
mittee, an emergency body appointed to mobilize the country's financial resources
for war purposes. 96 This committee, before it was dissolved in August 1919,
submitted two reports which pointed out the vast sums being lost by the public
and diverted away from legitimate enterprises through the sale of fraudulent or
worthless securities and recommended the enactment of Federal legislation to
correct the evil. The bill was drawn, in part, by the Hon. Bradley W. Palmer,
counsel of that committee and had the approval of President Wilson, Secretary
of the Treasury Glass, and the Federal Trade Commission.97
This act followed to a large extent the same general principles of control
employed in the Consolidated British Companies Act of 1929 98 and the corre-
sponding legislation of the Dominions, France, Germany, Belgium, Japan, and
some of the South American countries.99 It proposed that the promoters, chief
officers, and directors of companies offering their stock to the public in interstate
transactions should be required to file with the Secretary of the Treasury signed
statements containing detailed information concerning their organization and
prospects, this information to be at all times available to the public. The act
further provided that purchasers would be assumed to rely upon the informa-
tion filed and that in the event of material misrepresentation they would be
entitled to recover the purchase price from those signing the statement. A penal
clause was also included prescribing a fine or imprisonment or both for willful
violations of the act.
A number of questions were raised at the hearing, chiefly concerning the
wording of details that did not affect the substance of the bill and several minor
amendments were suggested. Whether or not the sale or transportation of
securities across State lines consituted interstate commerce and, as such, came
within the power of Congress to regulate, was also discussed and the Hon.
Huston Thompson, of the Federal Trade Commission, submitted a brief which
reviewed the decisions at considerable length and concluded that there was
ample authority to support its decisions that such traffic does constitute inter-
state commerce. He explained that the brief was prepared as a result of a
request from the Capital Issues Committee, at the time of its dissolution, con-
curred in by the Secretary of the Treasury and the Federal Reserve Board, that
the Federal Trade Commission investigate and prohibit the sale of fraudulent
securities in interstate commerce. Inasmuch as the Commission's authority
depended upon the interstate character of these transactions, the question was
carefully studied and determined in the affirmative after the review of the
authorities mentioned. The Commission then began to investigate, so far as
its limited facilities would permit, and to forbid the sale in interstate commerce
of the fraudulent securities investigated. Its decision on this point has never
been reversed by the courts.2 The bill was not reported out of the Committee.
02 H.R. 12603, 66th Cong., 2d. sess.
03 Hon. Clarence F. Lea, of California. Hearings on H.R. 7215, supra, p. 16.
04 Idem, p. 19.
98 Hearing before the Committee on the Judiciary on H.R. 188, 66th Cong., 1st sess. Colorado subse-
quently passed a somewhat similar law. Session Laws of Colorado, 1923, ch. 168.
36 Committee consisted of C. S. Hamlin, John Skelton Williams, F. H. Goff, Henry C. Flower, John S.
Drum. Public Documents 1485 and 1836, 65th Cong.
67 Hearing before the Judiciary Committee on H.R. 188, 66th Cong., ist sess., pp. 11, 12, 25.
08 Consolidated Companies Act of 1929, 19 and 20 George V. Chittys Annual Statutes, 1928–29, p. 557,
pt. II.
* Regulation of the Sale of Securities in Interstate Commerce, Hon. Huston Thompson, Federal Trade
Commissioner, A.B.A. Jour. 9:57, March 1923. Hearings on H.R. 188, supra., p. 19.
1 Idem, p. 50.
° Idem, pp. 26, 63.
* Idem, p. 124.
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328
SECURITIES ACT
CURRENT PROPOSALS
Since those three earlier bills, representing the three basic methods of attempt-
ing to correct the situation, were introduced, numerous other bills of the same
types have been proposed, particularly during the last (Seventy-second) session of
Congress. As they were all variations of 1 of the 3 earlier bills which have
just been discussed in detail, those presented in the Seventy-second Congress
may be summarized as follows:
Two comprehensive bills 4 were introduced at this session which were restricted,
however, to the issuance and sale of securities in the District of Columbia.
Eight different bills 5 relating to short selling of securities and commodities
and bucket-shop transactions were introduced.
Congressman A. J. Sabath, of Illinois, introduced H.R. 4638, “to prohibit
communication of false information with respect to securities in certain cases”,
which provides a fine or imprisonment for anyone who communicates or attempts
to communicate in interstate commerce any false information affecting the price
of securities.
Congressman F. H. LaGuardia, of New York, introduced two bills 6 one of
which prohibited the use of the mails for the sale of real estate securities, unless
they contain sworn statements by the owner as to valuation and assessment and
unless they were guaranteed as to both principal and interest by the person or
corporation originally underwriting or offering such mortgages, and a second bill
prohibiting banking institutions from purchasing stocks or bonds unless the
payment of principal and interest were guaranteed by the issuer and distributor.
Congressman A. J. Sabath, of Illinois, also introduced a bill 7 “to prevent the
use of the United States mails and other agencies of interstate commerce for
transporting and for promoting or procuring the sale of securities contrary to
the laws of the States, and for other purposes, and providing penalties for the
violation thereof." This bill is similar in character to that introduced by Con-
gressman Denison in the Sixty-seventh Congress in that it prohibits the sending
of information or offers of securities to States in which it is at that time unlawful
to solicit or sell such securities. There are numerous exceptions listed in this bill,
however, such as foreign government obligations, securities listed upon an organ-
ized stock exchange, the stock of banks, trust companies and savings institutions
and notes secured by mortgages when the face value of such notes does not exceed
75 percent of the then fair market value of such lands and 60 percent of the
insured value of any improvements thereon, and several other classes of securities.
THE NEEDED LEGISLATION
The proposed Taylor Act has been discussed at considerable length for, of the
three plans suggested by the bills introduced, this appears to be the most effective
and practical method for enabling the Federal Government to regulate the sale
of securities in interstate commerce and to fill the gap the States are unable to
control. As stated in the report of the Capital Issues Committee:
“This unlicensed and unrestricted traffic is a crevice in our financial structure
through which flows a constant torrent of funds in utter wastage. It can and
should be stopped; but more than that it is a source of heavy financial loss to
hundreds of thousands who have a right to look to their Government for pro-
tection. * * *"8
Constitutionality.—The authority of Congress to enact legislation regulating
interstate commerce in securities can no longer be seriously questioned. A
review of the judicial decisions relating to this point must, because of the nature
of the subject matter, consider two phases: (a) Securities as Subjects of Com-
merce; (6) Boundaries of Interstate Commerce.
H.R. 9065, introduced by Congressman Bowman "to supervise and regulate the sale of securities within
the District of Columbia", and H.R. 8912, introduced by Congressman Sabath “to suppress fraudulent
practices in the promotion or sale of stocks, bonds, and other securities sold or offered for sale within the
District of Columbia; to register persons selling bonds, stocks, or other securities; and to provide punish-
ment for the fraudulent or unauthorized sale of the same."
5 H. Res. 57 and 59; H.R. 11509, 4639, 4642, 11510, 4604, and 348.
6 H.R 9447 and 12898.
iH.R. 8932.
& Public Document No. 1485, 65th Cong., 3d sess.
329 (#341) ############################################
SECURITIES ACT
329
Securities as subjects of commerce.-In Bracey v. Darst the Federal court said:
“We do not think it can longer be questioned that stocks, bonds, debentures,
and other securities are subject matters of interstate commerce." ģ
Again in Alabama & N.O. Transportation Co. v. Doyle it was said:
“We cannot doubt that stocks and bonds are now the subjects of interstate
commerce and that shipments and sales of them, between the States, are inter-
state commerce." 10
Compton v. Allen contained a similar decision as follows:
* * That the transportation of such articles of personal property
(securities) from one State to another for the purpose of barter, sale, and
delivery constitutes not only commerce among the States of this country but
& very large and important element of such commerce * * * is self-
evident. * * *" 11
The Supreme Court of the United States, early in its history, went much further
in holding far less tangible transactions to be interstate commerce and, as such,
subject to regulation by the Federal Government. In the Telegraph Cases 12 it
held that telegraph messages between States constituted interstate commerce
and as such subject to Federal regulation. In another case 13 the Supreme Court
held that the transmission of electric current across State lines was interstate
commerce and in Book Co. v. Pigg 14 it said:
“We cannot doubt that intercourse or communication between persons in differ-
ent States, by means of correspondence through the mails, is commerce among
the States within the meaning of the Constitution."
In the Lottery case, 15 a Federal law enacted under the authority of the interstate
commerce clause of the Constitution, prohibiting the transportation of lottery
tickets between the States, was attacked as unconstitutional on the ground that
lottery tickets had no value and for this reason could not be subjects of commerce.
The Supreme Court disagreed with this contention, holding the statute to be
constitutional and stating in part as follows:
“We are of the opinion that lottery tickets are subjects of traffic and therefore
are subjects of commerce, and the regulation or the carriage of such tickets from
State to State, at least by independent carriers, is a regulation of commerce
among the several States.'
Early decisions of the Supreme Court have been so inclusive in defining sub-
jects of interstate commerce that it has never been seriously questioned either in
arguments before that Court or in discussions in Congress concerning proposed
Federal blue-sky laws, that stocks, bonds, and other securities fall within this
category.
In that series of leading cases, already mentioned, decided by the Supreme Court
in 1917, counsel contended that the blue-sky laws of Ohio, North Dakota, and
Michigan were unconstitutional inasmuch as they tended to regulate the sale of
securities originating in other States and, therefore, interfered with the exclusive
power of Congress to regulate interstate commerce. The Court by implication
agreed that such securities were subjects of interstate commerce bui that the
State legislation under discussion was not an unauthorized regulation of that
type, explaining their opinion as follows:
"Úpon the transportation into the State there is no impediment—no regulation
of them or interference with them after they get there. There is the exaction
only that he who disposes of them there shall be licensed to do so and this only
that they may not appear in false character and impose an appearance of value
which they may not possess—and this certainly is only an indirect burden upon
them as objects of interstate commerce * * * It is a police regulation
strictly, not affecting them until there is an attempt to make disposition of them
within the State.16
9 Bracey v. Darst, 218 Fed. p. 482, citing: Gibbons v. Ogden, 9 Wheat. 1, 6 L. Ed. 23; Browny. Maryland,
12 Wheat. 419, 6 L. Ed. 678; Chy Lung v. Freeman, 92 U.S. 275, 23 L. Ed. 550; Railroad Co. v. Husen, 95
U.S. 465, 24 L. Ed. 527; Telegraph Co. v. Telegraph Co., 96 U.S. 1, 24 L.Ed. 708; Telegraph Co. v. Pendleton,
122 U.S. 347, 7 Sup. Ct. 1126, 30 L. Ed. 1187; Lottery Cases, 188 U.S. 321, 23 Sup. Ct. 321, 47 L. Ed. 492;
Book Co. v. Pigg, 217 U.S. 91, 30 Sup. Ct. 481, 54 L. Ed. 678, 27 L.R.A. (N.S.) 493, 18 Ann. Cas. 1103; West
v. Kansas Co., 221 U.S. 229, 31 Sup. Ct. 564, 55 L. Ed. 716, 35 L.R.A. (N.S.) 1193; Cook on Corp. (7th Ed.)
vol. 2, par. 486, p. 1364.
10 Alabama & N.O. Transp. Co. v. Doyle, 210 Fed. 173.
11 Compton v. Allen, 210 Fed. 537.
12 Telegraph Co. v. Telegraph Co., 92 U.S. 1 and Telegraph Co. v. Teras, 105 U.S. 460.
13 Public Utilities Commission of R.I. v. Attleboro Steam & Electric Co., 273 U.S. 83.
14 Book Co. v. Pigg, 271 U.S. 91.
16 Lottery case, 188 U. S. 321.
16 Hall v. Geiger-Jones Company (242 U.S. 539-557). See also Caldwell v. Siour Falls Stockyards Co.
(242 U.S. 559), and Merrick v. Halsey & Co. (242 U.S. 568).
330 (#342) ############################################
330
SECURITIES ACT
In the Textbook Company case, supra,17 attorneys unsuccessfully contended
that correspondence school courses do not constitute interstate commerce and
cited in support of their contention the Supreme Court's early decision rendered
in the so-called Insurance case 18 holding that insurance policies are not subjects of
commerce. The Court overruled this contention, however, stating that the
Insurance case decision was not applicable to this class of cases because of the
peculiar character of an insurance policy.
That an insurance policy is essentially different from a security is evident
from the language of the Court itself in rendering the Insurance case decision
where it is said that “they (insurance policies) are not subjects of trade and
barter offered in the market as something having an existence and value
independent of the parties to them.” As has been shown above, decisions
subsequent to the Insurance case have followed the distinction then made in
holding that securities, lottery tickets, telegraph messages, correspondence
school courses, electric current and correspondence concerning these articles are
“subjects of trade and barter offered in the market as something having an exist-
ence and value independent of the parties to them.”
The question before the Supreme Court, in a case decided during 1918, involved
a contract between the New York Stock Exchange and certain telegraph com-
panies under the terms of which the exchange agreed to furnish those companies
with continuous market quotations which were to be transmitted in Morse
code to other cities and there decoded and distributed by ticker tape to the
officers of the telegraph companies' various broker-customers. The contract
also provided that no person should receive this service unless his application
had been approved by the exchange. The State of Massachusetts objected to
this arrangement in connection with quotations transmitted to and distributed
in Boston on the ground that the authority given the exchange to withhold the
service was discriminatory.
The State, in attempting to enforce regulatory State legislation, conceded that
the original transmission of the quotations from New York to Boston constituted
interstate commerce but contended that interstate commerce ended when the
quotations were received and decoded in Boston for distribution by other means
to local customers and for this reason were subject, from that point on, to State
control. The Supreme Court overruled this contention, however, and held that
interstate commerce did not terminate until the market quotations had actually
reached the brokers for whom they were originally intended.19
Boundaries of Interstate Commerce.-From the foregoing review of authorities
it appears clear that investment securities are subjects of commerce and that
interstate transactions in them are subject to regulation by the Federal Govern-
ment. The second question, then, involving interpretation of the commerce
clause—i.e., when interstate commerce begins and terminates—is important, not
as concerning the constitutionality of Federal securities legislation, but as affecting
the practical operation of such legislation, under varying circumstances, after it
has been enacted. The Supreme Court of the United States has rendered
numerous decisions on this subject, covering a great variety of situations, but a
few examples, particularly recent ones, should serve to indicate the general
principles followed.
In Real Silk Mills v. Portland,20 the State of Oregon had attempted to impose &
license fee on salesmen who solicited orders from individuals, collecting a deposit
of $1 on each box of hosiery ordered, the hosiery to be delivered later by c.o.d.
parcel post packages from the factory in Indiana. The Court, holding that such
a State tax was invalid as an unwarranted burden on interstate commerce, stated
that “Considering former opinions of this Court, we cannot doubt that the ordi-
nance materially burdens interstate commerce and conflicts with the commerce
clause.''21 “The negotiation of sales of goods which are in another State, for
the purpose of introducing them into the State in which the negotiation was made
is interstate commerce."22 In Shafer v. Farmers' Grain Company 23 the State of
North Dakota had attempted to enforce grading regulations covering purchases
of wheat by buyers within the State intended for shipment to other States. The
Court held such a regulation to be unconstitutional on the ground that “Buying
17 Book Co. v. Pigg (271 U.S. 91).
18 Paul v. Virginia (8 Wall., 168, decided in 1868).
19 Western Union Telegraph Co. v. Foster (247 U.S., 1
20 Real Silk Mills v. Portland (268 U.S. 325).
21 Citing Robbins v. Shelby Taring District (120 U.S. 489); Brennan v. Titusville (153 U.S., 289); Rearick v.
Pennsylvania (203 U.S. 507); Crenshaw v. Arkansas (227 U.S. 150); Alpha Portland Cement Co. v. Common.
wealth (268 U.S. 203).
22 Weeks v. U.S. (245 U.S. 618).
23 Shafer y. Farmers' Grain Co. ( U.S. 189).
331 (#343) ############################################
SECURITIES ACT
331
for shipment, and shipping, to markets in other States when conducted as before
shown constitutes interstate commerce —the buying being as much a part of it
as the shipping. We so held in Lemke v. Farmers' Grain Company, supra,24 follow-
ing and applying the principle of prior cases. Later cases have given effect to the
same principles."25
The first of these decisions (the Hosiery case) makes it clear that, if a principle
in one State sends an agent into another State for the purpose of selling an article
in the latter, to be delivered to the customer from without the State, the trans-
action constitutes interstate commerce and, as such, is subject to Federal regula-
tion. The second decision (the Grain case) establishes the principle that, if a
purchaser buys an article in one State for the purpose of transmitting that article
to and selling it in another, the buying as well as the shipping is interstate com-
merce. The complication in the second example would, perhaps, be one of fact,
of showing the intent when the purchase was made. This should not be impos-
sible to do, however, if it could be shown that the purchaser dealt habitually in
the article involved and isolated transactions where this could not be shown
would not, ordinarily, be particularly important.26
The point at which a transaction ceases to be interstate was defined in general
but unequivocal terms by an early decision of the Supreme Court which has since
been followed, under more specific circumstances, in numerous instances. In
Robbins v. Shelby Taxing District 27 it was stated that “as soon as the goods are in
the State and become part of its general mass of property, they will become liable
to be taxed in the same manner as other property of similar character * * *.”
It has been repeatedly held, for example, that merchandise entering a State
unsold, for the purpose of sale therein, ceases to be in interstate commerce when
it reaches its destination, but that merchandise already sold to a definite cus-
tomer before entering the State is in interstate commerce until delivery to the
buyer. In American Steel & Wire Company v. Speed 28 the court held that nails in
kegs, shipped to Memphis from outside the State and held in a warehouse there
until sold, ceased to be in interstate commerce on arrival at the warehouse even
though they remained in the original package until delivery to the eventual cus-
tomer. In Rearick v. Pennsylvania,29 decided 3 years later, the question raised
involved the sale of brooms to individuals in Pennsylvania by a solicitor on
behalf of a firm in Ohio. After a sufficient number of orders had been accumu-
lated, the brooms were shipped in one package to the solicitor or agent, who broke
the package and made deliveries to his customers. Mr. Justice Holmes, deliver-
ing the opinion of the court, held that the merchandise remained in interstate
commerce until delivery to the customers, distinguishing this case from the Wire
Company case on the ground that, in the present instance, the merchandise had
been sold before arrival within the State and was en route to designated pur-
chasers, while in the former case the merchandise was still unsold when received
by the shipper's agent (bailee) and stored in the warehouse.
An attempt to arrive at a precise rule, on the basis of the numerous decisions
on these points, indicates that interstate commerce ceases when the merchandise
arrives at its destination. If unsold before arrival in the State, its destination
is the point of delivery to the shipper or his agent. If sold before arrival, its
destination is the point of delivery to the purchaser even though it may have,
in transit, been received by and redelivered by the shipper's agent.30 There are
some decisions that appear to conflict with this general principle but in most
instances it will be found that some distinguishing element is involved. In
Browning v. Waycross,31 for example, it was held that the delivery of lightning
rods, shipped from without the State and delivered by the agent to a purchaser,
was subject to State taxation on the ground that considerable work within the
State was necessary in the installation of the apparatus and that it was, therefore,
as finally delivered, an article partly processed within the State. Uncomplicated
by such distinguishing features, however, the general rule appears to be as stated.
If this is correct, an order for securities obtained from a client by a broker, both
in Maryland, and completed by delivery from a firm in New York would continue
to be an interstate transaction until final delivery to the purchaser even though
24 Lemke v. Furmers' Grain Co. (258 U.S. 50).
26 Citing Star ord y. Wallace (258 U.S. 495); Binderup v. Pathé Erchange (263 U.S. 291).
26 Numerous other decisions reiterating these same principles are cited in the Federal Digest, Commerce,
secs. 40 and 66 to 68, inclusive.
27 Robbins v. Shelby Taring District (120 U.S. 489 (1886)).
28 American Steel & Wire Co. v. Speed (192 U.S. 500). See also Woodruff v. Parkham (8 Wall. 123).
29 Rearick v. Pennsylrania (203 U.S. 507).
30 Brennan v. Titusville (153 U.S. 289) and others cited in the Federal Digest, Commerce, secs. 40 and 66
to 68, inclusive.
31 Browning v. Waycross (233 U.S. 16).
332 (#344) ############################################
332
SECURITIES ACT
delivery was effected through the Maryland broker. If, however, the New York
firm should send securities to the Maryland broker for sale, the interstate char-
acter of the transaction would terminate on the receipt of the securities by the
broker. The point does not appear to be of practical importance, however, so
far as concerns the enforcement of the proposed Federal securities legislation,
inasmuch as both the New York firm and the Maryland broker would be subject
to the law in either event.
The proposed remedy.--Six basic features have been considered in drafting
the proposed Federal securities bill which is submitted with this study:
(a) The promoters, issuers, principal officers, and directors are required to
sign registration statements to be filed with the Federal Trade Commission and
are to be held jointly and severally liable to purchasers for any damages sustained
in the event of misrepresentations of material facts contained in the statements
so filed.
(b) The bill does not attempt to prevent investment in speculative projects,
inasmuch as many of the industrial developments in this country began as
speculations. An effort is made, however, to draft the law in such manner
that prospective investors are enabled to know the extent of the speculative
features and have reasonable knowledge concerning the chances of success or
failure.
(c) Full publicity is required relating to factors essential to a reasonably
accurate evaluation of the quality of the security offered by requiring that
certain basic information appear in all advertising matter, whether printed or
spoken.
(d) Certain classes of securities known to be sound, such as those of the Federal
Government, as well as certain classes of transactions, such as judicial sales, are
exempted from the foregoing provisions in order not to hamper the normal course
of legitimate business more than may be necessary to accomplish the desired
regulation of other classes.
(e) A fraud clause has been added to penalize fraud in the sale of securities
exempted from the registration and publicity provisions of the fraudulent manipu-
lation of sound securities.
(f) A further provision has been included for the purpose of preventing the use
of the United States mails or other instruments of interstate commerce in evading
State security laws.
Registration of information required.—The basic features of the proposed draft
follow the general plan adopted in the proposed Taylor bill, the securities law of
Colorado, and the legislation of several foreign countries, notably the British
Companies Act, with certain changes necessary in order to conform to our dual
form of government and others that are intended to strengthen various provisions
in some particulars and to facilitate normal transactions in those securities that
are generally recognized as sound. In substance, the act requires that every
corporation or other entity offering its securities to the public in interstate com-
merce, shall file with the Commission a registration statement, accompanied by
designated documents, and showing prescribed details concerning the financial
organization of the company that will enable purchasers to know such material
facts as may affect the value as an investment. This statement is to be signed
by the corporation or association, its promoters, principal officers, and by its
directors. All purchasers are assumed to rely upon the representations contained
in this statement and, in the event of the misrepresentation of a material fact,
purchasers are entitled to rescind the contract of sale and to recover the purchase
price and damages, jointly or severally, from those signing the statement. A
fine, imprisonment, or both, are the penalties for offering nonexempt securities in
interstate commerce until the required statement has been filed.
Exemptions. One of the important problems in this type of legislation con-
cerns exemptions from its provisions. These should be chosen with a view to
embodying the least possible burden on legitimate transactions without, at the
same time, providing means for evasion of the law's restraining clauses by fraud-
ulent manipulators. The exemptions of the Taylor bill differed considerably
from those found in the majority of the States. By specific designation, only
shares of stock came within its provisions, and, for this reason, bonds and other
evidences of indebtedness or interest were exempted on the theory that fraudulent
promoters were interested only in the sale of stocks for which they could promise
fabulous though uncertain returns.32 That may have been correct at that time
but no longer applies, as has been well demonstrated during the past few years
by the expenditure of more than $800,000,000 for almost worthless foreign bonds
3. Hearings, supra, pp. 19-20.
333 (#345) ############################################
SECURITIES ACT
333
alone, 33 and of $100,000,000 worth of dubious and in some instances valueless
mortgage bonds on District of Columbia real estate.34 Moreover, if any form
(as distinguished from class) of security should be exempted, the promoter would
inevitably adopt that form for his operations.
The Taylor bill also exempted sales at public auction and certain other classes
of transactions subject to the approval of the Secretary of the Treasury.35 It
was generally agreed at the hearing that this provision placed an unnecessarily
large discretionary power in the hands of an executive, it following by implication
that mandatory exemptions similar to those in most State legislation were to be
preferred. The exemptions included in the present bill are based upon those
included in the Uniform Sales of Securities Act, 36 which in turn are largely based
on the exemptions included in much of the State legislation. A number of the
exemptions contained in that proposal, however, such as foreign government
securities, have been eliminated, in the belief that they afford too great an oppor-
tunity for evasions of the main provisions of this bill. Securities such as those
issued by common carriers and national banks, which are already subject to
supervision by some unit of the Federal Government, have been left under the
control of the respective supervisory units, although it is required that literature
offering them for sale shall, nevertheless, contain the basic information required
in the advertisement of other classes of securities.
The operation of the proposed statute with reference to securities existing and
in the hands of the public at the time the law becomes effective should also be
considered. It would present a grave administrative problem to require that
all corporations now existing in the United States, including those that have
been established for many years, comply fully with all the terms of the proposed
legislation. On the other hand, thousands of worthless promotional projects
have been incorporated in the past, and, if the bill were drawn to apply to new
issues only, fraudulent promoters would resurrect old issues for the sole purpose
of evading the new legislation. To overcome these objections, it is proposed to
exempt all securities, other than common stock, which provide for a fixed return
and which have been in the hands of the public without default for a period of not
less than 5 years, when issued by a corporation having a total capital stock of less
than $100,000. The exemption of transactions on certain stock exchanges,
usually included in State laws, has been eliminated in this draft inasmuch as
such transactions are ordinarily intrastate and not subject to Federal regulation.
It should be emphasized that the proposed bill does not contemplate any
expression of opinion on the part of the commission relative to the merits of the
securities concerning which statements are filed. The statements required by
this proposal are merely officially recorded representations of fact to which
purchasers have access and on which they are assumed to rely in the event of a
civil action for the recovery of the purchase price. No other action is required of
the commission at the time of registration than the filing of the statement and
the act of filing accompanied by the prescribed fee constitutes registration, but
the commission is, however, authorized to revoke such registration later, for
cause shown, in which event it becomes unlawful to continue the sale, in inter-
state commerce, of the securities concerned. A representation, made in the
offer or sale of securities, that registration is equivalent to the commission's
approval of the issue, is declared to be an offense and subject to the penal clause
of the bill.
All literature or other communications, including radio publicity, announcing
or offering securities for sale in interstate commerce, must contain certain basic
information, prescribed by the bill, concerning the securities offered. Copies of
the literature containing this information, as well as transcripts of radio announce-
ments, must be filed with the Commission and also must be delivered to the
customer with each purchase of securities.
Fraud clause.-A clause similar to that employed in the Volstead bill 37 and the
Martin Fraud Act of New York, supra, has been added with a specific proviso
that the exemptions applicable to registration do not apply to this clause. This
provision empowers the Commission, on receipt of information that a fraud has
been or is about to be committed in an interstate offer or sale of securities, to
investigate and, if the investigation appears to justify such action, to refer the
necessary evidence to the Department of Justice for appropriate proceedings
which may be preventive or criminal, or both. The exemptions from registration
33 Congressional Record of Mar. 13, 1932, p. 6219-address of the Hon. Hiram Johnson.
34 S.Rep. no. 412 (72d Cong, Ist sess.).
35 H.R. 188, supra, secs. 9 and 10.
39 Supra.
37 H. R. 12603, 66th Cong., 2d sess.
169692-33- 22
334 (#346) ############################################
334
SECURITIES ACT
naturally increase the possibility of evasion and this fraud clause has been added
in order that interstate transactions, not subject to the registration provision may,
nevertheless, be supervised if investigation indicates that such a course is desira-
ble in specific instances.
Violation of State laws.-In order to preserve the integrity of the State blue-
sky laws, an additional clause has been included in this proposal which declares
it to be an offense to use the United States mails, or other agencies of interstate
commerce, to violate the requirements of those laws. Under this provision, to
which the exemptions from registration do not apply, the offer or sale between
States, by means of the mails, telephone, radio, or other agency, of securities that
do not meet the requirements of the State in which they are offered or sold, is
made a violation of the proposed Federal Securities law and the Federal law, in
this manner, supplements State laws now ineffective against vendors operating
across State lines.
These are the major provisions of the proposed legislation. A Federal law to
supplement the State blue-sky laws, and to supervise interstate transactions that
they cannot reach, has long been advocated by those who have given the subject
serious consideration. The securities commissions of most of the States have on
two occasions expressed the need of Federal assistance in their campaign against
the deluge of fraudulent securities that have been flooding the country. Because
of the recent financial debacle and conditions now existing in the nation, the
people of the United States would, at this time, look with especial favor upon
legislation of this kind designed, not only to protect the savings of the workers
and help to restore their confidence in our financial institution, but which would
also divert hundreds of millions of dollars from waste to legitimate industrial
development.
An outline of the proposed Federal Securities Act is attached.
DIGEST OF THE PROPOSED FEDERAL SECURITIES LAW SUBMITTED BY THE
DEPARTMENT OF COMMERCE
Sections 1 and 2 contain the entitling clause and definitions of certain key terms
used.
Section 3 defines the principal offenses under the act by prohibiting-
(a) The sale or offer to sell domestic securities in interstate commerce; (b) the
interstate advertisement of domestic securities; (c) the physical transportation
of domestic securities; (d) the sale or offer to sell foreign government securities;
until there shall have been registered with the Federal Trade Commission á
registration statement containing pertinent information concerning the security
offered and its issuers.
Section 4 provides that such registration statement shall be signed by the
promoters, principal officers and directors, except in the case of foreign govern-
ment securities when the statement shall be signed by the persons negotiating or
underwriting the loan for sale in the United States.
Section 5 designates the information required in the statements to be filed with
the Commission and consists of two subdivisions-
(a) Information required for domestic corporations; (b) information required
concerning foreign government securities.
The filing of the statement and the payment of the fee provided by the act
constitutes registration and the securities may then be offered in interstate
commerce.
A fee of one-hundredth of 1 per cent is provided which, it is estimated, will
more than pay the expenses involved in the administration of this act.
Section 6 empowers the Commission to revoke the registration of either domes-
tic or foreign government securities for causes indicated and gives the applicant
the right to a hearing before such order is made final.
Section 7 provides for the judicial review of the Commission's order.
Section 8 prohibits the interstate advertisements, either written or spoken, of
securities subject to this act, unless the communication contains certain desig-
nated information concerning the securities offered. Copies of all such adver-
tising material must be filed with the Commission. The registration statements
filed with the Commission shall be available for public inspection.
Section 9 provides that all purchasers of securities registered as heretofore pro-
vided, shall be assumed to rely on the representations contained in the registra-
tion statements and that all signers of such statements are jointly and severally
liable to the purchasers for damages, in the event of any material misrepresenta-
tion contained therein. Misrepresentations in the statement, when made with
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335
knowledge of their falsity, naturally subject the signers to the Federal perjury
laws.
Section 10 makes it unlawful to represent that registration with the Commission
constitutes the Commission's approval.
Section 11 exempts certain unquestionably sound securities, such as Federal
and State issues.
Section 12 exempts certain transactions, such as judicial sales and isolated
transactions by individuals.
Section 13 empowers the Attorney General, at the request of the Commission,
to prosecute for fraud in the interstate offer or sale of securities. The exemptions
of sections 11 and 12 are not applicable to this provision.
Section 14 declares that it shall be a Federal offense to transmit or offer in
interstate commerce securities that do not meet the requirements of the State in
which they are to be sold. In this section also it is specifically provided that the
exemptions of sections 11 and 12 do not apply.
Section 15 empowers the Commission to make necessary rules and regulations.
Section 16 gives jurisdiction to the Federal district courts to enforce the
criminal provisions of the act and the various orders of the Commission.
Section 17 provides a penalty of $5,000 or 5 years in prison, or both, for viola-
tions of the act.
Section 18 is a general appropriations clause.
Section 19 declares that the invalidity of parts of the act shall not invalidate
the remainder.
Section 20 declares that the act shall be effective 90 days after approval.
APPENDIX
MEMORANDUM PRESENTED BY WILLIAM C. BREED AND PAUL V.
KEYSER, COUNSEL FOR INVESTMENT BANKERS ASSOCIATION
OF AMERICA.
DOCUMENT No. 1
TENTATIVE SUGGESTIONS AS TO PROPOSED AMENDMENTS TO THE ABOVE BILLS TO
CARRY OUT PRINCIPLES SUGGESTED IN THE MESSAGE OF THE PRESIDENT OF THE
UNITED STATES AS THE OBJECTS AND LIMITATIONS OF SUCH AN ACT
The principles which should govern the new act, as stated in part by the
President, are as follows:
(1) “There is, however, an obligation upon us to insist that every issue of new
securities to be sold in interstate commerce shall be accompanied by full publicity
and information, and that no essentially important element attending the issue
shall be concealed from the buying public."
(2) “Of course, the Federal Government cannot and should not take any
action which might be construed as approving or guaranteeing that newly issued
securities are sound in the sense that their value will be maintained or that the
properties which they represent will earn profit."
(3) “The purpose of the legislation I suggest is to protect the public with the
least possible interference to honest business.”
The present bills should be amended, because:
1. They go much further than suggested by the President, and put the Govern-
ment into the business of passing upon the soundness of securities issued or to be
issued.
2. They impose a direct and continuous liability upon directors signing the
registration statement, which amounts to a guarantee of all statements therein,
irrespective of good faith; a liability not imposed by any statute or by the common
law or by decisions of the courts of this country or of England, France, Belgium,
or of any other country known to us.
3. They affect all outstanding securities, and as a result all existing corporations
whose outstanding securities are now being sold in interstate commerce would
have to register with the Commission if such sales are to be permitted to continue,
an obligation which would seriously interfere with the commerce and business of
the United States.
We are setting forth below general amendments which we suggest should be
considered by the Senate and House committees, in order to bring the proposed
bills in line with the principles outlined in the President's message, and also in
line with the decisions of our courts as to the responsibility of trustees, directors,
and other acting in a fiduciary capacity.
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In submitting these amendments we wish to have it clearly understood that,
for lack of time, we have been unable to do what we believe is essential if a
thoroughly workable bill is to be produced, namely, to consider carefully the
effect of each provision of such a bill on the business of all corporations in the
country. We have had no opportunity for consultation with practical men in
the investment banking business or with those identified with the management
of corporations, and we have been compelled to work out these amendments on
general lines primarily designed to carry into the bills the fundamental principles
that we believe must be recognized in order to make the bills a practical workable
Securities Act. We are submitting the suggestions at this time in accordance
with the wishes of the committees, Senate and House, as we understand the same,
in order that they may have the same at the time of the original consideration of
these bills. We also believe that until a new re-draft of the bills is presented
and sufficient time given to those interested in banking, commerce, and industry
carefully to study its provisions a great mistake would be made in passing any
legislation on this subject, as it so seriously affects the whole commerce and trade
of the United States.
SUGGESTED GENERAL AMENDMENTS
(New matter italics)
SECTION 1. Amend section 1 to change the title of the proposed act to “Federal
Securities Registration and Fraud Enforcement Act.”
The present title, “Federal Securities Act” carries the inference that it mav
cover everything-organization of corporations and general control over all
securities; whereas, the President only sought to cover full disclosure and preven-
tion of fraud, with no implication that the Government was approving or guaran-
teeing the soundness of securities.
SEC. 2. Amend subdivision d of section 2 to clarify the definition “Issuer."
Such amended subsection to read as follows:
"(d) 'Issuer' shall mean every person who issues, or proposes to issue, any
security representing an interest in or a direct obligation of such issuer or of any
property owned or held by such issuer, or any such person proposed to be forwarded:
Provided, That with respect to interim or other receipts for securities, certificates of
deposit, voting trust certificates, preorganization certificates, preorganization sub-
scripiions, and securities of a similar character, the word 'issuer' shall mean the
issuer of the underlying securities represented or to be represented thereby."
NOTE.—Consideration will have to be given to the definition of issuer in the
case of a fixed trust.
Insert a new subdivision in section 2 so as to define the terms “Underwriter”
and “Underwriting Syndicate”, as follows:
"Underwriter' or 'underwriting syndicate' shall mean when used with respect to
any security, any person, group, or syndicate which has purchased or underwritten
or contracted to purchase or underwrite such security from the issuer for the purpose
of offering or selling the same or any part thereof, directly or indirectly, to the public."
NOTE.---This definition may need expansion to include associates participating
in original public distribution of new issues of securities.
Sec. 3. Amend section 3, which covers actions prohibited prior to registration,
so as to clarify the language, to delete the possibly unconstitutional provision
prohibiting any sale or offer of foreign bonds even intrastate, and broadening
subdivision (a) so that foreign bonds will be included in those securities, the sale
or offer of which, in interstate commerce, prior to registration, is permitted.
Section 3 as so amended would read as follows:
“Sec. 3. That, until there has been filed with the Commission the registration
statement hereinafter referred to in accordance with the terms and conditions
provided by this act, with respect to a security, including authorized but unissued
securities, issued after the effective date of this act, it shall be unlawful for:
“(a) The issuer or underwriter thereof to make use of any means or instruments
of transportation or communication to sell or offer for sale, either directly or
indirectly, to ihe public, in interstate commerce, such security, or to solicit, directly
or indirecily, from the public, offers to buy such security in such commerce;
"(b) Or for such issuer or underwriter to make any sale or offer of sale of, or any
solicitation of an offer to buy, any such security in interstate commerce, through
the use or medium of any book, magazine, newspaper, or similar publication, or
by any circular, advertisement, or printed, written, or other graphic communi-
cation or document, or by any spoken communication carried or transmitted
through or by any means or instruments of transportation or communication in
interstate commerce, or any of them;
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“(c) Or for such issuer or underwriter to carry or cause to be carried in interstate
commerce, by any means or instruments of transportation, for the purpose of
any such sale or for delivery after any such sale, either directly or indirectly, any
such security.
Strike out subdivision (d).
SEC. 4. Amend section 4, having to do with registration, to clarify the language
to permit signing by power of attorney and accordingly delete requirement for
oath and to permit the Federal Trade Commission, where the obtaining of any
signature to the registration statement is impossible or impracticable, to waive
the same, under certain terms and conditions. Such section as amended to read
as follows:
“Sec. 4. That all securities required by section 3 of this act to be registered
shall be registered with the Commission under the terms and conditions herein-
after provided, by filing with the Commission a registration statement signed by
the issuer or issuers (or if not yet formed or organized, by the promoters), and if the
issuer be a corporation, association or other entity, by its principal executive officer,
its principal financial officer and its directors, trustees, or managers, or if there
be no board of directors, by any individual, or the members of any board having
the power of management of such corporation, association, or other entity:
Provided, That when such statement relates to securities issued by a foreign
government or political subdivision thereof, it shall be signed by an official repre-
sentative of such foreign government or political subdivision, and by the under-
writer thereof in the United States, and if such underwriter be a corporation, associa-
tion, or other entity, by its principal executive officer, its principal financial
officer and its directors, trustees or managers, or if there be no board of directors,
by any individual, or the members of any board having the power of management
of such corporation, association or other entity. Any person required by the
foregoing provisions to sign a registration statement may do so by an agent thereunto
duly and specially authorized by power of attorney. The Commission shall have
the power, in its discretion, in any particular case where it appears to the Commis
sion that it is impossible or impracticable, or will cause undue delay, to obtain the
signature of an individual so required to sign, to waive the requirement that such
individual shall sign such registration statement: Provided, That the Commission
shall be satisfied that such waiver is not being sought for the purpose of avoiding any
responsibility or liability under this Act. Signatures of all such persons when
printed on the said statements, shall be presumed to be so printed by authority
of the person whose signature is so affixed, and the burden of proof, in the event
such authority shall be denied shall be upon the party denying the same. The
affixing of any signature without the authority of the purported signer shall
constitute a violation of this Act.
Sec. 5. (a) That said statement, when relating to a security other than a security
issued by a foreign government or political subdivision thereof, shall contain the
following information concerning said security and the issuer thereof:
(1) Name under which the issuer is doing or intends to do business, name of the
state or other sovereign power under which the issuer is organized and location of
the issuer's principal business office.
(2) Names and addresses of the promoters, if any in the case of a corporation
to be formed), directors, trustees and principal officers, if the issuer be a corporation
or association or trust; of all general partners, if the issuer be a partnership, and of
the issuer, if the issuer be an individual.
(3) A brief description of the general character of the business actually being or
to be transacted by the issuer.
(4) A statement of the capitalization of the issuer, including the authorized and
paid-up amounts of its capital stock, the number and classes of shares into which
such capital stock is divided, a summary of the respective voting or other rights,
preferences, rights to dividends, profits, or capital of each class with respect to each
other class contained or to be contained in the articles of association and amend-
ments thereto or similar instruments of the issuer, the amount of capital stock of each
class issued or included in the shares of stock to be offered, a statement of the amount
of stock, if any, covered by outstanding options ,a brief description of the funded
debt, giving amounts, dates, maturities and general character of such debt, and of
the security, if any therefor; a report by independent public or chartered accountants
or by the chief accounting officer of the issuer containing a balance sheet of the issuer
(or, if the issuer has subsidiary corporations, a consolidated balance sheet of the issuer
and such subsidiaries) as of the most recent practicable date prior to the date of filing
such statement, and showing the general nature of the assets and liabilities of the
issuer, together with a profit and loss statement, stating operating and nonoperating
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income separately, or if the issuer has subsidiary corporations, a consolidated profit
and loss statement of the issuer and of its subsidiaries, if any, for the latest available
fiscal year and for the two immediately preceding fiscal years, or if in actual business
for less than one year, then for the longest practicable period during which the issuer
has been in actual business. In case there are any extraordinary items of profit
and loss, such as those arising from the sale of capital assets, they shall be enumerated.
NOTE.—This section should be carefully considered with public accountants.
(5) A statement setting forth:
(a) a brief description of the purpose or object of the issue of the proposed security;
(b) date and brief description of the proposed security;
(c) a brief description of the security, if any, pledged or to be pledged for the pro-
posed issue. A copy of the instrument or indenture under which the securities are to
be issued shall be filed with the Commission when prepared.
(d) price at which it is proposed that the security shall be offered to the public.
(e) the price to be paid to the issuer and if any of the securities are to be issued for
considerations other than cash, a detailed statement of such considerations.
(f) names of the underwriters of said security, and the amount of all commissions,
bonuses and other considerations paid or to be paid by the issuer for or in respect of
the issue, sale or offer of said security, including any capital stock or other securities
or considerations to be set aside and disposed of in connection with such purchase or
underwriting.
(6) If the issuer is a corporation there shall be filed with said statement a certified
copy of its articles of incorporation with all existing amendments and of its existing
by-laws. If the issuer is a trustee there shall be filed with the statement a copy of all
instruments by which the trust is created or declared, and in which it is accepted and
acknowledged. If the issuer is a partnership or an unincorporated association or
joint-stock company, or any other form of organization whatsoever, there shall be
filed with the statement a copy of its articles of partnership or association and all
other papers pertaining to its organization. If any of the instruments required by
this subsection 6 shall already be on file with the Commission, there need be filed only
such amendments or supplemental instruments, if any, as shall be necessary to bring
to date the instruments already on file.
(7) It shall be deemed in compliance with this section if a draft or outline of
any certificate of incorporation or mortgage shall be filed with the registration state-
ment, provided that within ten days after the execution of said mortgage or the filing
of said certificate of incorporation copies thereof in final form shall be filed. Failure
to file such papers in final form shall render the issuer liable to a penalty of $-
for each day's delay in filing, but shall not affect the validity of such registration.
(b) That said statement when relating to a security issued by a foreign govern-
ment or political subdivision thereof shall contain the following information con-
cerning said security and the issuer thereof:
(1) Name of the borrowing government or subdivision thereof;
(2) A brief description of the issue of the proposed security;
(3) Date and terms of the proposed security;
(4) Security, if any, pledged or to be pledged for the proposed issue;
(5) Date and terms of the purchase agreement, including the net amount to be
paid to the borrowing government or subdivision thereof for such security, the names
of the underwriters of said security; a statement of all bonuses and commissions,
except ordinary selling commissions paid to members of any selling syndicate, selling
group and salesmen, paid or to be paid by the underwriter, directly or indirectly,
in connection therewith; and a statement by the underwriters that they know of none
to be paid in connection therewith by the foreign borrowing government, excepting
only such as may be expressly stated in the statement;
(6) Budgetary receipts and disbursements of the borrowing government or sub-
division thereof for the latest available fiscal period and for the two immediately
preceding fiscal periods, and a statement of its funded debt, both external and internal,
as furnished by the chief financial officer thereof;
(7) Whether or not the borrower has, within a period of ten years prior to the
filing of said statement, defaulted on the principal or interest when due of any other
security publicly sold in the United States or other foreign country, and if so, the date,
amount and circumstances of said default;
(c) At the time of filing said statement, as hereinbefore prescribed in subsections
(a) and (b) of this section, the applicant shall pay to the Commission a fee of one
one-hundredth of 1 per centum of the aggregate price at which such securities are to
be offered to the public, but in no case shall such fee be less than $50.
(d) The filing with the Commission of a registration statement and the payment
to the Commission of the required fee shall constitute formal registration of the
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339
issue of the security concerned. Such filing and payment may be effected by for-
warding the registration statement, accompanied by a United States postal money
order or a certified bank check, for the required fee, by registered mail, postage prepaid,
properly addressed to the Commission at Washington, District of Columbia.
Sec. 6. Strike out section 6, giving authority to the Commission to revoke regis-
tration.
Sec. 7. Strike out section 7, which provides for appeals from orders of the
Commission revoking registration.
SEC. 8. Amend section 8, having to do with advertisements, into two new sec-
tions; that portion having to do with advertisements to be a separate section and
to be restricted to circulars announcing, offering or advertising original issuance
and distribution; and that portion which relates to information to be made
available to the public to a separate section; the two revised sections to read as
follows:
“Offering circulars"
“Sec. —. That it shall be unlawful to carry or transmit, or cause to be carried
or transmitted, in interstate commerce, any circular or other written, printed or
other graphic communication or document announcing, offering or advertising the
original issuance and distribution, directly or indirectly, to the public of any securi-
ties subject to the provisions of this act, unless such circular or other written, printed
or other graphic communication or document contains the following information
concerning the security so offered:
(a) Name of the issuer and of the underwriter, if any, offering the same directly
or indirectly to the public; amount of capitalization of the issuer authorized and
paid up; location of the principal office of the issuer and, if incorporated, the place
of incorporation.
(b) A brief description of the security offered, the amount of the issue, its
rights with reference to dividends or fixed returns, and voting power and rela-
tive position with reference to other outstanding securities having prior rights.
(c) The price at which the security is offered to the public, a brief statement of
the purpose of the offering and the price paid to the issuer.
(d) The names of the principal executive officers, directors, trustees or general
partners of the issuer.
(e) A summary statement showing the issuer's assets and liabilities as of the
date of the balance sheet filed with the registration statement and the earnings of
the issuer during each of three consecutive periods, each of twelve calendar months,
covered by the profit and loss statement filed with the registration statement.
(f) A statement to the effect that additional information is on file and may be
secured from the Commission at Washington, District of Columbia: Provided,
That any such circular announcing, offering, or advertising for original sale to the
public any securities of a foreign government or political subdivision thereof shall
contain such information as the Commission may specify.
Copies of all such circulars and communications and documents shall within five
days after distribution thereof be filed with the Commission, together with a
reference to the registration of the securities so offered.
Any sale of a security registered under this act not made in connection with an
original offering or original distribution of such security to the public shall be exempt
from the provisions of this section.
“Information available to public"
“SEC. — That the information contained in registration statements and cir-
culars and communications and documents filed with the Commission under the
provisions of this act shall be made available to the public under such regulations
as the Commission may prescribe.”
• SEC. 9. Amend section 9, which sets forth liability of persons signing registra-
tion statements, and the constitutionality of which, as set forth in the bill, is
at least doubtful, by limiting the time within which there shall be a presumption
of reliance on facts contained in registration statement and the time within which
suits may be brought for the relief provided for in the section; striking out the
provision giving right of rescision against various parties, since the right of resci-
sion can only lie against vendors, which in many cases would be other members
of the public, and providing that no signer of a registration statement shall be
held liable for damages under the provisions of the section, in certain cases where
such person acted in good faith and had reasonable grounds to believe that the
statement was true, following the English Companies Act, as follows:
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SEC. — That every person purchasing any security, a part of an issue of secu-
rities so registered, within six months after the original public offering of such secu-
rities for sale to the public, shall be presumed to have relied upon the representations
set forth in the registration statement with respect thereto, unless the contrary is
proved, and, in case such registration statement shall be untrue in any material
respect, any person shall have the right within one year after the original public
offering of such securities for sale to the public to obtain damages for any and all
losses sustained by him as a direct consequence of such untrue statements, from
any one or more of the signers of such registration statement.
No signer of a registration statement, however, shall be held liable for damages
under the provisions of this section on account of any statement contained therein if it
is proved that:
(a) As regards any untrue statement purporting to be a statement by a public or
chartered accountant, engineer, appraiser, lawyer, or other expert, or contained in
what purports to be a copy of or extract from a report, valuation or opinion of any
expert, which fairly represents the statement, or was a correct and fair copy of or
extract from such report, valuation, or opinion, and that such person had reasonable
ground to believe that the person making such statement, report, valuation, or opinion
was competent to make it and that it was obtained and accepted in good faith; or
(b) As regards any untrue statement contained in a public official document,
such statement was so contained in such document and was accepted in good faith by
such person; or
(c) As regards any untrue statement not purporting to be made on authority of
an expert or a public official document, such person had reasonable grounds to
believe and did, up to the time of the purchase of the securities with respect to which
such damages are claimed by the person claiming such damages, believe that the
statement was true; or
(d) Upon becoming aware of any untrue statement contained in such registration
statement such person had, prior to the purchase by the person claiming such damages
of the securities with respect to which such damages are claimed, notified the Commis-
sion of such error and given such reasonable public notice, if any, with respect thereto
as shall be directed by the Commission.
No signer of a registration statement shall be held liable for damages under the
provisions of this section on account of any failure to disclose any information in
any registration statement if-
(a) he proves that he in good faith exercised due diligence and was not cognizant
of the matter not disclosed; or
(b) he proves that the failure to disclose such matter arose from an honest mistake
of fact on his part; or
(c) the matter not disclosed was in respect of a matter which, in the opinion of
the court dealing with the case was immaterial or was otherwise such as ought, in
the opinion of that court, having due regard to all the circumstances of the case,
reasonably to be excused."
Any condition, stipulation, or provision, binding any person acquiring any
securities required by this act to be registered to waive compliance with any of the
provisions of this act shall be void. The rights and remedies herein provided
for shall be in addition to any other rights and remedies that may exist at law
or in equity.
Any person who becomes liable to make any payment under this section may
recover contribution as in cases of contract from any person who, if sued separately
would have been liable to make the same payment, unless the person who has become
so liable was, and the other person was not, guilty of fraudulent misrepresentation."
SEC. 11. Ámend subsection (b) of section 11 to include in exemptions public
utilities subject to State regulation, State banks, trust companies, and insurance
companies; to strike out unnecessary portion and to strike out provision sub.
jecting securities exempted in such section to the provisions of the section rela-
tive to advertising; strike out subsection (f) and insert two new subsections, one
subsection to exempt commercial paper and the other to exempt securities of
building and loan associations, such subsections to read as follows:
“(b) Any security issued by and representing an interest in or a direct obliga-
tion of any common carrier or other public utility subject to regulation or super-
vision as to the issue of its securities, by a commission, board, or officer of the
Government of the United States, or of any State, Territory, or insular possession
thereof, or of the District of Columbia; or any such security issued by any National
or State bank, or trust company or insurance company, or by any corporation
created and controlled by and acting as an instrumentality of the Government
of the United States pursuant to authority granted by the Congress of the
United States.
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341
(-) Negotiable promissory notes or commercial paper maturing within twelve
months of the date of issue.
“(-) Securities issued by any building and loan association, under the supervision
of a public commission, board, or officer of any State, Territory, or insular possession
of the United States or of the District of Columbia."
Sec. 12. Insert a new subsection to exempt communications, negotations, and
contracts relating for formation of syndicates with respect to securities proposed
to be offered, which transactions would necessarily have to precede the filing of
the statement; amend subsection exempting isolated transactions; insert new sub-
section exempting certain sales of securities registered under the act; amend sub-
section (d) to improve reorganization provisions; amend subsection (e) with
respect to real-estate mortgages to limit the same to cases where securities are
not intended to be offered to the public; amend subsection (f) to include additional
exemptions; such subsections to read as follows:
“ (--) Any and all communications, negotiations, and contracts between the issuer
and the underwriter or underwriters and relating to the formation of purchasing,
underwriting, or distributing syndicates, with respect to securities proposed to be
offered to the public.
“(-) Transactions in which any security is sold, offered for sale, subscription or
delivery by the owner or owners thereof, or by his or their representative, for the
owner's account, such sale or offer for sale, subscription or delivery not being made
in connection with an offering or distribution of such security to the public.
“(d) The distribution by a corporation, actively engaged in the business
authorized by its charter, of securities, to its stockholders, or other security
holders, or assigns, exclusively, as a stock dividend, or other distribution out of
earnings or surplus; or the issuance of additional capital stock of a corporation sold
or distributed by it exclusively among its own stockholders or assigns, where
no commission or other remuneration is paid or given directly or indirectly in
connection with the sale or distribution of such increased capital stock; or the
distribution of securities issued under a bona fide reorganization or recapitalization
by a corporation or corporations party thereto, or formed pursuant thereto or in con-
nection therewith, to its or their security holders or existing creditors or assigns, made
in good faith and not for the purpose of avoiding the provisions of this act, either
in exchange for the securities of such security holders or claims of such creditors or
partly for cash and partly in exchange for the securities or claims of such security
holders or creditors.
“(e) Bonds or notes secured by mortgage upon real estate or tangible personal
property where the entire mortgage together with all of the bonds and notes
secured thereby in the original transaction are sold to not more than five pur-
chasers, and not intended to be offered directly or indirectly to the public.
“(f) The issue or delivery of any security in exchange for any other security
pursuant to a right of conversion, or the issue and delivery of a security upon
the exercise of a warrant or the surrender of a certificate of deposit or receipt. or
pursuant to a subscription for such security entitling the holder of the security
surrendered to receive in exchange the security issued or delivered; or the issuance
of any certificate of deposit or receipt against the deposit or delivery of the security
represented thereby, or any similar transaction.”
SEC. 14. Strike out section 14 with respect to advertisements in blue-sky
States.
Sec. 15. Amend subsection (a) thereof to limit such rules and regulations to
those required for properly carrying out the act as follows:
“(a) That the Commission shall have authority from time to time to make,
amend, and rescind rules and regulations for the proper carrying out of this act.
It shall have authority to prescribe forms upon which all statements to be filed
as hereinbefore provided shall be made. Such rules and regulations shall be
effective upon promulgation in the manner which the Commission shall prescribe.”
Combine last paragraph of section 15 which grants investigatory powers to
the Commission with section 12 which deals with fraud.
SEC. 16. This section having to do with jurisdiction of courts, should be
amended by striking out the words “and under the rules and regulations promul-
gated by the Commission in respect thereto" appearing in the first paragraph
thereof and by striking out the last paragraph thereof.
Sec. 17. This secion having to do with penalties, should be amended by
striking out the words “or the rules and regulations promulgated by the Com-
mission pursuant thereto.”
Referring to Memorandum Document No. I presented by counsel for Investment
Bankers' Association of America, giving tentative suggestions as to proposed amend-
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SECURITIES ACT
ments to S. 875 and H.R. 4314, the said tentative amendsments, if applied to the
pending bills would make the text thereof read as follows:
NAME
SEC. 1. That this act shall be known as the “Federal Securities Registration
and Fraud Enforcement Act.”
DEFINITIONS
SEC. 2. That when used in this act the following terms shall, unless the text
otherwise indicates, have the following respective meanings:
(a) “Security" shall include any stock, note, bond, debenture, evidence of
indebtedness, certificate of interest or participation in a profit-sharing agreement,
or right to subscribe to any of the foregoing, certificate of interest in an oil, gas,
or mining lease, collateral trust certificate, voting trust certificate, certificate of
deposit, preorganization certificate, preorganization subscription, any certificate
of beneficial interest in title to property, profits, or earnings, or any other intru-
ment commonly known as a security; including an interim or temporary bond,
debenture, or other security, an instrument evidencing an interest in a security,
or a receipt for a security or for a subscription to a security.
(b) “Person” shall include a natural person, a corporation, a partnership, an
association, a joint-stock company, a trust, and any unincorporated organization.
As used herein the term “trust” shall not include a trust created or appointed
under or by virtue of a last will and testament, or by a court of law or equity, or
any public charitable trust, or a trust inter vivos for private purposes.
(c) “Sale” or “sell” shall include every disposition, or attempt to dispose, of a
security for value. Any security given or delivered with, or as a bonus on account
of, any purchase of securities or any other thing, shall be conclusively presumed
to constitute a part of the subject of such purchase and to have been sold for
value. “Sale” or “sell” shall also include a contract to sell, an exchange, an
option of sale or purchase, a subscription, or an offer to sell, directly or by an
agent, or by a circular, letter, advertisement, or otherwise.
(d) “Issuer" shall mean every person who issues, or proposes to issue, any
security representing an interest in or a direct obligation of such issuer or of any
property owned or held by such issuer, or any such person proposed to be formed:
Provided, That with respect to interim or other receipts for securities, certificates
of deposit, voting trust certificates, preorganization certificates, preorganization
subscriptions, and securities of a similar character, the word 'issuer” shall mean
the issuer of the underlying securities represented or to be represented thereby.
Note.-Consideration will have to be given to the definition of issuer in the
case of a fixed trust.
(e) “Underwriter” or “underwriting syndicate” shall mean when used with
respect to any security any person, group, or syndicate which has purchased or
underwritten or contracted to purchase or underwrite such security from the
issuer for the purpose of offering or selling the same or any part thereof, directly
or indirectly, to the public.
NOTE.—This definition may need expansion to include associates participating
in original public distribution of new issues of securities.
(f) “Commission” shall mean the Federal Trade Commission.
(g) “Mortgage" shall be deemed to include any trust instrument to secure a
debt.
(h) “Territory” shall include Alaska, Hawaii, Puerto Rico, the Philippine
Islands, the Panama Canal Zone, the Virgin Islands, and the insular possessions
of the United States.
(i) “Interstate commerce” shall mean trade or commerce in securities among
the several States or between the District of Columbia or any Territory of the
United States and any State or other Territory, or any printed, written, or other
graphic communication or any spoken communication or intercourse to or in
furtherance of the commerce described in this definition.
(j) “Registration statement” shall mean the statement required for registra-
tion by section 5 of this act, together with all documents and other information
required therein.
ACTS UNLAWFUL PRIOR TO REGISTRATION
SEC. 3. That, until there has been filed with the Commission the registration
statement hereinafter referred to in accordance with the terms and conditions
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343
provided by this act, with respect to a security, including authorized but unissued
securities, issued after the effective date of this act, it shall be unlawful for-
(a) the issuer or underwriter thereof to make use of any means or instruments
of transportation or communication to sell or offer for sale, either directly or
indirectly, to the public, in interstate commerce, such security, or to solicit,
directly or indirectly, from the public offers to buy such security in such commerce;
(b) or for such issuer or underwriter to make any sale or offer of sale of, or
any solicitation of an offer to buy, any such security in interstate commerce
through the use or medium of any book, magazine, newspaper, or similar publi-
cation, or by any circular, advertisement, or printed, written, or other graphic
communication or document, or by any spoken communication carried or trans-
mitted through or by any means or instruments of transportation or communi-
cation in interstate commerce, or any of them;
(c) or for such issuer or underwriter to carry or cause to be carried in interstate
commerce, by any means or instruments of transportation, for the purpose of
any such sale or for delivery after any such sale, either directly or indirectly, any
such security.
PERSONS REQUIRED TO SIGN REGISTRATION STATEMENT
SEC. 4. That all securities required by section 3 of this act to be registered,
shall be registered with the Commission under the terms and conditions herein-
after provided, by filing with the Commission a registration statement signed by
the issuer or issuers (or, if not yet formed or organized, by the promoters), and
if the issuer be a corporation, association or other entity, by its principal executive
officer, its principal financial officer and its directors, trustees, or managers, or if
there be no board of directors, by any individual, or the members of any board,
having the power of management of such corporation, association or other entity:
Provided, That when such statement relates to securities issued by a foreign
government or political subdivision thereof, it shall be signed by an official repre-
sentative of such foreign government or political subdivision, and by the under-
writer thereof in the United States, and if such underwriter be a corporation,
association, or other entity, by its principal executive officer, its principal financial
officer and its directors, trustees or managers, of if there be no board of directors,
by any individual, or the members of any board, having the power of management
of such corporation, association or other entity. Any person required by the
foregoing provisions to sign a registration statement may do so by an agent
thereunto duly and specially authorized by power of attorney. The Commission
shall have the power, in its discretion, in any particular case where it appears to
the Commission that it is impossible or impracticable or will cause undue delay
to obtain the signature of an individual so required to sign, to waive the require-
ment that such individual shall sign such registration statement: Provided, That
the Commission shall be satisfied that such waiver is not being sought for the pur-
pose of avoiding any responsibility or liability under this act. Signatures of all
such persons when printed on the said statements shall be presumed to be so
printed by authority of the person whose signature is so affixed, and the burden
of proof, in the event such authority shall be denied, shall be upon the party
denying the same. The affixing of any signature without the authority of the
purported signer shall constitute a violation of this act.
CONTENTS OF REGISTRATION STATEMENT
SEC. 5. (a) That said statement, when relating to a security other than a
security issued by a foreign government or political subdivision thereof, shall
contain the following information concerning said security and the issuer thereof:
(1) Name under which the issuer is doing or intends to do business, name
of the State or other sovereign power under which the issuer is organized, and
location of the issuer's principal business office.
(2) Names and addresses of the promoters, if any in the case of a corporation
to be formed), directors, trustees, and principal officers if the issuer be a corpora-
tion or association or trust; of all partners, if the issuer be a partnership; and
of the issuer, if the issuer be an individual.
(3) A brief description of the general character of the business actually to be
transacted by the issuer.
(4) A statement of the capitalization of the issuer, including the authorized
and paid-up amounts of its capital stock, the number and classes of shares into
which such capital stock is divided, a summary of the respective voting or other
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SECURITIES ACT
rights, preferences, rights to dividends, profits, or capital of each class with respect
to each other class, contained or to be contained, in the articles of association
and amendments thereto or similar instruments of the issuer, the amount of
capital stock of each class Issued or included in the shares of stock to be offered,
a statement of the amount of stock, if any, covered by outstanding options, a
brief description of the funded debt, giving amounts, dates, maturities, and gen-
eral character of such debt, and of the security, if any, therefor; a report by inde-
pendent public or chartered accountants or by the chief accounting officer of
the issuer containing a balance sheet of the issuer (or, if the issuer has subsidiary
corporations), a consolidated balance sheet of the issuer and such subsidiaries
as of the most recent practicable date prior to the date of filing such statement,
and showing the general nature of the assets and liabilities of the issuer, together
with a profit and loss statement, stating operating and nonoperating income
separately, or, if the issuer has subsidiary corporations a consolidated profit and
loss statement offsetting items eliminated) of the issuer and of its subsidiaries
(if any) for the latest available fiscal year and for the two immediately preced-
ing fiscal years, or if in actual business for less than 1 year, then for the longest
practicable period during which the issuer has been in actual business. In case
there are any extraordinary items of profit and loss, such as those arising from
the sale of capital assets, they shall be enumerated.
NOTE.—This section should be carefully considered with public accountants.
(5) A statement setting forth-
(a) a brief description of the purpose or object of the issue of the proposed
security;
(b) date and brief description of the proposed security;
(c) a brief description of the security, if any, pledged or to be pledged for
the proposed issue. A copy of the instrument or indenture under which the
securities are to be issued shall be filed with the Commission, when prepared;
(d) price at which it is proposed that the security shall be offered to the public;
(e) the price to be paid to the issuer, and if any of the securities are to be
issued for considerations in whole or in part, other than cash, a detailed state-
ment of such considerations;
(f) names of the underwriters of said security, and the amount of all commis-
sions, bonuses, and other considerations paid or to be paid by the issuer for or
in respect of the issue, sale or offer of said security, including any capital stock
or other secucities or considerations to be set aside and disposed of in connection
with such purchases or undertaking.
(6) If the issuer is a corporation there shall be filed with said statement a.
certified copy of its articles of incorporation with all existing amendments and
of its existing by-laws. If the issuer is a trustee there shall be filed with the
statement a copy of all instruments by which the trust is created or declared,
and in which it is accepted and acknowledged. If the issuer is a partnership or
an unincorporated association, or joint-stock company, or any other form of
organization whatsoever, there shall be filed with the statement a copy of its
articles of partnership or association and all other papers pertaining to its organ-
ization. If any of the instruments required by this subsection 6 shall already be
on file with the Commission, there need be filed only such amendments or supple-
mental instruments, if any, as shall be necessary to bring to date the instruments
already on file.
(7) It shall be deemed a compliance with this section if a draft or outline of
any certificate of incorporation or mortgage shall be filed with the registration
statement, provided that within ten days after the execution of said mortgage
or the filing of said certificate of incorporation copies thereof in final form shall
be filed. Failure to file such papers in final form shall render the issuer liable to
a penalty of $- for each day's delay in not filing, but shall not affect the
validity of such registration.
(b) That said statement when relating to a security issued by a foreign govern-
ment or political subdivision thereof shall contain the following information con-
cerning said security and the issuer thereof:
(1) Name of the borrowing government or subdivision thereof;
(2) A brief description of the issue of the proposed security;
(3) Date and terms of the proposed security;
(4) Security, if any, pledged or to be pledged for the proposed issue;
(5) Date and terms of the purchase agreement, including the net amount to
be paid to the borrowing government or subdivision thereof for such security,
the names of the underwriters of said security; a statement of all bonuses and
commissions, except ordinary selling commissions paid to members of any selling
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SECURITIES ACT
345
syndicate, selling group and salesmen, paid or to be paid by the underwriter or
underwriters, directly or indirectly, in connection therewith; and a statement by
the underwriters that they know of none to be paid in connection therewith by
the foreign borrowing government, excepting only such as may be expressly
stated in the statement.
(6) Budgetary receipts and disbursements of the borrowing government or
subdivision thereof for the latest available fiscal period and for the two immedi-
ately preceding fiscal periods, and a statement of its funded debt, both external
and internal, as furnished by the chief financial officer thereof.
(7) Whether or not the borrower has, within a period of ten years prior to the
filing of said statement, defaulted on the principal or interest when due of any
other security publicly sold in the United States or other foreign country, and
if so, the date, amount and circumstances of said default;
(c) At the time of filing said statement, as hereinbefore prescribed in sub-
sections (a) and (b) of this section, the applicant shall pay to the Commission a
fee of one one-hundredth of 1 per centum of the aggregate price at which such
securities are to be offered to the public, but in no case shall such fee be less than
$50.
(d) The filing with the Commission of a registration statement and the pay-
ment to the Commission of the required fee shall constitute formal registration of
the issue of security concerned. Such filing and payment may be effected by
forwarding the registration statement, accompanied by a United States postal
money order, or a certified bank check, for the required fee, by registered mail,
postage prepaid, properly addressed to the Commission at Washington, District
of Columbia.
. LIABILITY OF DIRECTORS AND OTHERS
Sec. 6. That every person purchasing any security, a part of an issue of securi-
ties so registered, within six months after the original public offering of such
securities for sale to the public, shall be presumed to have relied upon the
representations set forth in the registration statement with respect thereto, unless
the contary is proved, and, in case such registration statement shall be untrue in any
material respect, any person shall have the right within one year after the original
public offering of such securities for sale to the public to obtain damages for any
and all losses sustained by him as a direct consequence of such untrue statements,
from any one or more of the signers of such registration statement.
No signer of a registration statement, however, shall be held liable for damages
under the provisions of this section on account of any statement contained therein
if it is proved that:
(a) As regards any untrue statement purporting to be a statement by a public
or chartered accountant, engineer, appraiser, lawyer, or other expert, or con-
tained in what purports to be a copy of or extract from a report, valuation, or
opinion of any expert, which fairly represents the statement, or was a correct and
fair copy of or extract from such report, valuation, or opinion, and that such
person had reasonable grounds to believe that the person making such state-
ment, report, valuation, or opinion was competent to make it, and that it was
obtained and accepted in good faith; or
(b) As regards any untrue statement contained in a public official document,
such statement was so contained in such document, and was accepted in good
faith by such person; or
(c) As regards any untrue statement not purporting to be made on authority
of an expert or a public official document, such person had reasonable grounds
to believe, and did, up to the time of the purchase of the securities with respect
to which such damages are claimed by the person claiming such damages, believe
that the statement was true; or
(d) Upon becoming aware of any untrue statement contained in such registra-
tion statement such person had, prior to the purchase by the person claiming
such damages of the securities with respect to which such damages are claimed,
notified the Commission of such error and given such reasonable public notice,
if any, with respect thereto as shall be directed by the Commission.
No signer of a registration statement shall be held liable for damages under the
provisions of this section on account of any failure to disclose any information
in any registration statement if:
(a) He proves that he in good faith exercised due diligence and was not cog-
nizant of the matter not disclosed; or
(b) He proves that the failure to disclose such matter arose from an honest
mistake of fact on his part; or
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SECURITIES ACT
(c) The matter not disclosed was in respect of a matter which in the opinion
of the court dealing with the case was immaterial or was otherwise such as ought,
in the opinion of that court, having due regard to all the circumstances of the
case, reasonably to be excused.
Any condition, stipulation, or provision, binding any person acquiring any
securities required by this Act to be registered to waive compliance with any of
the provisions of this Act shall be void. The rights and remedies herein pro-
vided for shall be in addition to any other rights and remedies that may exist at
law or in equity.
Any person who becomes liable to make any payment under this section may
recover contribution as in cases of contract from any person who, if sued sepa-
rately, would have been liable to make the same payment, unless the person who
has become so liable was, and the other person was not, guilty of fraudulent
misrepresentation.
CIRCULARS
SEC. 7. That it shall be unlawful to carry or transmit, or cause to be carried or
transmitted, in interstate commerce, any circular or other written, printed, or other
graphic communication or document announcing, offering, or advertising the origi.
nal issuance and distribution to the public of any securities required by the pro-
visions of this act to be registered, unless such circular or other written, printed,
or other graphic communication contains the following information concerning
the security so offered:
Copies of all such circulars shall within five days after distribution thereof be
filed with the Commission, together with a reference to the registration of the
securities so offered.
Any sale of a security registered under this act not made in connection with
an original offering or original distribution of such security to the public shall be
exempt from the provisions of this section,
(a) Name of the issuer and of the underwriter, if any, offering the same directly
or indirectly to the public; amount of capitalization of the issuer authorized and
paid up; location of the principal office of the issuer and, if incorporated, the place
of incorporation.
(b) A brief description of the security offered, the amount of the issue, its rights
with reference to dividends or fixed returns, and voting power and relative posi-
tion with reference to other outstanding securities having prior rights.
(c) The price at which the security is offered to the public, a brief statement of
the purpose of the offering, and the price paid to the issuer.
(d) The names of the principal executive officers, directors, trustees, or general
partners of the issuer.
(e) A summary statement showing the issuer's assets and liabilities as of the
date of the balance sheet filed with the registration statement; and the earnings
of the issuer during each of three consecutive periods, each of twelve calendar
months covered by the profit and loss statement filed with the registration
statement.
(f) A statement to the effect that additional information is on file and may be
secured from the Commission at Washington, District of Columbia: Provided,
That any such circular announcing, offering, or advertising for original sale to the
public any securities of a foreign government or political subdivision thereof shall
contain such information as the Commission may specify.
INFORMATION AVAILABLE TO PUBLIC
Sec. 8. That the information contained in registration statements and circulars
filed with the Commission under the provisions of this act shall be made available
to the public under such regulations as the Commission may prescribe.
EXEMPT SECURITIES
SEC. 9. That, except as hereinafter otherwise expressly provided, the provisions
of this act shall not apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the United States or any Territory
or insular possession thereof, or by the District of Columbia, or by any State of the
United States or political subdivision, or by any instrumentality or agency of
any of the foregoing.
(b) Any security issued by and repesenting an interest in or a direct obligation
of any common carrier or other public utility subject to regulation or supervision
as to the issue of its securities, by a commission, board, or officer of the Govern-
347 (#359) ############################################
SECURITIES ACT
347
ment of the United States, or of any State, Territory or insular possession thereof,
or of the District of Columbia; or any such security issued by any National or
State bank, or trust company or insurance company; or by any corporation
created and controlled by and acting as an instrumentality of the Government
of the United States pursuant to authority granted by the Congress of the United
States.
(c) Any security issued by a corporation organized exclusively for religious,
educational, benevolent, fraternal, charitable, or reformatory purposes and not
for pecuniary profit, and no part of the net earnings of which inures to the benefit
of any person.
(d) Bonds or notes secured by mortgage upon real estate, improved or about
to be improved by a residential or agricultural structure, when the total encum-
brances against any single property so mortgaged, including the mortgage
securing the bonds or notes exempted by this paragraph do not exceed $25,000.
(e) Negotiable promissory notes or commercial paper maturing within twelve
months of the date of issue.
(f) Securities issued by any building and loan association under the supervision
of a public commission, board or officer of any State, Territory or insular pos-
session of the United States or of the District of Columbia.
EXEMPT TRANSACTIONS
Sec. 10. That, except as hereinafter otherwise expressly provided, the pro-
visions of this Act shall not apply to any of the following transactions:
(a) Any and all communications, negotiations, and contracts between the
issuer and the underwriter or underwriters and relating to the formation of pur-
chasing, underwriting or distributing syndicates, with respect to securities pro-
posed to be offered to the public.
(b) Judicial, executor's, administrator's, guardian's or conservator's sale, or
any sale by a receiver or trustee in insolvency or bankruptcy.
(c) Sales by or for the account of a pledgee or holder of a mortgage, selling or
offering for sale or delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of this Act, to liquidate a bona fide debt, a
security pledged in good faith as collateral for such debt.
(d) Transactions in which any security is sold, offered for sale, subscription
or delivery by the owner or owners thereof, or by his or their representative,
for the owners' account, such sale or offer for sale, subscription or delivery not
being made in connection with an offering or distribution of such security to the
public.
(e) The distribution by a corporation, actively engaged in the business
authorized by its charter, of securities to its stockholders or other security
holders, or assigns, exclusively, as a stock dividend or other distribution out of
earnings or surplus; or the issuance of additional capital stock of a corporation
sold or distributed by it exclusively among its own stockholders or assigns,
where no commission or other remuneration is paid or given directly or indirectly
in connection with the sale or distribution of such increased capital stock; or the
distribution of securities issued under a bona fide reorganization or recapitaliza-
tion by a corporation or corporations party thereto, or formed pursuant thereto
or in connection therewith, entirely to its or their security holders or existing
creditors or assigns, made in good faith and not for the purpose of avoiding the
provisions of this act, either in exchange for the securities of such security
holders or claims of such creditors or partly for cash and partly in exchange for
the securities or claims of such security holders or creditors.
(f) Bonds or notes secured by mortgage upon real estate or tangible personal
property where the entire mortgage together with all of the bonds and notes
secured thereby in the original transaction are sold to not more than five pur-
chasers, and not intended to be offered directly or indirectly to the public.
(g) The issue or delivery of any security in exchange for any other security
pursuant to a right of conversion, or the issue and delivery of a security upon
the exercise of a warrant or the surrender of a certificate of deposit or receipt,
or pursuant to a subscription for such security entitling the holder of the security
surrendered to receive in exchange, to receive the security issued or delivered;
or the issuance of any certificate of deposit or receipt against the deposit or
delivery of the security represented thereby, or any similar transaction.
(h) Subscription for shares of the capital stock of a corporation prior to the
incorporation thereof under the laws of any State, when no commission, compen-
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348
SECURITIES ACT
sation, or remuneration is paid or required for or in connection with the sub-
scription.
PROHIBITION OF REPRESENTATION OF APPROVAL BY COMMISSION
SEC. 11. That it shall be unlawful to represent or cause to be represented to
any prospective purchaser, either orally or in any written or printed communi-
cation, circular, advertisement, or other literature, that registration of securities
with the Commission constitutes or is evidence of the Commission's approval or
recommendation of such securities.
FRAUDULENT PRACTICES PROHIBITED
SEC. 12. (a) That it shall be unlawful for any person in any interstate sale,
promotion, negotiation, advertisement, or distribution of any security or securi-
ties, whether or not registered, willfully to employ any device, scheme, or artifice
to defraud or to obtain money or property by means of any false pretense, repre-
sentation or promise, or to engage in any transaction, practice or course of busi-
ness, relating to the interstate purchase or sale of any securities, which operates
or would operate as a fráud upon the purchaser.
ACTION BY COMMISSION
(b) Whenever it shall appear to the Commission, either upon complaint or
otherwise, that the provisions of this section (12) have been or are about to be
violated, the Commission may, in its discretion, either require or permit such
person to file with it a statement in writing, under oath or otherwise, as to all the
facts and circumstances concerning the subject matter which it believes to be in
the public interest to investigate, and may, with or without such requisition,
permit or statement, investigate such facts.
(c) Whenever it shall appear to the Commission that the practices investigated
constitute a fraud or an attempt to defraud under the provisions of this section
12 with respect to the statement required to be filed or the connection with the
issue, sale, or offer to sell of any security or otherwise, it shall promptly investigate
the facts and transmit such evidence as may be available concerning the trans-
action or facts complained of to the Attorney General, who may in his discretion
bring an action either in the district court of the United States, for the district
wherein the transmittal of the offer, announcement, advertising, or other com-
munication complained of begins or in the district wherein such offer, announce-
ment, advertising, or other communication is received, to enjoin the continuance
of such practices or transactions, or institute any appropriate criminal proceeding,
or both. The Commission also may, in its discretion, present the facts with
regard to any fraudulent practices to the Attorney General or the proper law
enforcement officer of any State or Territory, or the District of Columbia. The
exemptions contained in sections 9 and 10 of this act shall not apply to the pro-
visions of this section 12.
For the purpose of all investigations which, in the opinion of the Commission
are necessary and proper for the enforcement of this section, the Commission and
officer or officers designated by it are empowered to subpena witnesses, examine
them under oath, and require the production of any books, papers, or other docu-
ments which the Commission deems relevant or material to the inquiry.
POWER TO MAKE RULES AND REGULATIONS
Sec. 14. (a) That the Commission shall have authority from time to time to
• make, amend, and rescind rules and regulations for the proper carrying out of this
act. It shall have authority to prescribe forms upon which all statements to
be filed as hereinbefore provided shall be made. Such rules and regulations shall
be effective upon publication in the manner which the Commission shall prescribe.
JURISDICTION OF COURTS
SEC. 15. That the district courts of the United States, the district courts of
Alaska, Hawaii, Puerto Rico, Philippine Islands, Panama Canal Zone, and the
Virgin Islands, and the Supreme Court of the District of Columbia, shall have
have jurisdiction of offenses and violations under this Act, and of all suits in
equity and actions at law brought under this Act. Judgments and decrees so
SECURITIES AOT 349
rendered shall be subject to review in like manner as provided in sections 128 and 240 of the Judicial Code , as amended .
Any of the said courts hereinbefore named in this section , within the jurisdiction of which an investigation or inquiry of the Commission is carried on , may , in case of contumacy or refusal to obey a subpena issued to any person , issue an order requiring such person to appear before the Commission , or to produce documentary evidence if so ordered , or to give evidence touching the matter in question ; and any failure to obey such order of the court may be punished by such court as a contempt thereof .
PENALTIES
SEC . 16 . That whoever shall willfully violate any of the provisions of this Act , shall , upon conviction , be fined not more than $ 5 , 000 or imprisoned not more than five years , or both ; and any officer , director , or agent of any corporation who knowingly participates in any such violation shall be punished by a like fine or imprisonment , or both .
AUTHORITY FOR APPROPRIATION SEC . 17 . That the necessary appropriations for the purpose of carrying out the provisions of this Act are hereby authorized . All monies derived from the fees imposed by the provisions of this Act shall be paid into the Treasury to the credit of miscellaneous receipts .
VALIDITY OF PORTIONS OF ACT SEC . 18 . That if any provision of this Act , or the application of such provisions : to any person or circumstance , shall be held invalid , the remainder of this Act , or the application of such provision to persons or circumstances other than those as : to which it is held invalid , shall not be affected thereby .
EFFECTIVE DATE Sec . 19 . That this Act shall take effect ninety days after its approval .
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