declaration to become effective. (See Columbia Gas & Electric Corporation, 4 S. E. C. 406, 414 (1939).) However, in permitting the declaration to become effective we reserve complete freedom of action under Section 11 (b) (2) with respect to any unfair or inequitable distribution of voting power, whether now existing or created by the adjustments presently to be made. The Commission is in no sense precluded from instituting at any time hereafter proceedings under Section 11 (b) (2), or from considering the question of the equitable distribution of voting power in connection with any other proceeding in which that matter may be germane. The elimination of the deficit of $1,053,454.83 will make it unnecessary for General to retain earnings of this amount before the common stock would be in a position to receive dividends. Nevertheless, after the elimination of the deficit, there will remain a common stock equity of $369,183 as a cushion for the preferred stocks and the liquidating value of the preferred stocks of $657,400 will be covered approximately 1.56 times. It should also be noted that General's certificate of incorporation provides that no dividends may be declared or paid on the common stock which would reduce the earned surplus as of the date of declaration of such dividend below an amount equal to the aggregate of 3 years' dividend requirements on the preferred stocks issued and outstanding as of the date of said dividend declaration. This requirement is presently $123,861 and represents approximately 19 percent of the total liquidating value of the preferred stocks. This amount of earned surplus will have to be accumulated by General before any dividends can be declared on the common stock. Hence no common dividends can be paid which would reduce the common equity below $493,044. Were the common equity to reach this amount General would have net assets equal to 1.75 times the liquidating value of the preferred stocks. In our opinion, the protective equity available for the preferred stocks should be in excess of this amount before distributions on the common stock should be permitted. Although dividend payments on the common stock seem remote at this time, it nevertheless appears that the interest of the preferred stockholders requires an effective limitation on common stock distributions. To this end our order will be conditioned requiring approval of this Commission prior Calculated as follows: Common stock liability. Earned surplus---. $272, 500 • 96, 683 123, 861 493, 044 Applicant has stipulated that no charges to capital surplus will be made except with prior approval of this Commission. to the declaration or payment of dividends by General on its common stock. The practice of presenting in a balance sheet at $50 per share preferred stocks with a liquidating value of $100 per share, is, in our opinion, of doubtful propriety (cf. Accounting Release No. 9). Changing the common stock, no par value, from a stated value of 50¢ per share to a par value of $1 per share is not only in accordance with the clearly indicated policy of the Act, but will result in substantial tax savings to General. STATUTORY CONCLUSIONS UNDER SECTION 12 (c) AND RULE U-12C-2 We are of the opinion that in a readjustment of this character, provision for the accumulated dividends on the preferred stocks should be made. As we do not find that the payment of the preferred dividends will impair the financial integrity of any company in the International holding company system or prejudice the working capital position of any public utility company in such system, we will approve the application for such payment. We believe, however, that the proposed dividends aggregating $20,645.50 should not be paid other than in connection with the general plan of readjustment of the accounts. In our previous orders permitting the payment of dividends on the preferred stock, we imposed the following condition: That the payment of the proposed dividends on the cumulative preferred stock, $7 series, and on the cumulative preferred stock, $6 series, shall be charged to capital surplus, and that the amount of such dividends so charged shall be restored to capital surplus from the first available net income after December 31, 1938. No part of the dividends so charged against capital surplus has been restored. However, in view of the readjustment now proposed, we are of the opinion that such restoration need no longer be made. General is, therefore, excused from the performance of the above stated condition. CONDITIONS The declaration will be permitted to become effective, and the application will be approved, subject, however, to the following conditions: (1) That no dividends shall be declared or paid by General on its common stock without prior approval of this Commission; (2) That no charges shall be made to capital surplus without the prior approval of this Commission; (3) That the proposed dividend payment on the $7 series and $6 series cumulative preferred stock shall not be made until such time as See footnote 5, supra. 8 S. E. C. all the proposed readjustments set forth in the declaration shall have been consummated *: (4) That General mail to the $7 series cumulative preferred and the $6 series cumulative preferred stockholders, and to the common stockholders, concurrently with the solicitation of proxies for approval of the proposed readjustments, a copy of this Commission's findings and opinion in this matter; (5) That General within 10 days after the payment of the dividends on the preferred stocks and the consummation of the proposed readjustments file with this Commission a certificate of notification showing that such dividends were declared and paid and such readjustments consummated in accordance with the terms and conditions of and for the purposes represented by said application and declaration, and a statement of all expenses paid or incurred in connection therewith. An appropriate order will issue. By the Commission: Commissioners Healy and Henderson being absent and not participating. *EDITOR'S NOTE: On December 13, 1940 the Commission ordered that paragraph (3) be, and the same is, hereby amended to read as follows: "(3) That the proposed dividend payment on the $7 series and $6 series cumulative preferred stock shall not be made until such time as all the proposed readjustments set forth in the declaration shall have been consummated with the exception of the proposal to accord voting rights to its $7 series and $6 series cumulative preferred stock." By the Commission: (Chairman Frank, Commissioners Eicher and Pike) Commissioners Henderson and Healy were absent and did not participate in this action. 8 S. E. C. [No. 1158] IN THE MATTER OF AMERICAN TUNG GROVE DEVELOPMENTS, INC. File No. 2-4359. Promulgated September 30, 1940 (Securities Act of 1933-Section 8 (d)) REGISTRATION STATEMENTS. Facing Sheet. Facing sheet held to be deficient in failing to state the number of units being offered and the principal underwriters involved. DEFINITIONS. Principal Underwriter. Where it appeared that investment houses and salesmen were to be employed to distribute tung contracts to the public on a 20 percent commission basis, held such investment houses and salesmen would be principal underwriters. Where it appeared that officers of the issuer would devote a major part of their time and efforts in the sale of registrant's securities and on the same compensation basis as outside investment houses selling registrant's securities, held such officers would be principal underwriters. HISTORY AND BUSINESS. General Character of Business. Material Statements as to Business Done and to be Done. Statement as to character of business, held deficient for the inclusion of misleading statements, many failing to show the tentative nature of the plans of the issuer, and the failure to include information relevant to a complete statement of business. Although it appeared that the persons affiliated with the registrant and its predecessors made a living from the promotion of the enterprise, held the statement of the registrant's business was not incomplete for failing to include such information. PROMOTERS. What Constitutes. Persons taking active part in forming a corporation, conducting its operations and distributing its securities, held to be promoters. PROCEEDS OF ISSUE. Statement of Purposes for which Used. Statement as to devotion of proceeds, alleged to be "based on the result of five years' actual experience in Tung Oil Culture," held (a) false, and (b) deficient for failing to assign amounts to specific purposes. 8 S. E. C.-33-2361 ACQUISITION OF PROPERTY. Failure to Disclose Details of Property Acquisition. Answer to item in registration statement calling for information as to proceeds of sale of securities to be used to purchase property in ordinary course of business, held deficient for failure to refer to contracts calling for the purchase of acreage to be used for tung growth. DEFINITIONS. Material Contracts. Contracts calling for the purchase of land to be employed in the development of the tung acreage to be sold by the issuer, held to be material contracts. Remuneration. Remuneration held to include commissions. ACCOUNTING. Accountant's Certificate. Scope of Audit. Certain balance sheet and profit-and-loss statement deficiencies and certain shortcomings in accountant's examination, held to constitute a severe indictment of the value of the accountant's report. Failure of accountant to express any opinion with respect to the accounting practices of the registrant and his failure to follow recognized accounting procedures in making his audit, held to make report deficient and also to constitute a violation of the requirements of Rule 651. BALANCE SHEETS. Misleading Caption. Caption entitled "Contracts Purchased," held to be misleading in view of account which it represented. Failure to Disclose Contingent Liabilities. Balance sheet held deficient for failure to indicate the existence of contingent liabilities arising out of the sale of securities in violation of the Securities Act. TREATMENT OF SALE OF INSTALLMENT CONTRACTS. Where registrant treated profit from the sale of contracts as realized at the time of the signing of the contract, held record not sufficiently clear to determine whether such procedure was proper, but that in any event it is misleading to employ such procedure without a full statement of its character and effect. APPEARANCES: Smith W. Brookhart, Jr., and William W. Stickney, of the Registration Division of the Commission. Paul E. Price, of McKinley, Price and Quindry, for American Tung Grove Developments, Inc. FINDINGS AND OPINION OF THE COMMISSION This proceeding was instituted pursuant to Section 8 (d) of the Securities Act of 1933 to determine whether a stop order should issue suspending the effectiveness of a registration statement filed by American Tung Grove Developments, Inc. The registration statement, filed on form A-1, covers an offering of contracts for the sale, development, and maintenance of land, aggre |