mately 3 years, there have been five issues (i. e., the original issue and the four increases) and many changes in our plan of operation. By its nature and circumstances, this financing could only have been done through direct and continuous contact with an informed investor. I might state in confirmation of this that, in formulating our plans, we acted with the advice of a leading firm of investment bankers who were of the opinion that this was the only method. Our company, like all others, is benefited by having available to it three wellrecognized methods of financing, through public offering, bank credit, and direct placement with long-term institutional investors. We feel very strongly that it would be extremely undesirable not only for us but for the economy as a whole to have any of those means of raising capital limited. I think it obvious that a requirement of registration in the case I have described would be burdensome and of no conceivable protection to anyone. A registration requirement would have necessitated no less than five registration statements and a number of amendments, none of which would have served any possible useful purpose. I also wish to point out that this pattern of financing was not only of benefit to us but also made credit available to thousands of small enterprises. I believe that to be a result which deserves encouragement. I have attempted to express my views fully. If, however, I have failed to make them clear, I should welcome the opportunity to present a further statement or to appear before your committee. Very truly yours, ROY FRUEHAUF. SOUTH ATLANTIC GAS Co., Subject: Registration of direct placements of securities with the Securities and Exchange Commission. Hon. LOUIS B. HELLER, Chairman of Subcommittee Investigating Securities and Exchange Commission, House Office Building, Washington, D. C. DEAR MR. HELLER: It has been brought to our attention that the subcommittee investigating the Securities and Exchange Commission plans to hold hearings on the above subject beginning May 20, 1952. I am writing you, the chairman of such committee, to express the views of a small operating utility company with respect to the desirability of this change in the Securities Act of 1933. The company, which I represent, has a little over $5 million capitalization divided as follows; 55 percent first-mortgage bonds, 15 percent preferred stock, and 30 percent common equity. Due to the expansion of our business we have had to issue securities of one form or another in most of the years since organization in 1915. Except for the original financing in 1945, all subsequent dealings have been direct placements or of a minor amount not requiring registration under the present law. We wish you and your committee to know the reasons why we favor continuation of the present practice of permitting direct placements of securities without registration which are set forth below: (1) The cost of preparing registration statements and their certification makes the cost of doing business terribly expensive for a small concern issuing a nominal amount of securities. (2) The representatives of the individual investors are extremely capable men and are very thorough in their investigation for the protection of the in vestor. (3) The mortgages, purchase agreements, or other documents supporting the securities being issued by direct placement contain the same or equivalent restrictive clauses and protective provisions that would be in securities issued to the public. (4) Where a small company such as ours has dealt directly with a group of investors and they have become familiar with our operation and type of management, we feel that this past experience and association permits us to secure the most favorable terms available in the money market at the time of issuing the securities. If we were forced to submit our small issues to competitive bidding, we sincerely believe we would have to pay a higher interest rate on our borrow (5) The sale of securities by direct placement makes cash funds more quickly available to a small company by not having so much detail to prepare and approvals to be secured. (6) Being a public utility we are already subject to regulation by State public service commissions, whose approval is required before any securities can be sold. Prior business engagements prohibit presentation of this information in person before your subcommittee hearing as scheduled; however, we will appreciate your having copies of this letter presented to your subcommittee members as representing our expression in this matter. Very truly yours, W. E. BENFIELD, Jr., Mr. Louis B. HELLER, CAPE GIRARDEAU, Mo., May 26, 1952. Chairman, Subcommittee, House Interstate and Foreign Commerce Committee, Washington, D. C. DEAR MR. HELLER: You will recall that Congressman Paul Jones and the writer called at your office early on the morning of May 21 and you granted oral permission for Mr. A. Z. Patterson, an attorney of Kansas City, Mo., and the writer to file a letter statement with the committee in connection with the proposed legislation which has for its purpose the abolishment of private placement of securities with insurance companies or other large investors. In behalf of one of my clients, which is a small utility company, I desire to express opposition to the proposed legislation for the following reasons: 1. The existing law takes care of the public interest and if the suggested amendments were enacted it would tend to prevent the private placement of security issues with the insurance companies and other large investors. 2. The insurance companies make a most detailed examination of any security which they buy. Their respective staffs are just as well qualified to make an examination of the value of the security as any other group of men. 3. The law as it exists today enables the small-business concerns, which includes my particular utility company client, to secure additional financing for their respective expansions at far less cost than would be possible were they required to file a registration statement. 4. Since the preparation and filing of a registration statement is a complex and technical matter, small business is required to employ special counsel and frequently assistance from investment bankers, in order to meet the requirements of SEC in the preparation of a registration statement. All of this imposes an additional expense upon a small business which is not now necessary, and which often they are unable to incur. 5. The law as it exists today operates most satisfactory to both issuer of securities as well as the purchaser thereof. There is no need to change it. Thanking you for the opportunity of writing you thus and trusting that this letter may be incorporated as a part of the hearings and that you will have caused to be mailed me a copy of the printed hearings, I am Very truly yours, Hon. LOUIS B. HELLER, OLIVER & OLIVER, By R. B. OLIVER, Jr. KIMBERLY-CLARK CORP., Chairman, Securities and Exchange Commission Subcommittee of the Committee on Interstate and Foreign Commerce, House Office Building, Washington, D. C. DEAR SIR: It has come to our attention that your committee is investigating the advisability of requiring registration with the Securities and Exchange Commission for all long-term borrowing, whether it be effective through sales to the public or through private placement. We believe that procedures to be followed in the acquisition of funds needed for corporate purposes should be simplified rather than made more involved; and that both avenues, namely public offerings and private placements, should be made available instead of forcing borrowers to utilize only public financing methods. The opinion which we express is, we believe, completely impartial as we have utilized both public and private placements in our financing, and have found that circumstances applicable to each individual financing situation dictate whether direct or underwritten procedures should be followed. In the cases where direct deals are made, whether they be direct or through an intermediary— and again we have used both systems-it is our considered opinion that no good purpose can be served by requiring SEC registration and, on the other hand, aside from the cost of such filings which are very substantial, the delays necessitated by such registration could work a very serious hardship on the borrower. Where a direct deal is made with either banks or insurance companies or other lending organizations, the group of lenders is small and they are all completely informed not only at the time the deal is made, but continuously thereafter, of the financial condition of the borrower; and therefore the purpose of protecting the unwary investor, as is the case in public financing, just does not exist. We have had no problems arising in the public financing which we have done, all of which was registered with the Securities and Exchange Commission. Our dealings in connection with the SEC have been, in fact, most satisfactory from our standpoint, so this letter is not dictated by any feeling of unsatisfactory treatment at the hands of the SEC, but predicated entirely upon a firm conviction as a user of both systems that they should be permitted to continue, and that private placements and long-term borrowing through direct deals would be seriously hampered if registration were required. Yours very truly, W. H. CLIFFORD, Vice President. MEMORANDUM ON REGISTRATION OF DIRECT PLACEMENTS ON RESALE Hon. Louis B. HELLER, Chairman, Securities and Exchange Commission Subcommittee, Room 1334, House Office Building, Washington, D. C. DEAR CONGRESSMAN HELLER: I should like permission to supplement the answer which I gave to the question of whether or not it would be desirable to amend the Securities Act of 1933 so as to require the registration of direct placements on resale, by a memorandum, prepared by the vice president and general counsel of this company, commenting on that question. Twelve copies of the memorandum are enclosed. You will recall that the question was asked me and a number of witnesses. I think we each gave part of the answer and some of the reasons for considering such an amendment undesirable. The enclosed memorandum attempts to draw these parts together and present the complete answer, and it seems to me most desirable that it be made a part of the record of the hearings. I am forwarding it to you now in view of the fact that the Life Insurance Association of America has just completed assembling the figures which the subcommittee requested, showing the volume of directly placed securities resold in the period from 1934 to 1951 by life insurance companies, and the maximum amount of these which may have been sold to the public. I understand that they are being forwarded to the subcommittee today. The enclosed memorandum refers to and comments on those figures. Respectfully yours, STUART F. SILLOWAY, MEMORANDUM COMMENTING ON REGISTRATION OF DIRECT PLACEMENTS ON RESALE The Life Insurance Association of America is today forwarding to the Securities and Exchange Subcommittee of the House Committee on Interstate and Foreign Commerce the figures for which the subcommittee asked at its hearings on May 20 and 21, 1952, showing (a) the volume of directly placed securities resold between 1934 and 1951, both inclusive, by life insurance companies having approximately 73 percent of assets of the entire industry and (b) the maximum amount which may have been sold to the public. The figures show that less than 14 percent of the direct placements acquired during this 18-year period have been resold, that most of these have been resold to other institutional investors, and that the amount which may possibly have reached the public is very small indeed.' There is no indication whatever that any of the securities which may have reached the public was impaired in quality either at the time of issuance or at the time of resale. On the contrary, the memorandum being filed by the association shows that they were all high-grade securities. The record of this 18-year period results from the nature of the investors acquiring direct placements-informed institutional investors-and from the fact that in order to be initially exempt such purchases must be for investment and without any present intent on the part of the investor to resell. Thus, it is apparent that the record to date is not simply fortuitous but will continue to be the pattern. These figures alone demonstrate the absence of any need for requiring registration of securities directly placed on resale. Any claimed theoretical advantage of registration would be far outweighed by the very practical disadvantages produced by restraining the competition which now exists in the capital markets between different methods of obtaining long-term financing and by largely destroying the chief benefits and usefulness of direct placements in supplying the capital needs of industry, particularly of small-business enterprises that cannot resort to the public market for long-term capital. Even though the figures alone should dispose of the question, there is also a complete answer to it on principle. Portions of this answer were given in the testimony of several witnesses who testified at the hearings on May 20 and 21, but it may be useful to draw these portions together and sum them up, for purposes of the record, in this memorandum. The question was asked during the hearings in two forms: (a) Whether registration of direct placements should be required at the time of resale by the initial purchaser, or (b) whether it should be required at the time of issue if there is any possibility that the securities might be resold at a later date to the public. If registration were required at either time, it would be likely, for reasons set forth in point II below, to have almost the same practical effect as a general requirement for registration of direct placements at issue. Before proceeding further, it should be noted that the act does govern all sales of securities through the provisions of sections 12 and 17. These sections provide liabilities for untrue or misleading statements and penalties for fraud in sales of securities in interstate commerce and govern both sales on original issue, whether by direct placement or otherwise, and sales at any time after issue. But the act requires registration at issue only of publicly offered securities. POINT I The exemption of direct placements from registration under the Securities Art is express, well understood, and grounded on sound principles. The underlying purpose of the Securities Act of 1933 was to protect the uninformed public against the severe losses which had been sustained in the past through unethical or even dishonest practices on the part of some persons issuing securities and some underwriters promoting such sales. The act also created liabilities in the case of untrue or misleading statements and provided penalties for fraud in any sales of securities in interstate commerce at any time and under any circumstances. The Securities Act sought to accomplish its underlying purpose by providing assurance that investors were not deceived in respect of newly issued securities. In order to do so, it required that when securities were issued and offered to the public there should be full disclosure of pertinent information regarding their investment quality. This information was required to be filed with the Securities and Exchange Commission in connection with the registration of the issue. Copies were to be made available to the public under such regulations as the Securities and Exchange Commission might prescribe. The act also, however, provided in section 4 (1) that securities issued in transactions which did not involve a public offering need not be registered. The act, in this section, exempted not only "transactions by an issuer not involving any The figures show $19.9 billions of direct-placement acquisitions over the 18-year period: $243 millions resold, or about 14 percent of acquisitions: $58 millions, or less than 0.30 percent of acquisitions, which may have reached the public: $15 millions of these with respect to which there was some registration statement on file covering either the stock for which they were exchangeable or a part of the same issue which had initially been offered to the public. leaving only $43 billions, or a little more than onefifth of 1 percent, with respect to which there was no registration statement on file. public offering" but also "transactions by any person other than an issuer, underwriter, or dealer," thereby also expressly exempting sales by a purchaser on a direct placement. The exemption of direct placements, including their exemption on resale, was, therefore, not inadvertent, but express. Nor was it a novel exemption, for it simply carried over into the Securities Act an exemption the basis for which was well understood, since it had been common in the blue-sky laws of various States which long antedated the Securities Act. The exemption in the Securities Act rests on the proposition that disclosure through registration is unneccessary where securities are issued to financially experienced investors, who can reasonably be expected to secure for themselves in their negotiations with the issuer, the information needed to determine the quality of the new securities. The initial acquisition of securities by financially experienced investors actually gives a better voucher for the investment quality of the securities at the time of issue than does mere disclosure through registration, for reasons which follow. According to the testimony at the hearings on May 20 and 21, approximately 90 percent of direct placements are acquired by life-insurance companies; and if the volume of direct placements going to other investors such as commercial banks, pension trusts, savings banks, endowment funds, and other institutions were added, the proportion acquired from the issuer by financially experienced institutions would be close to 100 percent. The testimony at these hearings also disclosed that the investigation by lifeinsurance companies of direct placements generally goes considerably beyond the requirements of the registration statement. This investigation almost necessarily takes into account extremely important imponderables, such as the quality of the management of the issuer, which cannot possibly be shown in a printed prospectus. It generally includes a field investigation which involves, among other things, a study of the plant and plant lay-out, unless the purchaser is thoroughly familiar with the issuer's business. The investigation also takes into account the position of the issuer in its own industry, the likelihood of competition from sources outside the issuer's own industry, the experience of that industry and also of the issuer during the depression, and economic and industrial trends. The testimony also showed that it is generally possible for purchasers on direct placements to get stronger convenants from the borrower than are possible on public offerings, because of the expectation of the borrower that these convenants can be adjusted by future negotiation with the financially experienced purchaser or purchasers in the event that conditions change in such a way as to require modification. The testimony further showed that as a result the security for direct placements is generally better than the security for public offerings. One point which was probably not brought out as clearly as it might have been is that life insurance companies, when they acquire securities, whether through direct placements or through any other type of purchase, are required both by the nature of their business and even by the State laws governing most life insurance company investments, and these laws are enforced by State Insurance Department regulation, to "invest." The Armstrong, or Hughes, investigation of life insurance companies in New York in 1905 brought out the evils inherent in underwritings by life insurance companies, i. e., in the acquisition of new issues by life insurance companies as a step in the distribution of those securities, and ever since that time it has been almost universally recognized that life insurance companies must purchase securities only with the intent of holding them as investments and not as a mere step in their distribution. It must also, however, be recognized that the exigencies of their businesses may be such as to require liquidation of holdings at any time, and it is not uncommon for State insurance laws to include a provision that the disposition of an insurance company's property must at all times be within its control. The Securities Act itself, in section 2 (11), classifies anyone who purchases with a view to distribution as an underwriter, and, therefore, irrespective of the requirements of State insurance laws, any insurance company, or other purchaser on a direct placement, that did not purchase securities as an investment could not accept the exemption applicable to direct placements. In other words, under the act itself it would be impossible to have an exempted direct placement unless the institution was purchasing to invest, without any then present intention to resell. Thus, under the act, in public offering of new securities, on the one hand, the public is protected only to the extent of the disclosure of facts made in the registration statement at the time of issue. In the case of direct placements, on the |