suant to section 24 (b) of the Investment Company Act, together with three copies of a statement designating what information has been added and/or deleted. Each copy of the English-language translation of the text of the sales literature should be properly identified as a translation and should have affixed to it a written representation by representatives of the management of the investment company that the translation is accurate and complete.

II. The Applicability of the Investment Company Act of 1940 to the Offer and Sale of Open-end Investment Company Shares Outside the United States

It is the staff's view that the provisions of the Investment Company Act apply to an open-end company registered under that Act regardless of where its shares are sold. The staff recognizes, however, that the underwriters of some such companies desire to offer and sell shares of such companies to foreign nationals outside the United States under terms or arrangements different from those in effect in the United States.

For example, it may not be deemed economically feasible to offer or sell such shares to foreign nationals outside the United States with a sales load which is no different from that in effect in the United States. This raises the question whether it is appropriate that an exemption from section 22(d) of the Investment Company Act be granted.

Because of the variety of considerations that may be involved, the staff believes that any such question of the extent to which different arrangements should be employed outside the United States should be resolved by means of an appropriate application filed pursuant to section 6(c) of the Investment Company Act requesting relief from the provisions of the section in question. Under this procedure, the issuer should present full justification for the requested exemption, including appropriate discussion of relevant laws and business practices of the foreign countries in which open-end investment company shares may be offered and sold under the proposed arrangement. The issuer should submit as an exhibit to the application an opinion of counsel to the effect that the proposed arrangement would not be inconsistent with the laws of the countries in question and that it would meet the requirements of the appro

priate regulatory authorities of such countries. The staff will consider each such application on its individual merits.

Proxy materials and annual reports, required to be sent to shareholders, should be sent to foreign shareholders outside the United States to the extent such shareholders are known. Appropriate foreign-language translations of such proxy materials and annual reports should be prepared for foreign shareholders who have purchased their shares outside the United States in cases where there is a substantial number of shareholders speaking a particular foreign language.

III. Broker-Dealer Registration Requirements Under the Securities Exchange Act of 1934 for Foreign Broker-Dealers Who Offer and Sell Shares of Open-End Investment Companies Outside the United States, Its Territories and Possessions

Section 15 (a) (1) of the Securities Exchange Act makes it unlawful for a broker or dealer (other than one whose business is exclusively intrastate) to use the mails or instrumentalities of interstate commerce, including commerce between the United States and any foreign country, to induce or to effect any transaction in a nonexempt security otherwise than on a national securities exchange unless such broker or dealer is registered with the Commission. The staff generally will raise no objection because an unregistered foreign brokerdealer uses the Federal instrumentalities to buy shares issued by an open-end investment company from the issuer or its principal underwriter for sale in a foreign country if (a) such shares are sold only to foreign nationals outside the United States, its territories and possessions and (b) such foreign broker-dealer is not directly or indirectly selling such shares to or acting for the account of an unregistered investment company whose portfolio contains shares issued by open-end investment companies registered under the Investment Company Act. On the other hand, a foreign broker-dealer who offers and sells shares issued by such companies to U.S. nationals no matter where located should register with the Commission. This position supplements and is consistent with the position taken in Securities Exchange Act Release No. 7366 (Securities Act Release No. 4708), see p. 54.

SECURITIES ACT OF 1933

The Commission again called attention to the continued high volume of registration statements filed under the Securities Act of 1933, and noted that the number of campanies filing registration statements for the first time continues to mount, so that well over half of the filings now being made are by such companies. The Commission emphasized that the investing public should be aware that many such offerings of securities are of a highly speculative character and that the prospectus should be carefully examined before an investment decision is reached. It is characteristic of such speculative issues that the company has been recently organized, that the promoters and other selected persons have obtained a disproportionately large number of shares for a nominal price with the consequent dilution in the assets to be contributed by the investing public, and that the underwriters receive fees and other benefits which are high in relation to the proceeds to the issuer and which further dilute the investment values being offered.

The Commission has declared its policy in Rule 460 that it will not accelerate the effective date of a registration statement unless the preliminary prospectus contained in the registration statement is distributed to underwriters and dealers who it is reasonably anticipated will be invited to participate in the distribution of the security to be offered or sold. The purpose of this requirement is to afford all persons effecting the distribution a means of being informed with respect to the offering so that they can advise their customers of the investment merits of the security. Particularly in the case of a first offering by a nonreporting company, salesmen should obtain and read the current preliminary or final prospectus before offering the security to their clients.

The Commission also announced, in the exercise of its responsibilities in accelerating the effective date of a registration statement under section 8(a) of the Securities Act of 1933, and particularly the statutory requirement that it have due regard to the adequacy of the information respecting the issuer theretofore available to the public, that it will consider whether the persons making an offering of securities of an issuer which is not subject to the reporting requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, have taken reasonable steps to furnish preliminary prospectuses to those persons who may reasonably be expected to be purchasers of the securities. The Commission will ordinarily be satisfied by a written statement from the managing underwriter to the effect that it has been informed by participating underwriters and dealers that copies of the preliminary prospectus complying with Rule 433 (a) have been or are being distributed to all persons to whom it is then expected to mail confirmations of sale not less than 48 hours prior to the time it is expected to mail such confirmations. Such distribution should be by air mail if the confirmations will be sent by air mail, or a longer period to compensate for the difference in the method of mailing the prospectus should be provided. Of course, if the form of preliminary prospectus so distributed was inadequate or inaccurate in material respects, acceleration will be deferred until the Commission has received satisfactory assurances that appropriate correcting material (including a memorandum of changes) has been so distributed.

In view of the situation above discussed, the Commission proposes to invoke this acceleration policy immediately. When the Commission gains sufficient experience under this policy, it anticipates proposing appropriate revision of its rules.

SECURITIES ACT OF 1933

The Securities and Exchange Commission today made publicly known its concern with the methods being employed by a growing number of companies and persons to effect distributions to the public of unregistered securities in possible violation of the registration requirements of the Securities Act of 1933 and of the anti-fraud and anti-manipulative provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The methods employed can take and in fact have taken a variety of patterns.

I

Frequently, the pattern involves the issuance by a company, with little, if any, business activity, of its shares to a publicly-owned company in exchange for what may or may not be nominal consideration. The publicly-owned company subsequently spins off the shares to its shareholders with the result that active trading in the shares begins with no information on the issuer being available to the investing public. Despite this lack of information, moreover, the shares frequently trade in an active market at increasingly higher prices. Under such a pattern, when the shares are issued to the publicly-owned or acquiring company, a sale takes place within the meaning of the Securities Act and if the shares are then distributed to the shareholders of the acquiring company, that company may be an underwriter within the meaning of section 2(11) of the Act as a person "who purchased from an issuer with a view to . . . the distribution of any security" or as a person who "has a direct or indirect participation in any such undertaking."

While the distribution of the shares to the acquiring company's shareholders may not, in itself, constitute a distribution for the purposes of the Act, the entire process, including the redistribution in the trading market which can be anticipated and which may indeed be a principal purpose of the spin off, can have that consequence. It is

accordingly the Commission's position that the shares which are distributed in certain spin offs involve the participation of a statutory underwriter and are thus, in those transactions, subject to the registration requirements of the Act and subsequent transactions in the shares by dealers, unless otherwise exempt, would be subject to the provisions of section 5 requiring the delivery of a prospectus during the 40 or 90 day period set forth in section 4(3).

The theory has been advanced that since a sale is not involved in the distribution of the shares in a spin off that registration is not required and that even if it is required, no purpose would be served by filing a registration statement and requiring the delivery of a prospectus since the person receiving the shares are not called upon to make an investment judgment.

This reasoning fails, however, to take into account that there is a sale by the issuer and the distribution thereafter does not cease at the point of receipt by the initial distributees of the shares but continues into the trading market involving sales to the investing public at large. Moreover, it ignores what appears to be primarily the purpose of the spin off in numerous circumstances which is to create quickly, and without the disclosure required by registration, a trading market in the shares of the issuer. Devices of this kind, contravene the purpose, as well as the specific provisions, of the Act which, in the words of the statutory preamble, are "to provide full and fair disclosure of the character of the securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof." In the circumstances of a spin off, when the shares are thereafter traded in the absence of information about the issuer, the potential for fraud and deceit is manifest.

This release does not attempt to deal with any problems attributable to more conventional spin

offs, which do not involve a process of purchase of securities by a publicly-owned company followed by their spin off and redistribution in the trading markets.

II

Another pattern has come to the Commission's attention in which certain promoters have acquired corporations which have ceased active operations, or which have little or no assets ("shell corporations"), and which have a substantial number of shares outstanding, generally in the hands of the public. Thereafter the promoters have engaged in activities to quickly increase the market value of their shareholdings. For example, in some cases promoters have initiated a program of acquisitions, transferring assets of dubious value to the "shell corporations" in exchange for substantial amounts of newly issued shares. This activity is frequently accompanied by publicity containing exaggerated or misleading statements and designed to stimulate interest of public investors in the company's shares in violation of the antifraud provisions of the Securities Exchange Act of 1934. Thereafter the market prices of these securities have risen sharply under circumstances which bear no relationship to the underlying financial condition and business activities of the company. In some of these cases the promoters or other corporate insiders take advantage of the market activity and the price rise which they have generated, have sold their shares at the inflated prices to the public in violation of the registration and anti-fraud provisions of the Federal securities

laws. Similar activities have also been noted in a number of cases involving shares which a publicly held company has spun off to its shareholders.

III

The activities discussed above generally can only be successfully accomplished through the efforts of brokers and dealers. Accordingly, brokers and dealers are cautioned to be particularly mindful of their obligations under the registration and anti-fraud provisions of the Federal securities laws with respect to effecting transactions in such securities. In this connection, where a broker or dealer receives an order to sell securities of a littleknown, inactive issuer, or one with respect to which there is no current information available except possibly unfounded rumors, care must be taken to obtain sufficient information about the issuer and the person desirous of effecting the trade in order to be reasonably assured that the proposed transaction complies with the applicable requirements. Moreover, before a broker or dealer induces or solicits a transaction he should make diligent inquiry concerning the issuer, in order to form a reasonable basis for his recommendation, and fully inform his customers of the information so obtained, or in the absence of any information, of that fact.

In the foregoing connection the Commission also calls attention to its release dated February 2, 1962, on the subject "Distribution by Brokerdealers of Unregistered Securities" (Securities Act Release No. 4445, Securities Exchange Act Release No. 6721), see p. 44.

SECURITIES ACT OF 1933

of the guide is set forth below in definitive form, unchanged from the language of the proposal. 54. Misleading Character of Certain Registrants' Names

A registrant's name may be materially misleading if it indicates a line of business in which the

registrant is not engaged or is engaged only to a limited extent. If the registrant is not engaged to any substantial extent in the business indicated by the name, a change of name may be the only way to cure its misleading character. If the registrant is substantially engaged in the line of business, even though it does not comprise the major portion of the business, it may be sufficient to disclose under the name of the registrant on the cover page of the prospectus the limited extent to which the registrant is engaged in the business indicated by its name. This paragraph does not apply, however, to an established company which over a period of years has changed the general character of its business and where the investing public is generally aware of the change and the character of the registrant's present business.

A registrant's name may also be misleading if it is the same or substantially the same as the name of another well-known company. If it appears likely that the registrant's name may be confused with the name of the other company, consideration should be given to changing the name. However, if both companies are new or small and relatively unknown and are located in different parts of the country, so that investors are not likely to mistake one company for the other, it would be sufficient to disclose on the cover page of the prospectus, under the name of the registrant, the lack of any relationship between the two companies. By the Commission.

ORVAL L. DUBOIS

Secretary

The Securities and Exchange Commission and its staff frequently receive inquiries concerning the impact of the registration and prospectus requirements of section 5 of the Securities Act of 1933 ("Act") on publication of information concerning an issuer and its affairs by the issuer, its management, and by underwriters and securities dealers. Some of the more common problems which have arisen in this connection are discussed in Securities Act of 1933 Release No. 3844 (October 8, 1957),1 see page 19. Since the publication of that release there have been a number of developments relevant to this subject, including the broader reach of the reporting and proxy disclosure requirements through the 1964 amendments to the Securities Exchange Act of 1934 and the increased awareness of various self-regulatory organizations, corporate managements and others of the importance of timely disclosure. Moreover, in recent years the Commission and its staff also have become increasingly aware of the need for more clearly defined standards in this area. Concurrently with the pub

1 See also, Securities Act of 1933 Release No. 4697 (May 28, 1964), see p. 53.

lication of this release the Commission is proposing to adopt various rules which would accomplish this objective in certain respects (see Securities Act Release No. 5010). The Commission believes that a discussion of certain factors to be considered in dealing with other aspects of this subject may be of help to issuers, their advisers and professionals in the securities business.

There has been an ever increasing tendency to publicize through many media information concerning corporate affairs which goes beyond statutory requirements. This practice reflects the commendable recognition on the part of business and the investment community of the importance of informing investors and the public with respect to important business and financial developments. It has been reenforced by the policies of various selfregulatory organizations regarding timely disclosure of information which might materially affect the market for an issuer's securities." As the Commission has stated:

2 See, e.g., New York Stock Exchange Company Manual, pp. A-18 through A-27, revised July 19, 1968; American Stock Exchange Guide, pp. 101-108.