"We realize, of course, that corporations regularly release various types of information and that a corporation in which there is wide interest may be called upon to release more information more frequently about its activities than would be expected of lesser known or privately held enterprises. In the normal conduct of its business a corporation may continue to advertise its products and services without interruption, it may send out its customary quarterly, annual and other periodic reports to security holders, and it may publish its proxy statements, send out its dividend notices and make routine announcements to the press. This flow of normal corporate news, unrelated to a selling effort for an issue of securities is natural, desirable and entirely consistent with the objectives of disclosure to the public which underlies the Federal securities laws."3 However, the increasing obligations and incentives of corporations to make timely disclosures concerning their offerings raise a question as to a possible conflict between the obligation to make timely disclosure and the restriction on publication of information concerning an issuer which may have securities "in registration.” 4 The Commission believes that such a conflict may be more apparent than real. Events resulting in a duty to make prompt disclosure under the anti-fraud provisions of the securities laws or timely disclosure policies of self-regulatory organizations at a time when a registered offering of securities is contemplated are relatively infrequent and normally may be effected in a manner which will not unduly influence the proposed offering. Disclosure of a material event would ordinarily not be subject to restrictions under section 5 of the Securities Act if it is purely factual and does not include predictions or opinions. The Commission recognizes that difficult and close questions will inevitably arise with respect to whether particular items of publicity are subject to restriction, and encourages issuers and their counsel to seek informal consultation with the 3 Carl M. Loeb, Rhoades & Co., 38 SEC 843, 853 (1959). "In registration" is used herein to mean the entire process of registration, at least from the time an issuer reaches an understanding with the broker-dealer which is to act as managing underwriter until the completion of the offering and the period of 40 or 90 days during which dealers must deliver a prospectus. Commission's staff which is accustomed to dealing with such questions and is usually able to give rapid and definite responses. A number of more specific questions have been raised concerning the restrictions on circulation of information by broker-dealers, particularly during the "prefiling" period. There appears to be some confusion as to when the restrictions on publication activities commence. Ordinarily a broker-dealer becomes subject to restrictions at any time when he commences to participate in the preparation of a registration statement or otherwise reaches an understanding with the person on whose behalf a distribution is to be made that the firm will become a managing underwriter, whether or not the terms and conditions of the underwriting have been agreed upon. Other brokers become subject to restrictions at such time as they are invited by a managing underwriter or a person on whose behalf a distribution is to be made, to participate or seeks to participate. Persons who choose to forego such underwriting in order to be free to distribute such publications should not thereafter participate in the distribution as a dealer or otherwise. Distribution of communications containing recommendations with respect to securities which have been registered for sale from time to time at prices prevailing in the market pose difficult questions. Usually no broker-dealer group has made arrangements with the selling shareholders for distribution of the securities. It does not appear that restrictions on the dissemination of such material are necessary until such time as a brokerdealer has reached an understanding that he will offer securities on behalf of the selling shareholder, whether or not he has technically accepted an order to sell the security. After a particular security is "in registration,” broker-dealers often do not know the extent to which they may follow up recommendations concerning the security made before the security was “in registration." If a broker-dealer is a participant in a proposed underwriting and material events occur during the "prefiling" period, the broker should be able to make a brief, strictly factual report of these events to his customers. After the registration statement is filed and until it becomes effective, written communications furnished to customers or others should be restricted to the preliminary prospectus ("red herring"), the summary prospectus described in section 10(b), or the so-called "tombstone" announcements permitted under section 2(10) of the Act or Rule 134 thereunder. Also, Rule 135 permits certain announcements of offerings before and after a registration statement is filed. It should be recognized that the foregoing discussion is intended to be only a general guide for brokers in disseminating information concerning an issuer which has securities "in registration." Particular fact situations may result in different conclusions. In such situations, a broker may find consultation with the staff of the Commission helpful. Although the matters discussed herein reflect the policies and practices which the staff of the Commission will follow, they do not represent rules of the Commission. Accordingly, these interpretations are subject to change based on experience in their application, and the Commission would welcome comments and observations from interested persons. Such comments should be directed to the Director of the Division of Corporation Finance. It should be noted that the Commission is also proposing to amend Rule 174 which provides exemption from the prospectus delivery requirements of section 4(3) of the Act (see Securities Act of 1933 Release No. 5010). The proposed amendments would eliminate the requirement for dealers to deliver a prospectus for trading transactions in securities of issuers required to file reports pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934. If such a rule is adopted, dealers who have sold their allotments or who are not participating in the distribution would then be able to distribute information concerning an issuer subject to such reporting requirements during the period of 40 days after the effective date of the issuer's registration statement without the restrictions the existing prospectus delivery requirements may impose on their trading transactions. The Commission is not proposing to revise prospectus delivery requirements as they apply to issuers not required to file periodic reports under the Exchange Act, primarily the 90 day requirement which applies to issuers which have not previously filed a registration statement under the Act. Accordingly dealers desiring to publish information concerning such issuers during the 90 day period should consider the prospectus delivery requirements. By the Commission. RELEASE NO. 5018 November 4, 1969 ORVAL L. DUBOIS, Secretary. SECURITIES ACT OF 1933 The Securities and Exchange Commission today called attention to the applicability of the Federal securities laws to the sale and distribution of whisky warehouse receipts in areas subject to the jurisdiction of the United States. The Commission pointed out that the promotion and sale of such receipts may involve an offering of a security in the form of an investment contract within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, and that any public offering of any such securities must comply with the registration and prospectus requirements of the Securities Act, unless an exemption therefrom is available, and must comply with the antifraud provisions of the Securities Act and the Securities Exchange Act and the regulations thereunder. Recently, the public promotion and distribution of whisky warehouse receipts has been increasing in the United States. In most cases the whisky warehouse receipts offered have related to unblended whisky, usually unblended Scotch whisky being aged in a bonded warehouse in Scotland. The production of Scotch whisky involves distilling, aging and blending. The blenders, who, blend many varieties of aged whisky to arrive at their final product, are frequently unable to finance the purchase of all their needs from distillers because of the burden, of financing the long aging process and because of the risks associated with changes in the whisky as it mellows. The aging process is a fundamental part of the production process. Freshly distilled Scotch whiskies vary considerably and change as they age, and blenders' needs change as public tastes change; consequently the need for a particular whisky cannot be determined until it is ready for blending. In order to finance the risks involved in the final production of a blended whisky, whisky warehouse receipts are sold to persons and institutions. Generally, the receipt covers casks of whisky which are contained in one or more warehouses, and the arrangement under which the whisky warehouse receipt is sold to the investor-purchaser generally contemplates that the whisky will continue to be stored until it is aged and that it will eventually be sold for him to the blenders who will use it to blend other whiskies to produce the final product. The purchaser of the whisky warehouse receipt is not being offered or sold such receipts with a view to acquiring and taking possession of the whisky. Rather, the purchaser in these cases is making an investment under an arrangement which contemplates that others will perform services which will increase the value of the whisky and will also eventually sell the whisky under circumstances which are expected to result in a profit to the purchaser-investor. In S.E.C. v. W. J. Howey Co., 328 U.S. 293, 301 (1946), the Supreme Court stated that the test of whether a security is being offered "is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value. . . . The statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and irrelevant formulae." In Howey the Supreme Court noted that the Commission has followed the same definition in In re National Resources Corporation, 8 S.E.C. 635 (1941). The Commission there stated that "transactions which, in form, appear to involve nothing more than the sale of real estate, chattels or services, have been held to be investment contracts where, in substance, they involve the laying out of money by the investor on the assumption and expectation that the investment will return a profit without any active effort on his part, but rather as the result of the efforts of someone else." 8 S.E.C. at 637.1 The anti-fraud provisions of the Federal securities laws, including section 17(a) of the Securities Act and section 10(b) and Rule 10b-5 under the Securities Exchange Act, make it unlawful, in connection with the purchase or sale of a security, to make misstatements or misleading omissions of material facts, and prohibit other fraudulent and deceptive practices. The anti-fraud provisions apply to advertisements, literature and other statements and representations made in connection with the offer and sale of securities, and particular attention is called to these provisions in view of the exaggerated claims made in some of the advertisements and other material used to promote sales of whisky warehouse receipts. It should also be noted that persons engaged in the business of buying or selling investment contracts taking the form of whisky warehouse receipts as agents for others, or in the business of buying and selling such securities as principal for their own account, would be brokers or dealers within the meaning of the Securities Exchange Act of 1934, and would generally be required to be registered as such with the Commission under the provisions or section 15 of the Act. Such a broker or dealer would be subject also to other regulatory provisions, including the Commission's Rule 15c3-1, which imposes net capital requirements on brokers and dealers. Persons engaging in the sale of whisky warehouse receipts who have any questions concerning the applicability of the Federal securities laws to their activities should consult the nearest regional office of the Commission. 1 This is not the first time that the Commission has been concerned with the sale of whisky warehouse receipts in the context of investment contracts. In two related cases, Penfield Co. v. S.E.C., 143 F. 2d 746 (9th Cir. 1944), and S.E.C. v. Bourbon Sales Corp., 47 F. Supp. 70 (W.D. Ky., 1942), subpoenas issued by the Commission were enforced by the courts despite respondents' objections that no securities were involved. The respondents sold bourbon whisky warehouse receipts to investors and then, in exchange for the receipts, offered them contracts under which the respondents would bottle and sell the whisky for the investor with the respondents keeping a percentage of the profit. The court in Penfield stated: "These contract provisions and representations, as well as the fact that the contract-holders, being ordinary investors and not liquor dealers, would not have the facilities or the necessary Federal and State liquor licenses to take the whisky out of bond and dispose of it, make it clear that they must look entirely to the efforts of the promoters to make their investment a profitable one, the criterion in our opinion in Atherton v. United States . . . [128 F. 2d 463 (9th Cir. 1942)] at p. 465." 143 F. 2d at 751. RELEASE NO. 5036 SECURITIES ACT OF 1933 GUIDE FOR PREPARATION OF PROSPECTUSES RELATING TO INTERESTS IN OIL AND GAS PROGRAMS On August 27, 1969, the Securities and Exchange Commission published, in Securities Act Release No. 5001, a proposed guide concerning the preparation of prospectuses relating to public offerings of interests in oil and gas programs and invited interested persons to comment thereon. The letters received have been carefully considered in the preparation of the definitive guide. The guide represents the views of the staff of the Commission's Division of Corporation Finance and the Commission has authorized its publication in order to bring these views to the attention of prospective registrants. The guide is designed to accomplish, to the extent feasible, uniformity in both the sequence of the disclosures and their general content. Thus it should serve to assist issuers in preparing registration statements on Form S-1, as well as offering circulars under Regulation A, involving oil and gas drilling programs and facilitate the understanding and analysis of such programs by investors and enable them more readily to compare one offering with another. The guide is published as Guide No. 55 in the series of registration guides published December 9, 1968, in Securities Act Release No. 4936. The text of the guide follows. 55. Prospectuses Relating to Interests in Oil and Gas Programs Disclosures in prospectuses relating to oil and gas drilling programs should appear in the sequence indicated below, except that the table of contents, required by paragraph (c) of Rule 421 under the Act, to be included in the forepart of the prospectus may be inserted at any appropriate place in the sequence of disclosures. The following disclosures should be included under appropriate captions: 1. Summary of Program. There should be set forth briefly on the cover page of the prospectus a summary which should include the following: (1) Terms of Offering: State the title and general nature of the securities (interests in the proposed program) being offered; the maximum aggregate amount of the offering; the minimum aggregate amount necessary to initiate the program; the disposition of the funds raised if they are not sufficient for that purpose; the minimum subscription price; the period of the offering; any provisions for additional assessments; and a brief description of the proposed method of distribution, including the amount of any commission to be paid. If funds received from investors are not to be held in trust or in special account pending expenditure in the program, appropriate disclosures should be set forth including when appropriate reference to exposure to claims of creditors of the custodian of the funds. The tabular presentation specified in Item 1 of Form S-1 may be omitted. (2) Compensation: Describe generally all cash or property interests that will be paid as compensation in connection with the program, including underwriting commission; (3) Participation in Costs and Revenues: Show the percentages of expenditures to be borne, respectively, by the investors and by other parties, who should be briefly identified, and the percentages of revenues to be payable, respectively, to investors and to other parties, who should be briefly identified; and (4) Application of Proceeds: Indicate the minimum dollar amount of net proceeds (excluding additional assessments) that will be available to finance the program and the proposed estimated percentages thereof to be used for financing the principal activities of the program, such as acreage acquisition, drilling of exploratory wells, drilling of development wells and purchase of producing properties. 2. The Risk Factors. The investor should be advised in a carefully organized series of short, concise paragraphs, under subcaptions where appropriate, of the risks he should consider before making an investment in the program and should include cross-reference to where in the prospectus further information may be found. 3. Definitions. Include an appropriate glossary of terms used in the prospectus which should not be inconsistent with their customary usage in the oil and gas industry. 4. Terms of the Offering. Describe the interests and the amount and terms of offering. 5. Additional Assessments. Describe those assessments which may be later required from investors either for completion of wells or for the drilling of additional wells and where available, historical information relating to past programs, of the registrant or its associates, should be shown, in tabular form, indicating for each program, the aggregate amount (excluding assessments) paid by investors, the aggregate amount of additional assessments separately required for (a) the completion of wells and (b) the drilling of additional wells. 6. Plan of Distribution. Describe how the interests being offered are to be sold, as well as arrangements for compensation. 7. Proposed Activities. Describe the proposed activities of the program in which the interests are being offered. 8. Application of Proceeds. Include an appropriate percentage estimate of the proceeds to be applied to the different purposes within each of the principal activities of the program, such as acreage acquisition, drilling of exploratory wells, drilling of development wells and the purchase of producing properties. Where possible, the information should be set forth in tabular form. 9. Participation in Costs and Revenues. Describe the arrangements and understandings with respect to the provision of funds for expenditures in connection with the program and with respect to participation in revenues from any production of minerals which may be realized. Where possible, the information should be set forth in tabular form. 10. Compensation. Describe, whether in the form of cash or property interests, the compensation for underwriting, managerial, and operational services to be rendered in connection with the program, as well as the sources from which such compensation will be paid. Where possible, the information should be set forth in tabular form. 11. Management. Include the disclosures required by Items 16 through 20 of Form S-1 as to, respectively, the management and operating companies. 12. Conflict of Interest. Describe all conflicts of interest which may arise in the operations of the program involving parties engaged in the management and operation of the program. 13. Prior Activities. Describe in tabular form the results of programs during at least the past 10 years of the registrant or its associates, indicating in appropriate detail for each of the programs (1) the drilling results thereof, and (2) for, respectively, (a) the public investors and (b) others, the total investment in each of such programs and the recovery on investment to date and for the last 3 months of the period covered, together with any other information as may be appropriate. 14. Tax Aspects. Discuss the tax consequences of oil and gas exploration, drilling and production, as well as Federal tax legislation which has been proposed. This may include, in tabular form, only historical information relating to past programs of the registrant or its associates, showing expenses deductible and income taxable. 15. Other captions should then follow, such as Competition, Limited Partnership Agreement, Agent Agreement, Exploration Agreement, and Operating Agreement, under which other required information is set forth. |