mation would be filed with the Federal Trade Commission many times daily and would prevent the legitimate business of the country. Senator BYRNES. What language in the bill are you objecting to along that line?

Mr. DEAN. Well, the bill says

Senator BYRNES (interposing). Do you say a man must cease to offer or accept for sale a security unless you have had it registered? Mr. DEAN. All right; I will tell you

Senator BYRNES (continuing). Well, the security is registered and it has been offered for sale through the mails. Now, what do you complain about in that situation?

Mr. DEAN. I will show you in detail what cannot be done. Senator CAREY. Didn't Mr. Thompson say on yesterday that this statement only had to be made once?

Senator BYRNES. That is just what I have in mind in propounding my question.

Mr. DEAN. Mr. Thompson said that, but the bill itself seems to provide differently.

Senator BYRNES. Let us see the language of which you complain. Mr. DEAN. Section 2, subsection (c), on page 2, defines what shall be a sale.

Senator BYRNES. What line?

Mr. DEAN. Page 2, line 17, defines what would be a sale. Section 3, on page 5, states:

That until there shall have been registered with the Commission the statement hereinafter referred to

And that refers to section 5

in accordance with the terms and conditions provided by this act and by the rules and regulations promulgated pursuant thereto, it shall be unlawful.

That means it shall be illegal for any person either to sell or accept for sale or to buy a security in interstate commerce. Supposing that this bill were to apply to outstanding securities, and a corporation stated: "We are not interested in filing the information required by section 5, we are not going to do any additional financing, and we, as directors, do not see why we should undertake this liability. Therefore, we are not going to file that information." Then no one could sell a single security until that information was filed. It would absolutely paralyze the present security markets, and it would freeze practically every investment going through interstate com

merce.

Senator BYRNES. Your complaint is directed to the prohibition to outstanding securities.

Mr. DEAN. It is also directed

Senator BYRNES (interposing). You heard Mr. Thompson say for the group drafting the bill, that although the language did apply to outstanding securities they thought it might well be amended. He rather approved the suggestion that it be amended, and that it apply so far as outstanding securities are concerned, only to those authorized but not issued. In other words, if hereafter certain securities were issued, which had theretofore been authorized but not issued, it should apply to them but to nothing else. That was his statement. Senator CAREY. He offered this amendment, therefore, in line 7: Or if such registration has been revoked as hereinafter provided.

The CHAIRMAN. Does that proposed amendment fit the objection you make?

Mr. DEAN. I would have to go through the entire bill, because there are other provisions in the bill which seem to me to be in conflict with that amendment.

Senator BYRNES. Show us those provisions.

Senator BARKLEY. If the bill is amended so as not to apply to outstanding securities it will be amended all the way through.

Mr. DEAN. Yes; but I mean as to that particular amendment. The CHAIRMAN. You may go ahead with your statement.

Mr. DEAN. Section 5 requires that there shall be filed, in brief, the name of the issuer, the names and addresses of the promoters; and I might state right there that in connection with a corporation organized in 1881 I do not see how that could be done. So it ought to be made clear that that only applies to a new corporation to be formed, The purposes of incorporation

Senator BYRNES (interposing). Wait a minute. The names and addresses of directors.

Mr. DEAN. Of the promoters.

Senator BYRNES. Yes.

Mr. DEAN. It does not say in the case of a corporation to be organized. It says the names and addresses of the promoters. In the case of the United States Steel Corporation that would require going back to 1901 and finding out who promoted it, which is an absolute impossibility.

Senator BARKLEY. If the bill is amended so as not to apply to outstanding securities, and merely provides that it may apply to any securities authorized but that have not been issued, it would then apply to promoters of the new issue. It ought to apply to them, I take it.

Mr. DEAN. The word "promoters" should be defined in this bill as it is in the English Companies Act, as people sponsoring a new corporation.

Senator BARKLEY. It might not be a new corporation. Take the United States Steel Corporation, and we will say it proposes to authorize a new issue of stock, and an entirely new set of men are in charge of it. In that case the board of directors would be the promoters.

Mr. DEAN. Yes; they would do the filing, but technically speaking they would not be promoters in connection with the issue. Unless you are using the name "promoters "

Senator BARKLEY. There might be someone connected with the sale of it who would be promoting the sale.

Mr. DEAN. Then you should name the investment banker or the broker buying the stock.

Senator WAGNER. Has the word "promoter" been given any judicial interpretation at all? Or does it rely upon definitions in statutes? Mr. DEAN. It relies pretty generally upon common usage, but there are definitions in some. I could not define a promoter now.

Senator BARKLEY. What is the English definition of the word. "promoter"?

Mr. DEAN. Could I give you that later, and now go on with my statement?

Senator BARKLEY. Yes.

169692-33-10

Mr. DEAN. Subdivision 4 of section 5 requires that there be stated the capitalization of the issuer.

Senator BARKLEY. Did you say section 4 of the bill?

Mr. DEAN. No, it is subdivision (4) of section 5, page 8. It requires that there be stated the capitalization of the issuer, that a description of the respective voting rights, preferences, and so forth, be given. Now, generally speaking, in the case of a new corporation those are summarized in detail in the offering circular. But they are worked out in detail between the date of the offering circular and the delivery date. To require that that be done in detail in the offering circular would mean that the corporation would have to go to the expense of preparing those papers in full before it knew whether or not it could raise the money. The Delaware law

Senator ADAMS (interposing). You do not mean that a corporation should have leeway in working out the voting rights after the sale is authorized?

Mr. DEAN. I mean that the law should permit a summary description of the voting rights, for the voting rights, for example, in Delaware or in the New York law, are extremely complicated. For example, you cannot take way from preferred stock in certain States the right of voting on dissolution, or the right of voting on the sale of assets. Or if you are going to amend their preferences you may have to get a vote by classes, voting separately. These voting rights usually take 8 or 10 pages in the certificates of incorporation.

Senator ADAMS. My inquiry was whether or not it would be permissible in your judgment for a corporation to fix the character of those rights after it had made an offer to sell the particular stock.

Mr. DEAN. Provided they are summarized in the circular. It is impossible to set them forth in full in the circular. For example, the Delaware law permits a summary of the preferred stock provisions to be printed on the back of stock certificates. In New York, to my knowledge, none of the leading law firms approve summaries to be printed. They have to be printed in full, due to the fact that you cannot tell what provision you leave out might be considered important. And inasmuch as in this bill any director is liable for any material misstatement, regardless of good faith, he would not dare sign a statement that did not state them in full.

And it requires a balance sheet showing a detailed list of its assets and liabilities on a date not more than 90 days prior to the date of filing. In many instances that would be impossible. In other instances it would work a hardship. If a balance sheet must be certified by a firm of certified public accountants, it takes them from 60 to 90 days after the end of the year to complete the audit. If the audit had been made at the end of the fiscal year and you wanted to make an offering, say, in June, you would have to have a complete audit of your books again for the first 3 months of the fiscal year, which in the case of a large corporation would cost anywhere from $15,000 to $20,000.

Senator ADAMS. Certified public accountants do not object to that, I take it, and maybe that is why they are appearing here.

Mr. DEAN. I assume that is why Colonel Carter was here. I think the bill should be amended to permit the filing of balance sheets as of some recent date.

Senator GORE. The last regular statement, you mean, some months back, or perhaps a year back, or something like that.

Mr. DEAN. And the bill in another place, in section 8, requires that it be as of the close of the preceding fiscal year. That would prevent any offering of securities in the case of large corporations in January or February. I think it ought to be the balance sheet as of the close of the corporation's last fiscal year, or for some reasonable period prior thereto, let us say the latest available balance sheet and earnings statement that has been audited. I think the statements should be of some recent period, but 90 days is an unreasonable period in the case of large corporations.

In section 5, line 4, you have to state the net amount returnable to capital investment. You asked me why you could not engage in a secondary distribution. In the case of an original offering it would be possible to show the amount that the corporation is going to get. But in section 8, in the case of anyone selling securities already outstanding, it would not be possible for them to file the information inasmuch as the corporation itself would then have nothing to do with that security issue.

On page 9, line 4, it says that there must be shown the net amount returnable to capital investment. I do not know what that phrase

means.

The CHAIRMAN. Is that in the British Companies Act?

Mr. DEAN. No, sir. That particular term is not familiar in financial circles. If you get out a bond issue you set up on your liability side the face amount of the bonds, and you put in your cash, the proceeds of the issue. Now, that might be used to pay off bank loans. It might be used to provide current working capital, or it might be used to buy a plant with. I presume what is meant is the amount received by the corporation. Throughout the bill there are other phrases whose meanings are vague. I will comment on each of those phrases in my memorandum.

You see in section 8

Senator BYRNES (interposing). Wait a minute. You say it is vague. What language do you suggest in order to improve the text of the bill?

Mr. DEAN. Right there?

Senator BYRNES. Yes.

Mr. DEAN. I would say the amount to be received by the corporation.

Senator BYRNES. Instead of what?

Mr. DEAN. Instead of the net amount returnable to capital investment.

Senator BYRNES. Well, you knew what it meant.

Mr. DEAN. No, sir; I do not know what it means.

Senator BYRNES. Then, why are you suggesting other language? Mr. DEAN. There isn't any such thing on the assets side of a balance sheet as capital investment. It may not be fixed capital investment. It may represent cash or other working capital.

Senator BYRNES. Net amount returnable to capital investment it says here. And your suggestion is-will you repeat that again?

Mr. DEAN. The amount to be received by the issuing corporation.

Senator BYRNES. Then that language would read:

The price at which they are offered to the public and the amount to be received by the issuing corporation.

Mr. DEAN. Yes, sir.

Senator BYRNES. All right.

Mr. DEAN. In the case of secondary distribution it would not be possible to state the amount that they are going to be offered to the public at each time those bonds are offered, because that price would' change with every sale every day. In other words, this bill is unworkable in its present form because it requires all this information, apparently, to be filed in the case of secondary distribution, whereas the information has already been placed on file in the case of the original offers.

Senator GORE. Diverting for the moment to the original offering, let me ask: Where you state the amount to be offered and the amount to be received by the corporation, what accounts for the difference, selling commissions or promotion charges? What would account for the difference between those two items?

Mr. DEAN. In the first place, the bonds might be sold at a discount. It would depend upon the market rate of money and the face amount of the coupons. If the market rate of money were 7 percent and you got out a 5 percent bond, you would have to sell that bond at a discount.

Senator GORE. Is that limited to bonds, or does it apply also to stocks?

Mr. DEAN. In the case of par value stock the corporation would have to receive at least the par value under the most of the State laws, and would have to pay a commission for selling it. In the case of no-par stock it would depend on the then market or the then worth of the stock.

Senator ADAMS. The fact that this phrase is, amount returnable to capital investment, that conveyed to me a fairly definite idea, perhaps inaccurate, but I had assumed what was meant by the draftsmen of the bill by that language was to distinguish that portion of moneys received which was to go into what would be fixed capital investment as distinguished from money which might be used for current expenditures. I thought that was so that a man who was buying the security would know how much was going into a more or less permanent security behind the paper he was buying, and how much of it, if any, would be used to meet current expenditures, and therefore disappear out of capital investment.

Mr. DEAN. Why shouldn't he know both? Senator ADAMS. I think he should. But your suggestion would not give him information as to both. It would give him the aggre-gate without segregating the two.

Mr. DEAN. Well, I do not think it possible for me to suggest detailed amendments to this bill until the committee decides what theory they want to proceed on. You have got to adopt the theory behind any statute before you can really attempt to draft specific amendments.

Senator GORE. Could you state succinctly the theory between this bill and the English Companies Act?

Mr. DEAN. Yes.