Summary
post-filing occurrence of contingency making exemption unavailable is ground for suspension of exemption under analogous provisions of Regulation A, 17 C.F.R. §§ 230.251-.263
Summary of this case from Securities Exchange Com'n v. Southwest CoalOpinion
No. 72-3284.
June 5, 1973.
Richard B. Marx, Miami, Fla., for petitioner.
Mark Q. Connelly, Theodore Sonde, Securities Exchange Commission, Washington, D.C., for respondent.
Petition for review of order of Securities and Exchange Commission.
Before BELL, GOLDBERG and SIMPSON, Circuit Judges.
This is a petition for review of an order entered by the Securities and Exchange Commission pursuant to Rule 261 of Regulation A under the Securities Act of 1933 permanently suspending the exemption from registration with respect to the offering of securities by petitioner, Tabby's International, Inc. The order is affirmed on the basis of the SEC's opinion, which we attach hereto as an appendix.
Affirmed.
APPENDIX
Securities Act Release No. 5283 [Caption omitted]
FINDINGS, OPINION AND ORDER PERMANENTLY SUSPENDING REGULATION A EXEMPTION
ex post facto ex post facto Before the SECURITIES AND EXCHANGE COMMISSION: Tabby's International, Inc. ("issuer"), a Florida corporation organized in 1969 for the purpose of engaging in the restaurant business, filed with us on June 25, 1969 a notification and an offering circular for the purpose of obtaining an exemption from the registration requirements of the Securities Act of 1933 pursuant to Section 3(b) thereof and Regulation A thereunder, with respect to a proposed public offering of 150,000 shares of its common stock at $2 per share. In April 1970 it filed a report on Form 2-A stating that the offering had been completed on November 19, 1969. On May 12, 1971, we issued an order pursuant to Rule 261 of Regulation A temporarily suspending the exemption. The issuer requested a hearing, and following submission of a stipulation of facts entered into by it with our Division of Corporation Finance, the hearing examiner filed an initial decision. The examiner found, as alleged in the temporary suspension order, that as a result of the activities of the underwriter in the course of the offering, the offering circular became materially false and misleading, the terms and conditions of Regulation A were not complied with, and the offering was made in violation of Section 17 of the Securities Act, and he concluded that the exemption should be permanently suspended. The issuer filed a petition for review and a brief in support thereof which presented objections to the examiner's conclusion. As found by the examiner on the basis of the stipulation, the offering was carried out by the underwriter in a fraudulent manner. The details of the underwriter's activities and the respects in which they caused the offering circular to be false and misleading and resulted in noncompliance with the terms and conditions of Regulation A are set forth in the examiner's findings which we adopt. In brief, prior to completion of the offering, the underwriter repurchased shares from nominees and others at prices substantially above the offering price and resold part of such shares; induced other broker-dealers to make a market in the issuer's stock at double the offering price; and offered yet other broker-dealers financial inducements to promote the stock. As a result of the failure to disclose these activities and the actual aggregate offering price resulting therefrom, the offering circular became false and misleading. Moreover, the offering exceeded the $300,000 limitation for Regulation A offerings then in effect, and the Form 2-A was inaccurate regarding, among other things, the completion date of the offering, the proceeds received from the public, and the underwriter's discount. It is stipulated that the issuer had no knowledge of the underwriter's fraudulent activities and had no reason to believe that the offering had not been completed on November 19, as reported to it by the underwriter. The issuer contends that since the record contains no evidence of wrongdoing on its part and involved activities over which it assertedly had no control, it is not in the public interest to suspend the exemption permanently, thereby exposing it to civil and criminal sanctions for violation of the registration provisions of Section 5 of the Securities Act. It asserts that in other cases involving more serious wrong-doing we have vacated temporary suspension orders. The issuer further argues that since it could not anticipate the underwriter's illegal activities, there is no basis for taking action against it based on nondisclosure of such activities in the offering circular which was accurate when it became "effective." Such action, it is urged, would amount to an law prohibited by the United States Constitution and would violate due process. We cannot accept the issuer's arguments. Where events occur or actions are taken in the course of an offering which render statements in the offering circular materially false or misleading, it is clearly improper to continue the offering without appropriate amendment of the circular. The exemption provided by Regulation A is a conditional one based on strict compliance with express provisions and standards, and its suspension is appropriate where they are not met. The issuer, in challenging the propriety of permanently suspending the exemption in the absence of a finding of culpability on its part, misconceives the nature of the exemption as well as of a suspension. A suspension of the exemption is not a sanction or a penalty, but rather serves the remedial purpose of protecting investors by making the safeguards of a registration statement under the Securities Act a prerequisite for any further public offering of securities either by the issuer or the underwriter where there has been a failure to adhere to the conditions of the exemption. Accordingly, any reference to prohibition of laws is entirely inapposite. Where as here the offering is permeated with fraud, we think a permanent suspension of the exemption as to the security in question is clearly required for the protection of investors, even though only the underwriter is the cause of noncompliance. Contrary to the issuer's contention, the cases cited by it in which we vacated temporary suspension orders involved far less serious noncompliance. In summary, Rule 261 provides for the suspension of a Regulation A exemption if, among other things, the exemption was not, in fact, available, or the conditions of the exemption were not satisfied, or if the offering circular was false or misleading, or if fraudulent or manipulative practices were utilized in the offering. All of the above grounds for suspension are clearly present in this case. Consequently, suspension is proper since the exemption is not, and should not be, available under the circumstances, nor does the basis for suspension depend upon whether the issuer or the underwriter was the person at fault. We recognize that suspension of a Regulation A exemption may have collateral consequences for, in this case, the issuer. If the issuer seeks to be relieved, in whole or in part, from these consequences, its remedy is to seek relief under Rule 252(f). In connection with such an application, the Commission could explore the degree of care exercised by the issuer in the selection of the underwriter and the extent, if any, to which the issuer kept itself informed about the activities of the underwriter in connection with the offering. On the issue of suspension, it appears that the hearing examiner believed, we think correctly, that these issues were not relevant, and he did not examine them in his initial decision. Accordingly, it is ordered, pursuant to Rule 261 of Regulation A under the Securities Act of 1933, that the exemption from registration with respect to the offering of securities by Tabby's International, Inc. be, and it hereby is, permanently suspended. By the Commission (Chairman Casey, and Commissioners Owens, Herlong, and Loomis). /s/ Ronald F. Hunt Secretary