Without complying with the registration requirements of the
Securities Act of 1933, a corporation offered shares of its stock
to a number of its "key employees." These employees were not shown
to have had access to the kind of information which registration
under the Act would disclose.
Held: these transactions were not exempted under § 4(1)
of the Act as transactions "not involving any public offering." Pp.
346 U. S.
120-127.
(a) A transaction "not involving any public offering," within
the meaning of § 4(1), is one with persons who do not need the
protection of the Act. Pp.
346 U. S. 124-125.
(b) The number of offerees involved is not determinative of
whether an offering is "public" within the meaning of § 4(1). P.
346 U. S.
125.
(c) The § 4(1) exemption does not deprive corporate employees,
as a class, of the safeguards of the Act. Pp.
346 U. S.
125-126.
(d) In view of the broadly remedial purposes of the Act, it is
reasonable to place on an issuer who pleads the § 4(1) exemption
the burden of proving that the purchasers had access to the kind of
information which registration under the Act would disclose. Pp.
346 U. S.
126-127.
200 F.2d 85 reversed.
On a complaint brought by the Securities and Exchange Commission
under § 20(b) of the Securities Act of 1933, seeking to enjoin
respondent's unregistered offerings of its stock to its employees,
the District Court held the exemption of § 4(1) applicable, and
dismissed the suit. 102 F.Supp. 964. The Court of Appeals affirmed.
200 F.2d 85. This Court granted certiorari. 345 U.S. 903.
Reversed, p.
346 U. S.
127.
Page 346 U. S. 120
MR. JUSTICE CLARK, delivered the opinion of the Court.
Section 4(1) of the Securities Act of 1933 exempts "transactions
by an issuer not involving any public offering" [
Footnote 1] from the registration
requirements of § 5. [
Footnote
2] We must decide whether Ralston Purina's offerings of
treasury stock to its "key employees" are within this exemption. On
a complaint brought by the Commission under § 20(b) of the Act
seeking to enjoin respondent's unregistered offerings, the District
Court held the exemption applicable, and dismissed the suit.
[
Footnote 3] The Court of
Appeals affirmed. [
Footnote 4]
The question has arisen many times since the Act was passed; an
apparent need to define the scope of the private offering exemption
prompted certiorari. 345 U.S. 903.
Ralston Purina manufactures and distributes various feed and
cereal products. Its processing and distribution
Page 346 U. S. 121
facilities are scattered throughout the United States and
Canada, staffed by some 7,000 employees. At least since 1911, the
company has had a policy of encouraging stock ownership among its
employees; more particularly, since 1942, it has made authorized
but unissued common shares available to some of them. Between 1947
and 1951, the period covered by the record in this case, Ralston
Purina sold nearly $2,000,000 of stock to employees without
registration, and, in so doing, made use of the mails.
In each of these years, a corporate resolution authorized the
sale of common stock
"to employees . . . who shall, without any solicitation by the
Company or its officers or employees, inquire of any of them as to
how to purchase common stock of Ralston Purina Company."
A memorandum sent to branch and store managers after the
resolution was adopted advised that
"The only employees to whom this stock will be available will be
those who take the initiative and are interested in buying stock at
present market prices."
Among those responding to these offers were employees with the
duties of artist, bakeshop foreman, chow loading foreman, clerical
assistant, copywriter, electrician, stock clerk, mill office clerk,
order credit trainee, production trainee, stenographer, and
veterinarian. The buyers lived in over fifty widely separated
communities scattered from Garland, Texas, to Nashua, New
Hampshire, and Visalia, California. The lowest salary bracket of
those purchasing was $2,700 in 1949, $2,435 in 1950, and $3,107 in
1951. The record shows that, in 1947, 243 employees bought stock,
20 in 1948, 414 in 1949, 411 in 1950, and the 1951 offer,
interrupted by this litigation, produced 165 applications to
purchase. No records were kept of those to whom the offers were
made; the estimated number in 1951 was 500.
The company bottoms its exemption claim on the classification of
all offerees as "key employees" in its organization. Its position
on trial was that
"A key employee . . .
Page 346 U. S. 122
is not confined to an organization chart. It would include an
individual who is eligible for promotion, an individual who
especially influences others or who advises others, a person whom
the employees look to in some special way, an individual, of
course, who carries some special responsibility, who is sympathetic
to management and who is ambitious and who the management feels is
likely to be promoted to a greater responsibility."
That an offering to all of its employees would be public is
conceded.
The Securities Act nowhere defines the scope of § 4(1)'s private
offering exemption. Nor is the legislative history of much help in
staking out its boundaries. The problem was first dealt with in §
4(1) of the House Bill, H.R. 5480, 73d Cong., 1st Sess., which
exempted "transactions by an issuer not with or through an
underwriter. . . ." The bill, as reported by the House Committee,
added "and not involving any public offering." H.R.Rep. No. 85, 73d
Cong., 1st Sess. 1. This was thought to be one of those
transactions "where there is no practical need for . . . [the
bill's] application, or where the public benefits are too remote."
Id. at 5. [
Footnote 5]
The exemption, as thus delimited, became law. [
Footnote 6] It assumed its present shape
Page 346 U. S. 123
with the deletion of "not with or through an underwriter" by §
203(a) of the Securities Exchange Act of 1934, 48 Stat. 906, a
change regarded as the elimination of superfluous language.
H.R.Rep. No. 1838, 73d Cong., 2d Sess. 41.
Decisions under comparable exemptions in the English Companies
Acts and state "blue sky" laws, the statutory antecedents of
federal securities legislation, have made one thing clear -- to be
public, an offer need not be open to the whole world. [
Footnote 7] In
Securities and
Exchange Comm'n v. Sunbeam Gold Mines Co., 95 F.2d 699, 701
(1938), this point was made in dealing with an offering to the
stockholders of two corporations about to be merged. Judge Denman
observed that:
"In its broadest meaning, the term 'public' distinguishes the
populace at large from groups of individual members of the public
segregated because of some common interest or characteristic. Yet
such a distinction is inadequate for practical purposes;
manifestly, an offering of securities to all redheaded men, to all
residents of Chicago or San Francisco, to all existing stockholders
of the General Motors Corporation or the American Telephone &
Telegraph Company, is no less 'public,' in every realistic sense of
the word, than an unrestricted offering to the world at large. Such
an offering, though not open to everyone who may choose to apply,
is nonetheless 'public'
Page 346 U. S. 124
in character, for the means used to select the particular
individuals to whom the offering is to be made bear no sensible
relation to the purposes for which the selection is made. . . . To
determine the distinction between 'public' and 'private' in any
particular context, it is essential to examine the circumstances
under which the distinction is sought to be established, and to
consider the purposes sought to be achieved by such
distinction."
The courts below purported to apply this test. The District
Court held, in the language of the
Sunbeam decision, that
"The purpose of the selection bears a
sensible relation' to the
class chosen," finding that
"The sole purpose of the 'selection' is to keep part stock
ownership of the business within the operating personnel of the
business, and to spread ownership throughout all departments and
activities of the business. [
Footnote 8]"
The Court of Appeals treated the case as involving
"an offering, without solicitation, of common stock to a
selected group of key employees of the issuer, most of whom are
already stockholders when the offering is made, with the sole
purpose of enabling them to secure a proprietary interest in the
company or to increase the interest already held by them. [
Footnote 9]"
Exemption from the registration requirements of the Securities
Act is the question. The design of the statute is to protect
investors by promoting full disclosure of information thought
necessary to informed investment decisions. [
Footnote 10] The natural way to interpret the
private
Page 346 U. S. 125
offering exemption is in light of the statutory purpose. Since
exempt transactions are those as to which "there is no practical
need for . . . [the bill's] application," the applicability of §
4(1) should turn on whether the particular class of persons
affected need the protection of the Act. An offering to those who
are shown to be able to fend for themselves is a transaction "not
involving any public offering."
The Commission would have us go one step further and hold that
"an offering to a substantial number of the public" is not exempt
under § 4(1). We are advised that,
"whatever the special circumstances, the Commission has
consistently interpreted the exemption as being inapplicable when a
large number of offerees is involved."
But the statute would seem to apply to a "public offering,"
whether to few or many. [
Footnote 11] It may well be that offerings to a
substantial number of persons would rarely be exempt. Indeed,
nothing prevents the commission, in enforcing the statute, from
using some kind of numerical test in deciding when to investigate
particular exemption claims. But there is no warrant for
superimposing a quantity limit on private offerings as a matter of
statutory interpretation.
The exemption, as we construe it, does not deprive corporate
employees, as a class, of the safeguards of the Act. We agree that
some employee offerings may come within § 4(1),
e.g., one
made to executive personnel who, because of their position, have
access to the same kind of information that the act would make
available in the
Page 346 U. S. 126
form of a registration statement. [
Footnote 12] Absent such a showing of special
circumstances, employees are just as much members of the investing
"public" as any of their neighbors in the community. Although we do
not rely on it, the rejection in 1934 of an amendment which would
have specifically exempted employee stock offerings supports this
conclusion. The House Managers, commenting on the Conference
Report, said that
"the participants in employees' stock investment plans may be in
as great need of the protection afforded by availability of
information concerning the issuer for which they work as are most
other members of the public."
H.R.Rep. No. 1838, 73d Cong., 2d Sess. 41. [
Footnote 13]
Keeping in mind the broadly remedial purposes of federal
securities legislation, imposition of the burden of proof on an
issuer who would plead the exemption seems to us fair and
reasonable.
Schlemmer v. Buffalo, R. & P. R. Co.,
205 U. S. 1,
205 U. S. 10
(1907). Agreeing, the court below thought the burden met primarily
because of the respondent's purpose in singling out its key
employees for stock offerings. But, once it is seen that the
exemption question turns on the knowledge of the offerees, the
issuer's motives, laudable though they may be, fade into
irrelevance.
Page 346 U. S. 127
The focus of inquiry should be on the need of the offerees for
the protections afforded by registration. The employees here were
not shown to have access to the kind of information which
registration would disclose. The obvious opportunities for pressure
and imposition make it advisable that they be entitled to
compliance with § 5.
Reversed.
THE CHIEF JUSTICE and MR. JUSTICE BURTON dissent.
MR. JUSTICE JACKSON took no part in the consideration or
decision of this case.
[
Footnote 1]
48 Stat. 77, as amended, 48 Stat. 906, 15 U.S.C. § 77d.
[
Footnote 2]
"SEC. 5. (a) Unless a registration statement is in effect as to
a security, it shall be unlawful for any person, directly or
indirectly --"
"(1) to make use of any means or instruments of transportation
or communication in interstate commerce or of the mails to sell or
offer to buy such security through the use or medium of any
prospectus or otherwise; or"
"(2) to carry or cause to be carried through the mails or in
interstate commerce, by any means or instruments of transportation,
any such security for the purpose of sale or for delivery after
sale. . . ."
48 Stat. 77, 15 U.S.C. § 77e.
[
Footnote 3]
102 F.Supp. 964 (1952).
[
Footnote 4]
200 F.2d 85 (1952).
[
Footnote 5]
". . . the bill does not affect transactions beyond the need of
public protection in order to prevent recurrences of demonstrated
abuses."
Id. at 7. In a somewhat different tenor, the report
spoke of this as an exemption of
"transactions by an issuer unless made by or through an
underwriter so as to permit an issuer to make a specific or an
isolated sale of its securities to a particular person, but
insisting that, if a sale of the issuer's securities should be made
generally to the public, that transaction shall come within the
purview of the Act."
Id. at 15, 16.
[
Footnote 6]
The only subsequent reference was an oblique one in the
statement of the House Managers on the Conference Report:
"Sales of stock to stockholders become subject to the act unless
the stockholders are so small in number that the sale to them does
not constitute a public offering."
H.R.Rep.No. 152, 73d Cong., 1st Sess. 25.
[
Footnote 7]
Nash v. Lynde, [1929] A.C. 158;
In re South of
England Natural Gas and Petroleum Co., Ltd., [1911] 1 Ch. 573;
cf. Sherwell v. Combined Incandescent Mantles Syndicate,
Ltd., 23 T.L.R. 482 (1907).
See 80 Sol.J. 785,
1936.
People v. Montague, 1937, 280 Mich. 610, 274 N.W. 347;
In re Leach, 215 Cal. 536, 12 P.2d 3 (1932);
Mary
Pickford Co. v. Bayly Bros., 68 P.2d 239 (1937),
modified, 12 Cal.2d 501, 86 P.2d 102 (1939).
[
Footnote 8]
102 F.Supp. at 968, 969.
[
Footnote 9]
200 F.2d at 91.
[
Footnote 10]
A. C. Frost & Co. v. Coeur D'Alene Mines Corp.,
312 U. S. 38,
312 U. S. 40
(1941). The words of the preamble are helpful:
"An Act To provide full and fair disclosure of the character of
securities sold in interstate and foreign commerce and through the
mails, and to prevent frauds in the sale thereof, and for other
purposes."
48 Stat. 74.
[
Footnote 11]
See Viscount Summer's frequently quoted dictum in
Nash v. Lynde,
"'The public' . . . is, of course, a general word. No particular
numbers are prescribed. Anything from two to infinity may serve:
perhaps even one, if he is intended to be the first of a series of
subscribers, but makes further proceedings needless by himself
subscribing the whole."
[1929] A.C. 158, 169.
[
Footnote 12]
This was one of the factors stressed in an advisory opinion
rendered by the Commission's General Counsel in 1935.
"I also regard as significant the relationship between the
issuer and the offerees. Thus, an offering to the members of a
class who should have special knowledge of the issuer is less
likely to be a public offering than is an offering to the members
of a class of the same size who do not have this advantage. This
factor would be particularly important in offerings to employees,
where a class of high executive officers would have a special
relationship to the issuer which subordinate employees would not
enjoy."
11 Fed.Reg. 10952.
[
Footnote 13]
A statement entitled to more weight than different views
expressed by one of the conferees in Senate debate.
See 78
Cong.Rec. 10181, 10182.