Action Needed To Better Protect Investors From Fraud in Purchasing Privately Placed Securities

FGMSD-80-56: Published: May 14, 1980. Publicly Released: May 14, 1980.

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Under the Securities Act of 1933, a securities issue must be registered with the Securities and Exchange Commission (SEC) unless the issue is exempt from registration. Section 4(2) of the Act, the private placement exemption for issues sold to investors in private transactions, states that registration requirements shall not apply to "transactions by an issuer not involving any public offering." In its study, GAO reviewed the legislative history of the Act, SEC rules and releases, and court decisions regarding the private placement exemption. Information on violations of the private placement exemption was obtained from 142 investigations conducted by the SEC during a 3-year period ending September 30, 1978.

The SEC investigation revealed misuse of the private placement exemption. Investors suffered serious losses as a result of being sold securities which were improperly represented as privately placed issues. The investors were not given the accurate and complete information which would have been available to them had the securities been registered as public offerings. The investigation did not indicate that the purchase of fraudulent securities was also a problem for institutional investors. It was observed that serious misuses of the exemption have occurred because: use of the exemption has been a continuing source of uncertainty; SEC does not always receive notification of exemption use; and SEC does not have timely access to promotional literature and other information.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should amend section 4(2) of the Securities Act of 1933 to better protect investors, while at the same time enabling legitimate promoters to raise capital through use of the private placement exemption. The following alternatives are offered for consideration. (1) Amend the Securities Act of 1933 to provide guidance and criteria under which the private placement exemption may be used. (2) Amend the Act to provide SEC with authority to establish mandatory rules governing the conditions for use of the private placement exemption. (3) Amend the Act to provide SEC with pertinent information on the use of the exemption by requiring issuers, unless specifically exempted by SEC, to (a) notify SEC when they plan to issue privately placed securities, and (b) provide SEC with immediate access to promotional literature and other information relevant to the sale of the securities.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: SEC should establish and publicize a toll-free telephone service to enable earlier contact with investors. This would help strengthen oversight and enforcement capabilities to prevent misuse of the private placement exemption.

    Agency Affected:

 

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