Highland Malt Ltd. , (June 01, 1979)INQUIRY LETTERSchramm & Raddue 15 West Carrillo Street, Post Office Box 1260 Santa Barbara, California 93102 TELEPHONE(805) 963-2044 March 23, 1979
Securities and Exchange Commission 500 North Capitol Street Washington, D. C. 20549
(File No. 2-50042): Advertising
Background Information
As noted above, the Company also effects repurchases of Scotch whisky warehouse receipts, both from its own customers and from other investors who acquired their warehouse receipts from other sources. In effecting such repurchases, the Company may act either as a principal or as a broker. The Company may act as a broker in assisting an investor in selling whisky which the investor originally purchased from the Company; in other cases, the Company effects the repurchase as a principal, but with a view toward making an immediate resale to a broker or blender in the United Kingdom. Acting on the advice of the Commission, the Company has registered as a broker-dealer pursuant to Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). We believe that the Commission required the Company to register as a broker-dealer due to its brokerage services in assisting in the resale of Scotch whisky warehouse receipts for which it was also the issuer, as opposed to its repurchase of Scotch whisky warehouse receipts that had been acquired by investors from other sources. Compare SEC Release 33-5018, November 4, 1969 with Marjorie Newball, available August 1, 1975. The Company has received no formal exemption from the requirements of Rule 15b10-9 as promulgated by the Commission under the Exchange Act. However, the Company has assumed that, since its registration as a broker-dealer under the Exchange Act was required by the Commission, the Commission, on its own motion, has exempted the Company from the requirements of Rule 15b10-9 pursuant to Subparagraph (d) thereof. The Company also qualifies the offer and sale of its Scotch whisky warehouse receipts in accordance with the Blue-Sky laws of the various states in which the offers and sales are made, and also registers as a broker-dealer in those states where such registration has been required. To the best knowledge of its management, the Company is the only organization in the United States which presently is offering and selling Scotch whisky warehouse receipts to investors in the United States pursuant to a public offering registered under the Securities Act and qualified under the applicable state Blue-Sky Laws. However, the Company believes that sales are also being made to United States investors directly by distillers in the United Kingdom, and other offers and sales may be taking place which are exempt from federal registration requirements pursuant to Section 4(2) or Section 3(a)(11) of the Securities Act. Issues Presented
1. An illustrative form of press release regarding the Companys registration statement; 2. Two illustrative press releases regarding Scotch whisky prices; and 3. A proposed form of announcement for a seminar concerning investments in Scotch whisky warehouse receipts. We recognize that, under existing interpretations of Section 2(10) of the Securities Act, the press releases and the proposed form of seminar announcement could be considered advertising and therefore a prospectus, since the Company is engaged in a continuous offering. We also recognize that, if the Commission were to conclude that the enclosed materials are advertising, they might not conform to the literal requirements of Rule 134, as promulgated by the Commission under Section 2(10) of the Act. The purpose of this letter is to obtain the advice of the Commission concerning the applicability of Rule 134 to the enclosed materials, to ascertain whether or not the Staff would take a "no action" position with respect to their use, either as presented or in a modified form, and to inquire whether or not the Commission would consider exercising its rule-making authority under Section 2(10) of the Securities Act with respect to the written media communications of the Company. Press Releases
In our opinion, the fact that The Highland Malt Ltd. is the only Company in the United States to have succeeded in recent years in registering Scotch whisky warehouse receipts under the Securities Act is genuinely newsworthy; we believe that the Company should be permitted to communicate this information to the news media, notwithstanding the provisions of Rule 134. It is also our opinion, however, that the enclosed form of press release, if construed by the Commission to be advertising within the meaning of Section 2(10) of the Securities Act, is not inconsistent with the provisions and intention of Rule 134 for the following reasons: a. The statements concerning the Companys Registration Statement having become effective are statements of fact of the type contemplated by Rules 134(b)(1) and 134(d) concerning the status of the Registration Statement. b. The statements concerning the status of the Company as (a) a registered broker-dealer, (b) the only company which currently may lawfully offer and sell Scotch whisky warehouse receipts to the public at large, and (c) a firm which also repurchases warehouse receipts both from its own customers and form other U.S. investors, constitute a brief indication of the general type of business of the Company, as contemplated by Rule 134(a)(3)(iv). c. The statements explaining the nature and effect of Scotch whisky warehouse receipts, while perhaps broader than is contemplated by Rule 134(a)(2), are believed to be within the scope of the information which an investment company may include in its advertising, and which should be permitted to be made by the Company in this case. See Rule 134(a)(3)(iii) and SEC Release 33-4709, July 14, 1964. d. The information relating to the prospectus delivery requirements is basically only a variation of the requirement under Rule 134(c) that the communications state from whom a prospectus meeting the requirements of the Securities Act may be obtained. e. The remaining items of information in the proposed press release are the basic news items for which the release is being issued; i.e., that the Company is the only issuer in a number of years successfully to register Scotch whisky warehouse receipts under the Securities Act, and that there are few other issuers in this country which have demonstrated the experience, perseverence and financial resources necessary to obtain such registration. f. There are no statements in the proposed press release which are "selling" statements or which are designed to depict Scotch whisky receipts as an attractive investment. (2) Scotch Whisky Prices We believe that press releases by the Company concerning developments in the Scotch whisky broking market, particularly pricing and trading information, are analagous to press releases made by publicly-held corporations whose shares are registered under the Exchange Act concerning their revenues, earnings and other results of operations. There are many investors in the United States who hold Scotch whisky warehouse receipts as investments. In its fiscal year ended September 30, 1978, the Company effected approximately $1.2 million in repurchase transactions. It expects to do at least that much in the current fiscal year. In addition to the Company, there are a number of other firms and individuals in the United States known to the Company to be engaged in the business of dealing in Scotch whisky warehouse receipts. None of these firms are currently registered as brokers or dealers under the Exchange Act, and therefore are not subject to examination or oversight by any regulatory agency. The Company therefore has no information as to the volume of the business done by these other firms each year. The Company believes, however, that press releases of the type which are enclosed will serve a legitimate public interest by providing investors in this country with information they might otherwise not receive. We recognize, of course, that any such press releases by the Company will be subject to the limitations on false or misleading statements, and that great care will be required to assure that any pricing data included in such press releases is factually correct. However, we believe that information of the type included in these hypothetical releases is within the policy guidelines discussed in SEC Release 33-5509, October 7, 1969, which suggests that issuers and broker-dealers will be permitted to make factual reports to customers and to the public provided they do not include predictions or opinions and are made in a manner which do not unduly influence the offering. Seminar Announcement
Of course, there will be distributed during the seminar a copy of the Companys current prospectus, and the Scotch whisky warehouse receipts offered and sold by the Company will also be discussed at the seminar. Thus, in many respects, the seminar will resemble those which are conducted by brokers and dealers who are engaged in the sale of commodities, or in limited partnership interests in oil and gas syndications and other forms of tax shelters. We recognize that, in view of the identity of the broker-dealer sponsoring the seminar and the issuer whose prospectus will be distributed at the seminar as one and the same entity, it can be argued that the announcement regarding the seminar must comply with the requirements of Rule 134. It is our belief, however, that this view should not be adopted. We see little to distinguish (a) a seminar which, in substance, is sponsored by the issuer of the security from (b) a seminar which in substance is sponsored by a broker-dealer solely for the purpose of offering to prospective investors the securities of a single issuer. Stated another way, if broker-dealers are permitted to advertise investment seminars, even though the seminar in substance is conducted primarily for the purpose of distributing the prospectus of a particular issuer and offering the securities of that issuer to prospective investors at the seminar, then The Highland Malt Ltd., as a broker-dealer, should also be permitted to advertise investment seminars concerning Scotch whisky warehouse receipts provided that its advertising meets the necessary standards under Rule 10b-5 and similar rules. If the Commission is of the opinion that any seminar announcements published by the Company are subject to the requirements of Rule 134, then we would concur that the enclosed mock-up may not comply with the literal requirements of that Rule. However, we do not believe that the proposed form of announcement contains the type of "selling information" referred to in SEC Releases 33-4709, July 14, 1964, and SEC Release 33-4940. We recognize, of course, that these releases are expressly limited in their application to investment companies. However, we believe that the underlying rationale of those releases can and should be extended to the Company, provided that its seminar announcements are limited to statements of fact not which do not have the effect of transforming the announcement into selling media. Additional Considerations
1. The only business of the Company is purchasing and selling Scotch whisky warehouse receipts to and from investors; 2. The Company is engaged in a continuous offering; and 3. To the best knowledge of its management, the Company is the only issuer in the United States which is presently making a registered public offering of Scotch whisky warehouse receipts to investors pursuant to a Registration Statement filed under the Securities Act of 1933, as amended and qualified under the Blue-Sky laws of the various states in which the offering is taking place. Although Scotch whisky warehouse receipts are considered to be investment contracts of which the Company is the issuer, we believe the Company is in fact more analagous to a commodities broker or an investment company than it is to an issuer. We recognize that it is in the public interest to assure that persons distributing Scotch whisky warehouse receipts be subject to the liabilities imposed under the Securities Act, and that they comply with its disclosure requirements. The Company has consistently stated and evidenced its willingness to assume these obligations. However, we are also of the opinion that the apparent unwillingness of the Commission to require firms engaged in the business of repurchasing Scotch whisky warehouse receipts to register as broker-dealers clearly evidences the fact that we are dealing with a fiction, and that the Company does not fit neatly into any of the existing classes of persons or entities traditionally regulated under the Securities Act and the Exchange Act. The Company has no products it can advertise, except the Scotch whisky it sells. It does not sell shares of its own stock, and investors acquire no interest in the Company. The public at large has no interest in the Companys revenues, earnings or dividends per share. The simple fact is that the only thing the Company can do to make people aware of its existence is to talk about the business it is in, which is selling Scotch whisky to investors. On any given day the financial pages of any major newspaper are filled with advertising by brokerage firms and investment companies that are selling various commodities, products and programs calculated to earn money for prospective investors. Rule 134 itself contains special provisions to alleviate the difficulties that would otherwise confront an investment company if its media communications were limited to traditional "tombstone" advertisements. We believe that, while it may be appropriate to classify the Company as an "issuer" in order to assure that Securities Act liabilities will be available to individuals who purchase Scotch whisky for investment purposes, it is manifestly unreasonable to classify the Company as an issuer for purposes of Rule 134. If the Company were required to limit published communications concerning its business (when not accompanied by a statutory prospectus) to the items permitted by Rule 134, the Company would, in effect, be prohibited from providing any news to the press and the public concerning its activities and the business in which it is engaged. The Company would be unable to attract the interest or attention of a prospective investor in any way, other than by tombstone advertisements and direct mailings of its prospectus. It should be apparent to the Staff that this latter alternative would impose an unreasonable burden and expense on the Company. We are of the opinion that the Companys unique status within the regulatory framework of the federal securities laws dictates that it be afforded some relief from the results which would follow if the Staff were to conclude that the Company will at all times be subject to Rule 134. In our judgment, the circumstances of this Company are such as to warrant the exercise by the Commission of its rule-making authority under Section 2(10) of the Securities Act in order to establish some specific guidelines that the Company can follow in preparing reasonable media communications that are not circumscribed in content by the limitations of a Rule which was not formulated with a business of this nature in mind. Advice Requested
1. To what extent are the enclosed materials subject to the requirements of Rule 134? 2. Would the Staff recommend a no action position with respect to the use of any of the enclosed materials, or comparable materials, by the Company? 3. If the Staff cannot recommend a no action position with respect to materials such as those that are enclosed, what changes would be necessary in order for the Staff to recommend a no action position? 4. To what extent, if any, may the Company rely on the interpretations set forth in SEC Releases 33-4709 and 33-4940 (i.e., statements of fact not having the effect of transforming the advertisement into selling media, when not misleading, unduly repititious or argumentative) in preparing advertising that is subject to Rule 134. 6. Is the Company exempt from the provisions of Rule 15b10-9 as promulgated by the Commission under Section 15 of the Exchange Act and, if so, what terms and conditions, if any, has the Commission attached to said exemption. The response of the Commission to the questions raised in this request are of significant importance to the Company, and are of equal concern to us as the Companys counsel. We would therefore appreciate your responding to this request as soon as conveniently possible. Of course, we would be pleased to provide you with any additional information you might request, and representatives of the Company and its counsel would be prepared to meet with the Staff in Washington D. C. to discuss these issues if the Staff believed such a meeting might be useful. Very truly yours,
Enclosures cc: The Highland Malt Ltd. (w/encl.) Attention: Mr. John Akiskalian Securities and Exchange Commission, Washington, D. C. (w/encl.) Attention: Mr. Carl T. Bodolus (Inter. Corp. Finance) Ronald Adee, Esq. (Corp. Finance) Ardith Eymann (Market Reg.) Securities and Exchange Commission, Los Angeles (w/encl.) Attention: Mr. Isreal Mattatia
MAY 2 1979
Schramm & Raddue 15 West Carrillo Street P.O. Box 1260 Santa Barbara, CA 93102
We understand the facts to be as follows. The Company is engaged in the offer, sale and repurchase of investment contracts for interests in Scotch whisky. These securities are offered pursuant to an effective registration statement under the Act. The Company has also registered as a broker-dealer pursuant to Section 15 of the 1934 Act. You have attached several press releases discussing the Company, its registration statement, Scotch whisky prices, and an announcement of a seminar the Company proposes to conduct on investing in Scotch whisky warehouse receipts. It is your opinion that these materials should not be considered to be prospectuses within the meaning of Section 2(10) of the Act, and alternatively that offerings of the companys securities should be deemed to be analogous to offerings of securities by investment companies for purposes of Rule 134. After examining the materials enclosed with your letter, it is our view that they could be deemed prospectuses within the meaning of Section 2(10) of the Act. Accordingly, we are unable to conclude that we will not recommend enforcement action to the Commission with respect to their use by your client, unless they are revised to comply with the provisions of Rule 134 applicable to issuers who are not investment companies. Implicit in the position expressed above is our disagreement with your opinion that your client should be treated under Rule 134 in the same manner as investment companies. We believe there are many significant differences between investment companies and your client, and these differences warrant separate treatment for each under the rule. Accordingly, we do not believe your client may rely on either the provisions of rule 134 applicable to investment companies or on the interpretations regarding advertising by such companies set forth in Release Nos. 33-4709 and 33-4940. Sincerely,
Chief Interpretive Counsel |
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