## Facts

- The Republic of China authorized large bond issues in 1937 and 1938 that were offered to purchasers in the United States.
- Chinese Consolidated Benevolent Association, Inc. (CCBA), a New York nonprofit, formed a committee with no official or contractual relationship with the Chinese government.
- The committee held meetings, advertised through mailed newspapers, and made personal appeals urging members of Chinese communities and the public in New York, New Jersey, and Connecticut to purchase the bonds.
- For purchasers’ convenience, the committee collected about $600,000, transmitted funds and written purchase applications to the Bank of China in New York, and facilitated the routing of purchases through the bank’s Hong Kong branch.
- The bonds were mailed from Hong Kong to New York and then mailed to purchasers, sometimes via CCBA.
- No registration statement was filed or effective for the bonds under the Securities Act of 1933.
- CCBA and the committee received no compensation for their activities.

## Issues

1. Whether §5 of the Securities Act applies to the use of the mails and interstate commerce to effect sales of unregistered foreign government bonds to U.S. purchasers.
2. Whether a nonprofit association that solicits purchases and performs key steps to effect delivery of unregistered securities is barred from the §4(1) exemption as a participant functionally acting as an underwriter (or necessary distribution participant).
3. Whether the SEC may enjoin such conduct under §20(b) even absent compensation or issuer authorization.

## Decision

- The Second Circuit reversed the district court’s judgment dismissing the SEC’s complaint.
- The court directed that an injunction issue against CCBA.
- The court held that CCBA’s conduct fell within §5’s prohibition because CCBA was an essential participant in the unregistered distribution and could not rely on the §4(1) exemption.

## Legal Principles

- Section 5 bars use of the mails or interstate commerce to sell or deliver unregistered securities unless an exemption applies.
- The §4(1) exemption for transactions by persons other than an issuer, underwriter, or dealer is unavailable to actors who, as a practical matter, perform steps necessary to distribute an unregistered offering to the investing public.
- Liability under §5 turns on functional participation in the distribution process, not on nonprofit status, lack of compensation, or lack of contractual privity with the issuer.
- Foreign sovereign bonds offered and sold in the United States through interstate means are subject to the Securities Act’s registration requirements absent a valid exemption.
- The SEC may seek injunctive relief against meaningful distribution participants to prevent unregistered offerings from reaching investors through interstate channels.

## Conclusion

The court treated the registration requirement as applying to the distribution as a whole and held that an organization that solicits purchases and carries out essential steps to consummate and deliver an unregistered offering may be enjoined under §5, even if it is unpaid, nonprofit, and not formally authorized by the issuer.


Sec. & Exch. Comm’n v. Chinese Consol. Benevolent Ass’n, Inc., 120 F.2d 738 (2d Cir. 1941)