## Facts

- The SEC sought to stop sales and deliveries of 50,000 shares of unregistered Guild Films common stock held as collateral by Santa Monica Bank and Southwest Bank of Inglewood.
- The banks had loaned $120,000 to Hal Roach, Jr. and initially took other stock as collateral, which later declined in value after an SEC trading suspension affecting related securities.
- To strengthen the collateral, Roach pledged 50,000 shares of Guild Films stock bearing a restrictive legend stating the shares were unregistered and could not be sold until properly registered.
- After Roach defaulted or faced default, the banks attempted to liquidate the collateral by selling the Guild shares.
- Guild’s transfer agent initially refused transfer due to the restrictive legend and lack of registration; the banks obtained relief compelling transfer and then sold about 10,500 shares.
- The SEC advised that further sales required an effective registration statement, but the banks continued efforts to sell, asserting an exemption from registration.

## Issues

1. Whether banks that take unregistered securities as collateral and then sell them upon a borrower’s default are “underwriters” under § 2(11) of the Securities Act, making § 5 registration mandatory and defeating the § 4(1) exemption.
2. Whether the district court properly granted a preliminary injunction under § 20(b) to restrain further sales pending registration.

## Decision

- The Second Circuit affirmed the preliminary injunction.
- The court held that the banks’ intended sales constituted participation in a distribution of unregistered securities, bringing them within the statutory definition of “underwriter.”
- Because the banks were treated as underwriters, the § 4(1) exemption for persons other than issuers, underwriters, or dealers did not apply.
- The court found no abuse of discretion in enjoining further sales absent an effective registration statement.

## Legal Principles

- Section 5 generally prohibits sales or deliveries of securities through interstate means unless a registration statement is in effect.
- The § 4(1) exemption does not apply to transactions by an “underwriter.”
- “Underwriter” under § 2(11) is construed broadly to include direct or indirect participants in steps necessary to a distribution, even without a traditional underwriting contract.
- Taking unregistered shares as collateral with awareness of transfer restrictions, coupled with an expectation of resale upon default, can satisfy “purchase from an issuer with a view to” distribution.
- Courts look to economic reality to prevent collateral arrangements from functioning as a route for unregistered public distributions.
- In evaluating preliminary injunctive relief in SEC enforcement actions, a sufficient showing of a likely § 5 violation and the need to prevent continued unlawful distribution supports an injunction pending final determination.

## Conclusion

The court treated the banks as statutory underwriters because their collateral-based liquidation plan would place unregistered shares into the public market, so their sales were subject to § 5 registration and properly enjoined pending compliance.


Securities & Exchange Comm'n v. Guild Films Co., 279 F.2d 485 (2d Cir. 1960)