The Securities Act requires that all securities sold in interstate commerce must be registered with the Securities and Exchange Commission (SEC), but exempts issues sold to investors engaging in private transactions. During 1975-78, the SEC investigated 142 purported private placement offerings involving fraud. Many persons who bought these securities and subsequently lost their savings were novice investors who did not have the knowledge or experience to buy unregistered securities. GAO reviewed these cases, and the legislative history of the act, and surveyed State Securities Commissions. Officials from the SEC and Securities Commissions in seven states were also interviewed. Total losses from investments in fraudulent private placement securities are unknown, but in 95 of the 142 SEC investigations, roughly 30,000 investors were defrauded of over $255 million. Responses from 28 state Securities Commissions reported that their investigations in 1978 had uncovered losses of between $330 and $350 million in private placement schemes. Examples from SEC files illustrate the devastating impact of fraud on investors who were elderly, had limited incomes, or were in poor health. Misuse of the exemption is difficult to control under any circumstances, but the SEC's enforcement efforts are hampered by the act's vague language defining criteria for exemptions and uncertainty about the SEC's authority to issue regulations limiting use of the exemption. The SEC attempted to address these problems by using Rule 146 on requirements for the exemption, but compliance is optional. Futhermore, issuers are not required to give notice when they sell securities under the exemption, or file promotional materials. GAO offered suggestions for congress to amend the 1933 Act, which could better protect investors while enabling legitimate promoters to raise capital using the private placement exemption: (1) establish guidelines and criteria governing use of the exemption; (2) provide the SEC with authority to set mandatory rules concerning the exemption; and (3) require issuers to notify the SEC when they plan to issue privately placed securities, and provide access to all information on the sale. SEC's monitoring and enforcement capabilities could be strengthened by establishing and publicizing a toll-free telephone service for investors. Concerns expressed by the small business administration about the recommendations are discussed. the appendixes contain the GAO questionnaire sent to State Security Commissions and the report form requested by Rule 146. (Author Abstract Modified)