from fraudulent securities, we should not go so far as to prevent entirely the marketing of speculative issues; on the contrary, we must permit the ready financing of new enterprise or become industrially stagnant.

If we are to do more than guard against fraud in the marketing of securities, and furnish the necessary information on which an intelligent investor can form a reasonably sound judgmentif we are to go back of the selling process and place in the hands of government officials the power to veto an honest issue of securities, merely on the ground that such an issue would be highly speculative, we should be lodging with government officials a substantial control in directing our industrial development. Or if we refuse to permit any securities to be issued for public sale until the issuing corporation has proved successful over a period of years, we compel a corporation to pass its novitiate either as a partnership or as a closed corporation where the funds are derived entirely from a small group of interested investors.

All things considered, it is doubtless wise to attempt a more rigid control over the formation of new corporations; for it is conceivable that such control may be so safeguarded that only good would result from its inauguration. It would seem that two results, at least, might reasonably be achieved. On the one hand, a plan might well be devised that would shift the risks of starting and financing new enterprises to the classes which can best afford to bear the risks; namely, the larger private investors and capitalists, rather than the rank and file of small investors. On the other hand, the promotion business should be made unprofitable; indeed, it should be made impossible for men to float new schemes, take their profits out of the promotion process, and then sell out, leaving the enterprise to work out its own salvation, as best it may.

This is not the place, however, either to attempt a formulation of the details of securities legislation or to reach any final judgment on the whole question of blue sky regulation. It will be sufficient if the foregoing consideration of the nature

of the promotion business, and the difficulties that have been encountered in connection with blue sky legislation make it clear that we still have before us some very baffling problems in regulating the issue and sale of low-grade securities.'

QUESTIONS FOR DISCUSSION

1. What is meant by low-grade securities? Might bonds ever be included?

2. What are some of the principal types of low-grade securities ? Classify them by different branches of industry.

3. Examine the quotations of securities on the New York and Chicago stock exchanges. Do you find among the shares there traded in any belonging to (a) the industrial group? (b) the mining group? (c) the automobile group? (d) the oil group? Are the issues of these companies low grade?

4. Examine the quotations of securities on the New York curb. Are all of these highly speculative low-grade issues?

5. Do you imagine that all of the oil and mining companies whose stocks are daily being bought and sold are fraudulent or worthless concerns?

6. May low-grade securities in time become high-grade securities? If so, under what circumstances? Would it have been a good thing to have prevented the raising of capital for such enterprises? 7. What classes of people are most frequently besought to buy low-grade securities? What classes of people take the greatest risk when buying such securities? What classes of people can least afford to buy highly speculative securities?

8. What ways are available to newly organized corporations for raising the capital required? Which way would you adopt? Under all circumstances?

9. Do you think it is necessary to protect the people from investing their funds in such schemes as those promoted by George Underhill?

10. Judging by the number of oil and mining companies that have

been organized since the Great War, do you think investment knowledge has advanced much since the time of the South Sea Bubble?

'For this material on securities' regulation the author has drawn heavily upon a paper prepared by one of his students, Mr. J. W. Angell, Much of the phraseology, even, has been borrowed. See Journal of Political Economy, April, 1919, pp. 307-21.

II. Is the post-war speculative craze attributable to any lack of conservative investment opportunities?

12. Do you think the Ranger-Texas Oil Company has any possibility of proving successful?

13. What ways are available for preventing fraud in the promotion of new companies?

14. Why is it so difficult to apprehend and punish the guilty parties? 15. What features of the advertisement of the Waltham Motor Car Corporation appear suspicious to you? Do these features necessarily prove the issue of doubtful value?

16. Do you think any of the provisions governing the issues of securities in Class C, under the Illinois Securities Law, are unduly onerous?

17. Do you regard any of the provisions governing the issue of Class D securities as unduly severe ?

18. Under the Illinois Securities Law, as it stands, would it be possible to raise capital for a new concern by the sale of securities to the general public?

19. Can a concern furnish a balance sheet and an income statement if it is not already a going concern?

20. Do you favor the abolition of all promotion?

21. "All that the state can hope to do is to prevent fraud in the selling of securities and to see to it that only reliable parties engage either in the issue or sale of securities." Do you agree? 22. "All agree that the solicited investor should not be permitted to buy blindly, even if he is willing to do so. But should we go further? Should the state administrator say 'this is an unsound venture; finance it privately, if you can, but you cannot finance it by a general solicitation or offering'? In the answer to this question lies the fundamental diversity of opinion among the advocates of blue sky legislation." What is your opinion on the subject?

23. "When a company applies for a charter, it should be the duty of the state to ascertain whether the individuals who are organizing the concern are men of ability and integrity, and whether the company has any possibility of success." How could the state know whether a concern had any possibility of success? 24. "We cannot afford to make either our corporation laws or the regulations governing the issue and sale of securities so strict that the raising of capital for new concerns in established lines

of industry, or for concerns in new lines of industry, is rendered impossible, or is seriously hampered." Do you agree? 25. "Newly organized corporations should be required to raise the capital necessary for making the enterprise a going concern without offering the securities to the general public; or if offered to the general public, subscriptions should not be taken for less than a minimum, say, of $1,000, in order to insure that only people of some means and some ability in judging values shall risk their funds in the enterprise." Do you agree?

CHAPTER XIV

THE MARKETING OF HIGH-GRADE

SECURITIES

The marketing of high-grade securities, such as those enumerated in Classes A and B under the Illinois Securities Act, is largely effected nowadays through the intermediation of financial houses called investment banking institutions. At the present time the principal sources of demand for investment funds are: first, the raising of capital for business enterprises; second, the needs of governments, national, state, and local; and third, the purchase and improvement of real estate. All these sources of demand have increased tremendously in the last half-century; and it is this fact, together with the development of the corporate form of organization, that has forced the development of the elaborate investment banking machinery of the present day.

The securities that are marketed by these financial institutions include the issues of railroad, public utility, industrial, and other corporations, and of federal, state, city, county, township, and other local government bodies. Real estate issues are usually not marketed through the regular investment channels. The types of securities handled now comprise stocks, bonds, and short-term notes; although until recently bonds have occupied a dominant position in the investment market. Some houses specialize in the marketing of bonds; some are mainly concerned with issues of high-grade stock, common as well as preferred; while others handle both bonds and stock. In general the drift appears to be away from narrow specialization, with the emphasis, however, always upon conservative, as distinguished from speculative, securities.

'See classification on pp. 198-99 above.

For a discussion of the marketing of real estate bonds and mortgages see chap. xxvi below.