Unincorporated Associations

UNINCORPORATED ASSOCIATIONS The unincorporated association is a common form of organiza tion for other than business purposes, and is also occasionally used for the carrying on of business. When used for the latter purpose it is in effect a large partnership with transferable shares and has the serious disadvantage that it results in personal lia bility on the part of the shareholders. Such liability may, how ever, be avoided in many States by giving control of the enter prise and legal title to its assets to trustees. This latter form of organization at one time possessed certain advantages over the corporation, but recent statutes have largely done away with these advantages. (E. M. D.) See S. D. Thompson, Commentaries on the Law of Private Corpora tions (6 vols.) ; Beach on Corporations, and the American Encyclo paedia of Law.

Company-promotion is a rec ognized branch of financial industry, called into being by the readiness of capitalists, large and small, to take a share or shares in any kind of enterprise, from a government loan down to a mining venture in some obscure part of the earth. Some com panies, notably many evolved at the time of the South Sea craze that ended in the bursting of the Bubble, had no more solid foundation than the imagination of the people who promoted them ; people who traded upon the eagerness of the greedy, and the innocence of the ignorant, in drawing-up the prospectus of some fantastic scheme that might lure money from the public's pocket and direct it into the hands, farther than which it did not travel, of the fraudulent company promoter. The Limited Liabilities act, 1862, and its supplementary enactments, went far to lay down greatly needed law upon the subject of new companies, and, by slow degrees, company promotion won a place for itself amongst responsible branches of finance. Com pany-promoting is no longer a synonym for dishonesty and legal ized chicanery. It is recognized as an essential cog in the wheel of financial machinery.

Promotion of a Company.—The founder of a successful store, desirous of turning his interest into cash, approaches a com pany promoter and says how much he wants for the undertaking. Valuations are made, reports drawn up, profit-statements or es timates set out, the proportions settled of what the seller, f ound er of the business, will accept in cash and shares, preference, ordi nary, deferred shares—perhaps debenture stock—of his own property. He asks certain terms : the company-promoter, experi enced judge in such matters, suggests variations. By degrees, and by compromise, agreement is reached. Underwriting arrangements, with trust companies and others, are then made. The promo tion of the company has thus arrived at that stage where the pub lic can be approached with a prospectus of the undertaking, and investors are thereupon invited to subscribe the money for the purchase of the business, provision of working capital, etc. The company-promoter may buy the whole business outright and re-offer it to the public, making a profit for himself on the trans action. The small-print part of a prospectus, which not everybody takes the trouble to study, often contains information that will enable a prospective subscriber to judge whether an excessive sum has been paid to the intermediaries between the seller of the business and the public who are invited to buy it through ap plication for its shares. There may be a number of businesses which, bought singly by the company-promoter, lend themselves to amalgamation and to issue of their shares in a new, big concern to the public.

Promoters and Promoting.—Company-promoting fulfils a necessary part of the development of the principles governed by the Limited Liabilities Acts. It can be, and is, carried on by an individual, or a firm, or a limited company, It is a business in which the ordinary risks vary a good deal, according to the fluctuating factors of the money market ; of political events, do mestic and foreign ; of natural disturbances. The company-pro moter may find prospects of a very successful new issue are marred, on a sudden, by a revolution, an earthquake, the illness or death of a foreign ruler. Company-promoting takes into ac count these hazards, the unknown as well as the known, and charges its clients accordingly. There is no set scale of profit or commission. There is no set rule as to who may or may not be the promoter. Sometimes a railway or other company, with pow ers in hand to issue more stock, will give an order to stock ex change firms to sell, at a fixed minimum price, a particular secur ity of its own until a certain amount has been disposed of, and the railway or company has thereby obtained the money it re quires. In such a case, the services of a professional company promoter are dispensed with, while, to instance a foreign gov ernment or municipal loan, the borrower frequently sells the whole amount to a single firm, or to three or four firms, who pay one price, and issue the loan to the public at some higher figure. The borrower is thereby secured of getting his money. The issuing firms, out of the profit they make, may pay underwriting, advertising and other expenses. The popularity of the limited liability principle, and of its application to all sorts and conditions of business, have made company-promotion a lucrative branch of business, and have accordingly drawn to its ranks an increasing number of persons though, as has been said above, it is a business by no means without its risks.

. Share "Introductions..

Bef ore the World War, the usual manner for the company-promoter to approach the investor was through the medium of a prospectus, advertised in the news papers and circulated, with a certain degree of discrimination, through the post. Since the War, there has sprung up a wide spread development of the practice of doing without a prospectus, and, in lieu, of "introducing" shares to the stock exchange markets. The owner of a business which he, the owner, wishes to turn into cash, will take the necessary legal steps to incorporate that busi ness into a public company, the shares of which he will sell out right to a buyer who advertises certain particulars, including vari ous contracts in relation to the company, in newspapers, as being for public information only, and not as an invitation to subscribe for the shares. This is preliminary to the Stock Exchange com mittee being asked to give their sanction—without which nothing can be done to make a stock exchange market—for dealing in the shares. Public interest is aroused by the advertisement ; pos sibly there may be a few other advance paragraphs that whet curiosity; the buyers of the shares can usually count with confi dence upon finding other buyers who will pay a higher price if they, the prospective buyers, have the assurance that the new corner is a sound concern. By the time that permission to deal is given by the Stock Exchange committee, the people who hold all the shares, and who therefore are the only people able to sell, find themselves armed with a long list of buyers ready-made for the opening of the market : buyers who quite commonly do not know the price at which the shares will be sold to them, but who do know that it will be a reasonable figure, as compared with the lower price that the first buyers had given for the shares. This system of company-promotion had a mild vogue before the War, but it achieved prominence by reason of the difficulties encountered during the War in the way of raising money for fresh enterprises through the medium of the prospec tus. Since then the practice, despite obvious disadvantages that have evoked criticism from the thoughtful and the austere, has gained increasing popularity amongst those who have stocks and shares for sale, and who claim for this method that it is more economical than that of issuing and circulating a full prospectus.

Promotion by Offer of Sale.

The main disadvantage, and principal point for criticism, is the fact that less information may appear in an offer for sale than is contained in a prospectus. Reference to the newspapers will show, on many days in a month, the marked differences between the two kinds of invitation offered to the public to subscribe money for the stock, bonds or shares in a new company, in some new loan, or other form of borrowing. The prospectus sets out a good deal of comprehensive detail. It gives (generally in small print) the amount of money or shares payable to the original sellers, and the amount that the inter mediary, the promoter, is asking from the public, the difference being, of course, the promoter's profit. The offer for sale, which is a different thing from the introduction of shares to a market, frequently takes the shape of a letter, written by someone con nected with the concern—the chairman of a company, or perhaps its managing director—which letter details the same kind of in formation as a prospectus would give, but from which there will be omitted, in all probability, the intermediate profits that are be ing made by promoters or others.

Stock Exchange Requirements.

In all cases, the Stock Exchange committee, before granting permission to deal in the new issue. require the assurance that the directors collectively and individually are responsible for the information advertised. The announcements made for "public information only" are gen erally followed by the shares being introduced to the stock ex change market in the manner described above. The issue must be advertised in two leading London morning papers, and must give all material conditions relating to the formation of a corn pany, as precedent to permission being obtained from the Stock Exchange committee for transactions to take place in the shares. As the object of the people who have bought the shares is to sell the latter again at a profit, it is obvious that the Stock Exchange committee's permission to deal is essential; otherwise, there will be no such free market as shall enable the sale to be easily effected. The sellers, in command of the majority of the issue, can ask what price they please. The buyers, with little to guide them except details required to be advertised, are di vided between the fear on the one hand, of paying too high a price, and, on the other hand, of being left out of some good op portunity because it is advertised in a way that certainly saves money. The ordinary prospectus affords the investor a more con siderable body of detail, as a general rule, than do the offers of sale or the particulars advertised as being "for public infor mation only." The role of the promoter is to take the new idea of the inventive mind and make it feasible for commercial exploitation. Until comparatively recently, he was the only link who brought the dreamer and the practical man together. The promoter's stock in trade is imagination, backed by enthusiasm. He must be able to open the windows of his mind to admit oblique rays of light, to which the common run of mentalities are not yet sensitive. As a figure who makes business more dynamic, more receptive to the inevitable consequences of flux, the promoter serves a useful economic function.

Of late, the financing of new ideas has not rested exclusively with promoters. Established companies have to an ever-increas ing extent since the World War recognized the importance of research. Going concerns have in their laboratories consciously sought to extend the frontiers of applied science. The General Electric Company, for example, spends more on research each year than Harvard university. The Bell laboratories of the American Telephone and Telegraph Company appropriate huge sums annually to keep abreast of the newer thought in the field of communications. That relative newcomer, the Radio Cor poration of America, is another leader in research. In the field of industrial chemistry, E. I. du Pont de Nemours and Company, of Wilmington, Del., is active in combining science with business. In the purely industrial field, the General Motors Corporation devotes vast energies to engineering research. Accordingly, eco nomic progress is less haphazard than it used to be before the war. New ideas are no longer borne primarily in the minds of casual, outside inventors. To an increasing extent, new methods and new processes are found as a result of deliberate planning. New inventions spring to an increasing extent from a deliberate search in the laboratories for novel means of accomplishing new objectives.

An outstanding characteristic of the management of the best conducted American companies is an open mind. Accordingly, the individual with a new idea no longer finds his only avenue to success through combination with a promoter. Frequently, his best market is with an established company. But changes of view point come gradually. Conservatism in business, though rela tively less insistent, still lingers. Some pioneers must still set up new business agencies to exploit their novel conceptions. In the United States, the conditions for starting new companies vary in the 48 States. In general, a vast amount of freedom is given to promoters. Some commonwealths, like Delaware, specialize in granting companies a free hand, and accordingly even com panies intending to operate mainly in other States prefer a Dela ware charter. Tax exemption features in Florida have encouraged company organization in that State. Ninety per cent of American business is carried on by corporations operating under State charters. Although the nature of the restrictions vary, new com panies get a large area of freedom. However, in the last decade, two score States have adopted so-called blue sky laws, which set up standards to safeguard the interests of security buyers. Under the blue sky laws, the vendors of securities must satisfy a State commission of their own integrity and also as to the authenticity of statements made concerning the new company, which is being financed. Of late, there has been a drift away from this pater nalistic type of regulation in favour of the fraud law, which has been adopted in N'ew York, New Jersey and Maryland. Under this type of legislation, the law enforcement officers do not deal with all new security issues, but specialize in those which seem tainted with fraud. The blue sky and fraud laws are State enact ments, rather than Federal laws. The Federal Government oper ates to protect investors from fraud largely through the statutes to prevent the use of the mails for fraudulent purposes. The argu ment used in favour of the newer type of fraud law, as opposed to the blue sky type, is that it is less burdensome to legitimate business. Moreover, it is commonly stated that the blue sky law gives the investor a false sense of security, in that he feels that the State has certified as to the good character of a par ticular new offering. As a matter of fact, the State only intends to imply an absence of fraud, but to the untrained mind there is an implication that governmental authority stands behind the investment.

In dealing with new promotions, governmental authority is sup plemented by the organized effort of honest business to protect its good name. "Better Business Bureaux" have been organized in 44 American cities, and their work in fraud fighting in the financial and merchandise field is co-ordinated through the National Better Business Bureau, whose headquarters are in New York city. Recently, Better Business Bureaux have been organized in Mon treal and Toronto. These bureaux are voluntary organizations. supported by subscriptions of individuals, corporations and organ ized security exchanges. The New York Stock Exchange virtually underwrote the initial expenses of the New York Better Business Bureau, which is the largest and most effective link in the nation wide system. The better business movement originated from a realization that fraudulent practices increased the sales resistance which legitimate business faced. With the rise of the small investor during the war loans, the public became easy prey for crooked promoters. Andrew W. Mellon, secretary of the Treas ury, once estimated that the American public squandered a billion dollars a year in fraudulent investments. Unless new ideas are sponsored by established companies, financing becomes difficult. The better grade investment houses are chary of novelties pro moted by newcomers without a record of business success behind them. Accordingly, many inventors have been driven into the hands of security charlatans who operate in the shadow of the financial district. Recognizing the economic need of financing promising new ideas, a group of New York capitalists banded together and agreed to put up their own capital to finance new projects during the experimental stage, after which securities would be offered directly to the investment public. Out of thousands of ideas submitted, an extraordinarily small percentage was deemed feasible. Inventors are frequently deluded with the importance of their creation, and are inclined to overvalue it.

Ordinarily the promoter limits himself to finding business opportunities, and to organizing to take advantage of them. Such preliminary work includes the mobilizing of capital, physical property and management. If the individual is a professional promoter, he steps out when the company has been launched, and turns to something else. Charles R. Flint, organizer of the Amer ican Chicle Company, was not inclined to continue to manage companies after organizing them. Sometimes, as in the case of O. P. and M. J. Van Sweringen, of Cleveland, real estate and railroad operators, the genius of promoters is combined with a capacity for management. When a promoter deals with estab lished investment bankers, the procedure resembles the English practice. Bankers make their commitments dependent on surveys by engineering concerns and audits by certified public account ants. The work of promoters in recent years has included not only the sponsoring of new ventures, but also the merging of old. In the field of gas and electricity, mergers have been almost uni versal. Huge holding companies have absorbed increasing num bers of operating companies scattered in various districts at home and abroad. Promoters and brokers have played an active part in persuading the old owners to sell out to the new. The develop ment has been paralleled in industry, where the newest develop ment has been the creation of what Paul M. Mazur, of Lehman Brothers, bankers, has described as the circular trust, which con sists of a combination of companies in allied lines, like the cereal, coffee, salad dressing and imitation coffee units banded together by the Postum Company. The alleged advantage of such trusts, which are neither of the old fashioned vertical or horizontal type, is that they become more important factors in dealing with their customers, particularly the powerful chain stores. Moreover; there are supposed to be economies in the saving of executive salaries, in financing, in co-ordinated handling of advertising and in combination of sales and service forces. Frequently, new units are acquired through an exchange of stock. The deal is made attractive to the group selling out because it gets a liquid security for an illiquid one. The public, moreover, is willing to capitalize the earnings behind the liquid security far more liberally. In the railroad field, under the Transportation Act of 192o, railroad mergers are encouraged, and the restraining hand of the anti trust laws is partially lifted. Progress in the direction of railroad weddings has been slow, partially because of vagaries in the law, but important initial steps have already been taken. These new groupings call for promotion skill of the highest order.

In the case of new companies, the promoter is frequently compensated in stock, and his remuneration depends on the suc cess of the venture. Company-promotion has been facilitated in the United States in recent years by a new public appreciation of the value of common stocks as long term investments. The bulk of industrial financing has not consisted of the launching of brand new companies, but of the turning of hitherto close cor porations, like the great department stores, into companies in which outside investors participate. In some transactions, like the sale of Dodge Brothers, to the banking house of Dillon, Read and Company, the former owners completely relinquished their stake in the company. In other deals, like the financing of great department stores, the bankers will buy for the public only a minority interest, and will insist on a continuance of the same management.

Ordinarily new untested securities are not promptly admitted to trading on the New York Stock Exchange, but are first required to go through a seasoning process on the New York Curb Market. Many new issues are unlisted and are dealt in only over the counter. New issues are most economically distributed through the established banks and investment banking houses, with a regular clientele. Newspaper and magazine advertising backs up the efforts of legitimate stock and bond salesmen. The process of financing through less well established finance houses that send out "high-pressure" salesmen to call upon strangers, has repeatedly been demonstrated to be costly and unsatisfactory. Established companies, like the public utilities enterprises, have been able in specific deals to eliminate the middle man—the banker—by selling securities directly to patrons of the companies. Many of the large public utility, industrial and railroad companies have been selling stock directly to employees. (M. S. R.)