THE FAIRY LAND OF FINANCE' 1. Signs of great change has taken place in the investment market during the past twenty years. Formerly, small investors put their money in houses and lots, farm lands, building and loan associa tions and local manufacturing concerns. The only distant corporations to which they intrusted their funds were the life insurance companies and the rail ways.
At present, the spread of the practice of incorporat ing business enterprises has acquainted every one with the method of organizing a corporation, and has multiplied by many times the number of shares that are offered to the investing public. The consolida tion of small local enterprises into larger corporations, frequently with exchange of shares, has made local investors the holders of the paper of distant corpora tions, almost without their volition. Many investors feel that they must look away from home to find profitable fields. The news agencies now report daily the doings of great establishments, and spread abroad the story of occasional areat profits, by which the ambitious are made restless. These and many other influences help to account for the fact that the small investor has launched out into deep waters, and now, without fear, and without much investiga tion, trusts his capital to unknown persons for strange enterprises in distant places. Shares can now be sold, and money can be raised, by advertising and mail order service.
The stage, the setting and the audience for the fraudulent promoter to utilize in playing his role has thus been created. The opportunity has been seized. According to the post-office authorities, the schemes closed up by the Federal government in 1912 had ob tained $77,000,000 from the public in exchange for shares worth, on the average, less than one-tenth of one cent on the dollar, and commanding practically no income. The Financial World of New York City has estimated that known schemes operating in that city in the same year had defrauded the public out of $1,000,000,000 in seven years. Someone has said, "Lots of men are slaves to money; but then, the world is full of emancipators."
The permissive conditions which account for the immunity which fraudulent promoters enjoy, have been summarized by President George B. Caldwell before the First Annual Convention of the Invest ment Bankers' Association of America, in 1912: Many factors have contributed their share to making fraudulent promotion so general and so profitable as to be come almost a national disgrace. Among them are the corn plication and diversity of laws of each of our forty-nine commonwealths; the laxity of our prosecuting authorities: the difficulty of proving intent to defraud under the Federal statutes ; the absence of any Federal bureau of registration, or responsibility of state officials after a charter is issued, providing some supervision over security issues ; and, the acceptance by many newspapers and some magazines of fraudulent and misleading advertisements.
In view of this situation, let us consider some of the danger signals which the individual investor may for himself, and which may enable him to safeguard his capital to a certain extent. These signs we may call the signs of fraud. It is not meant to argue that every enterprise showing any of them is fraudulent. They are sometimes signs of ignorance, of undue and undiscriminating enthusiasm, signs, at least, that the promoter is departing seriously from the usages of the best class of financial houses in presenting proj ects to prospective subscribers. In most cases, the projects discussed in this chapter are connected with types of industrial enterprise which never ought to be presented to small investors of the country, and which no first-class financial house would think of offering to the general public. Where these signs occur collectively, they are emphatically the signs of fraudulent intent.
It is encouraging that the better type of advertising mediums refuse advertisements of investments of the gold-brick type. Reputable brokers also refuse to deal in shady investments. The gullible public, unless protected against itself, will continue to buy them.