WATERED STOCK not intending to be controversial, we may seem, nevertheless, in discussing the subject of watered stock, to be putting our selves in the position of advocatus diaboli when we say we purpose here to name the perfectly right and proper things stock-water ing may accomplish. To show, however, that we know about the evils charged against the practice we shall state them at the very out set.
It is charged that stock-watering works a fraud on the investing public through enabling unscrupulous men to deceive people, by a certificate marked "par value, $100," with the idea that the corporation has assets of equivalent value. Such deception is common. Promoters of "fake" corporations have a thoroughly organized business. It must be owned that those who are deceived have only taken the view that, nominally at least, the law itself takes. For the law generally says that when a stock certificate of the par value of $100 is issued, it shall have back of it assets of the value of $100. To be sure, the law goes on to say that it will not inquire too closely into the actual value of those things which the corporation states to be of the value of $100. Having opened the door so far, the camel, if we may use this metaphor from the arid desert when speaking of watered stock, has thrust his whole body in, till we have certificates of "the par value of $100" that did not represent any assets at all when is sued, yet are perfectly law proof. Doubtless "of the par value of $100" does deceive many people. It is only fair to ask if we cannot do away with the evil without doing away with the thing itself and whatever good it may have.
Two possible remedies suggest themselves. One is to do away with the statement "of the par value of $100," and let the certifi cate stand simply as, say, one share of ten thousand, representing of the total ownership. That should put the prospective purchaser on inquiry as to whether the total ownership is worth anything, and conse quently how much is worth. Sev eral eminent financiers came out against this idea and several in favor of it in a recent con gressional inquiry. The proposals seem to me in accord with the facts, and I should favor it even aside from whatever its adoption would accomplish towards doing away with the deceit practiced on innocent purchasers.
If the certificate did not describe itself as of the par value of anything, it would not repre sent itself as having any special amount of assets behind it. Under such circumstances watered stock would be like the Kantian con ception of time and space, a category of the human mind, with the mind taken away.
A second proposed remedy for this decep tion of the unsophisticated purchaser is a pro spectus act requiring a statement in any pub lic offering of stock of the exact way it became "fully paid up," commissions paid, and other information sufficient to enable the prospect ive owner to see just what assets do stand back of the stock, and form some estimate of its probable value. Though this remedy does not seem quite to strike at the root of the matter in the way that removing "of the par value of" does, still, might not this do away with the evil complained of without destroy ing the good there may be in the thing itself? A second charge made against watered stock is that it enables corporations, by giving a false appearance of large capital expendi tures, to charge more for their services than they otherwise could. It must be owned that corporation managers do take advantage of large capitalizations to give an impression that the enterprise is making a small or very moderate return on invested capital. Gener ally speaking, people do not press this charge of evil against watered stock except in the case of public service corporations possessing a monopolistic or quasi-monopolistic character. The fact that many public service corpora tions are not paying any dividends at all, and that some occasionally fail to pay interest, proves that the possibility of raising rates under the cover of any given capitalization is not unlimited. It is not part of our purpose at this point to discuss the relation of rates and capital investment. We simply raise the ques tion now whether the abolition of watered stock, if means can be found to effect it, would prove helpful enough to make it worth while. There is this much at any rate to be said, that some of the meritoriously useful results of watered stock can be gained ap proximately in other ways, so that corpora tion finance would not be so enormously the loser by its abolition as it would be if that were not the case.