6. Preliminary financing.—The path of the pro moter is full of jolts. He wears no shock absorber except a smiling countenance, an atmosphere of pros perity, and unbounded external confidence in his un dertaking. The investigation satisfactorily con cluded, he then faces the difficulties of preliminary financing. The promoter is usually a free lance, working on his own account, and deriving his profit by selling the business to investors for more than it cost him. It is true, as in the case of some of the earlier combines, that the promoter is sometimes en gaged at a stated compensation. But this plan is not frequently resorted to because it ties the hands of the promoter so that he cannot deal to the best advan tage with the various parties at interest, some of whom may be deeply prejudiced against those who have engaged his services. If he appears in the deal as a hired man, most of his prestige and independence are gone. For these reasons, the promoter, before he can finance an enterprise, must not only investi gate it, but he must usually secure absolute control, and retain this control until the financial plan has been carried out and the project is put into operation.
7. Procedure in obtaining most cases, this control is obtained by options upon the various resources which are to be capitalized. The options are purchased as cheaply and for as long a term as possible. In some cases it is necessary for the pro moter to buy outright some resource upon which op tions cannot be had. The purchase agreement usually calls for payment on easy terms, so that the promoter may finance the enterprise before complet ing payment. Where options are to be had for a nominal sum, the real investigation is made after wards, but, where options are expensive, or proper ties are purchased outright, an exhaustive investiga tion is necessary before the option is taken or the seller is asked to guarantee his statements of condi tion and earnings.
If the promoter should fail to assemble the prop osition carefully, he may find that others have dis covered his plan and forestalled him. For this rea son, the various parties who own the resources which are to be capitalized, are dealt with individually by the promoter. Each is kept in ignorance, if possible, of the negotiations or transactions with others, in order to avoid dissensions and jealousies.
Usually the promoter must be prepared to finance his plan thru the early stages with his own capital, or with funds borrowed upon his personal credit. A thoro investigation often costs considerable, to say nothing of the value of the promoter's time. When the investigation has been completed and the financial plan is prepared, it becomes necessary to incorporate the new company, and this involves expense. Some
times, as we shall see, several corporations must be formed, as, for instance, where a construction com pany is utilized for the purpose of financing initial construction work. The stock books and securities of the new company must be prepared, and legal ad vice engaged. All this involves expense.
8. Prospectus.—With the financial plan completed and the company incorporated, the next step is to present the proposition to the investing public in the most attractive form. Here again expense is in volved in the preparation and mailing of literature, advertising, etc. A prospectus must always be pre pared, outlining the proposition in a manner designed to secure the support of investors. In the case of new and untried propositions, the prospectus must usually be elaborate. In more substantial undertak ings, such as combinations of established companies having a record of earnings, or based upon the pro duction of a standard product or service, or backed by men of recognized experience and financial stand ing, the flowers may often be omitted, but the wed ding between capital and opportunity must neverthe less be held. The prospectus is a necessity in each case.
9. Financing initial operations.—Frequently the proposition is such that initial operations must be financed before an effective appeal can be made to investors. A few tangible results, or a little tangi ble property subject to inspection, especially in highly speculative enterprise, appeals far more pow erfully than an enterprise which exists only on paper. For this reason, the promoter and his associates, when financing an entirely new enterprise, often find it necessary to advance funds personally. Ordinarily this is done by issuing to the promoter all the securi ties of the new company in exchange for the proper ties, patents, or other resources which are to compose its assets. The promoter will then finance the enter prise personally, or with the assistance of borrowed funds, until enough of a tangible nature has been done to enable him to market the securities at a profit.
Usually enough securities are left with the cor poration, or turned back to it as treasury stock, to enable the company to secure working capital and pay off any balance which may fall due upon the pur chase price of its properties. This process, it should be remembered, is only followed in the case of highly speculative enterprises, where something tangible must be had to talk about before the investing public is approached.