10. Financial plan.—The promoter obtains the securities of the company in payment for the property which he transfers to it. The speculative public likes low priced stocks. To meet this demand, and to re tain some stock for himself, the promoter is usually compelled to overcapitalize the new company. He may then offer low priced securities to obtain the necessary capital and still retain a block of stock for his promotion profits.
Bonds will probably be issued if the assets are such as to afford good security, the object being to sell these bonds, perhaps at a discount, or accompanied by a stock bonus, to secure the bulk of the actual money needed. If the enterprise is an industrial un dertaking, not affording good security for bonds, preferred stock will probably be issued, to be offered in the market at a discount, or accompanied by a bonus of common stock. Those who sell their prop erty to the new company will be induced, if possible, to accept bonds or preferred stock in part or full pay ment, and to this extent the necessity is removed of finding an outside market for the securities and per haps of borrowing for initial financing.
The promoter must be careful to see that adequate new capital is provided, else the plan may fall thru completely at a critical stage from lack of funds. If enough cannot be borrowed directly, upon his own credit and that of the new company, to finance it until the securities have been sold, it may be necessary to employ an intermediary corporation, often known as a construction company, having capital of its own.
The object of this construction company is to sup plement the credit of the new corporation, so that funds may be borrowed for construction purposes. As a rule, the construction company can accomplish this purpose only where the property to be constructed affords reasonably good security for bonds. The capital of the construction company itself, supple mented by the bonding power of the property under construction, is made the basis of temporary loans.
11. Construction company.—If, for instance, a rail way is to be constructed and it is desired to put a portion of the road into operation before appealing to the public for funds, a construction company will be organized which will make a contract with the railway company to construct a certain portion of its road and to receive in payment the bonds of the rail way company at a certain rate per mile, together with all or part of the capital stock of the railway com pany. The bonds and stocks will be issued in pay
ment as the road is constructed. It is expected that the bonds will cover the actual cost of production, the capital stock being looked upon as promotion profits. The construction company expects, when the road has been placed in operation, to market the bonds for enough to pay back the amount expended in construc tion. But the construction must go forward and be paid for before the bonds are sold, and the construe tion company, therefore, must borrow to meet the cost of construction.
This it does by arranging with local banks or others to advance funds at a certain rate per mile as the road is completed. The construction company gives its own notes secured by the deposit of the railway company bonds. The bankers may also exact a bonus in stock to compensate them for the risk as sumed. When the road has been constructed and placed in operation, the bonds are marketed, the bankers are paid off out bf the proceeds, and the construction company is wound up by the distribution of its capital and profits to the promoter and his as sociates who formed it. The railroad company itself has retained certain securities which are now sold to obtain working capital and to complete the construc tion and equipment of the road.
12. Promoter and the corporation.—The pro moter has a peculiar relation to the corporation which he is promoting. The corporation is not bound by his contracts unless it specifically ratifies them or ac cepts benefits under them. A corporation is not bound to pay the promoter, except for the necessary expense involved in the processes of incorporation. This includes nothing for investigation, sale of securi ties, or promoter's services. That is why the pro moter must usually get his pay by watering the stock and selling it to the public at somewhat inflated prices.
It is illegal for the promoter to make secret profits at the expense of the corporation, altho reasonable profits, or high prices paid by the corporation with its eyes wide open, are permitted.