For the same reason that the seller of most commodities needs either a sample or a catalogue, the seller of securities needs a prospectus. Its essential characteristic is that it is a written statement of the record, the present condition, and the prospects of the corporation and of the terms on which its securities are offered for sale. No prospective purchaser of securities, who is not one of the inside managers of the concern, will be likely to buy until after a written statement has been put into his hands and he has had an opportunity to look it over. Even though his analysis of the statement may not be thorough, still the fact that it is made in writing tends to increase his confidence. Verbal assurances which he discounts acquire greater strength when they are committed to permanent written form. The written statement may take the form of a private letter; it may be a somewhat more formal typewritten statement; or, if intended for wider distribution, it may be printed. The, form in which the statement is given does not change its essential character: it contains the definite representations on the strength of which the security is being sold, and for this reason is of importance both in effecting the sale and in connection with any legal questions that may later arise.

If the corporation which is selling the securities is well-established and has been running for some years, the most important statements in the prospectus are the records of earnings and the balance sheets. These figures should be scrutinized and analyzed with the greatest care. Attention should be given to omissions as well as to allegations of fact. The record of earnings, for example, should go back, not one or two years, but possibly five or six years. The list of assets in the balance sheet should be checked with a suspicious eye, and it should be noted whether ample reserves for depreciation and loss have been established. Sometimes it is claimed that it would be inadvisable to present records of earnings over a period of years, on the ground that this would be making public information that might be of value to competitors. If the business is of so secret a character that even its records of profits are not to be made known to its stockholders or prospective stockholders, it is certainly not the kind of a business which should offer securities to the public at large.

A common practice in writing prospectuses, which properly arouses suspicion, is the presentation of vague and plausible statements that do not commit the corporation or its promoter to anything definite, and yet are intended to create the impression that remarkable profits are in prospect. In the prospectus of a small copper mining company, for example, it is stated that "copper mining has proved a source of some of the greatest fortunes the world has ever known, and its possibilities are not yet exhausted." This statement is literally true, and in its proper context is certainly not objectionable. But when it appears in a prospectus, with the obvious intention of suggesting that the particular company which is offering its stock is likely to prove a boundless source of wealth, it may well cause suspicion as to the entire sincerity and good faith of the authors of the prospectus. Because of the fact that glowing statements beget suspicion rather than confidence, the writers of prospectuses for high-grade companies frequently go to the other extreme and decline to commit themselves in any way as to the future. They will not even express an opinion. By so doing they may avoid straining anyone's confidence in their statements, but they lose the persuasive power of their own well-founded belief in the future growth of the enterprise. The skilled prospectus writer will steer his way carefully between these extremes.

An important factor in creating confidence, especially in a new corporation, is the list of names of men who are identified with the management or have consented to join the board of directors. Knowing this to be true, many unscrupulous promoters have deliberately set to work to secure "ornamental" directors who, for some consideration or because of personal vanity, are willing to become members of the new board.

Probably this practice has prevailed to a greater extent in the organization of banks than in any other line of business. It is unquestionably a vicious practice and the careful purchaser of securities is likely to be repelled rather than attracted when he sees a number of widely advertised names included in the directorate.

It is always desirable that the prospectus should be dignified in its form and in its contents. Red ink and buffoonery may conceivably help to sell some commodities, but they will not help to sell thousands of dollars of stock and bonds. A man who is thinking of putting his money into securities, generally looks upon the proposition seriously and does not ask to be either startled or amused.

However, this need not prevent a strong appeal at times to other motives besides money-making. A trust company in a small Texas city, for example, which had been unable to raise additional capital that it badly needed, found that it had no difficulty in getting capital as soon as it put its appeal on the ground of the local pride which should be felt by the leading ranchers and merchants of the community in building up a sound financial institution. The sentimental appeal, if it is used, must of course be sincere and legitimate. Otherwise, it becomes mere bathos and a destroyer of confidence.

It is a well-established legal principle that misrepresentations or fraud in the prospectus may invalidate a subscription to the stock which the prospectus is designed to sell. It is, however, extremely difficult to prove either misrepresentation or fraud. In 99 cases out of 100 they are merely to be suspected. Very seldom does the prospectus writer find it necessary to make statements that are directly false. He insinuates an untruth, but he avoids saying it. Even the most extravagant accounts of the prospectuses of swindling companies rarely contain false statements of fact. Whatever is said as to the future is merely expressed as an opinion.