Over one hundred million dollars annually are engulfed in the whirlpool of predatory finance. This is the amount one conservative estimate places as the tribute paid each year by credulous investors to the modernized American confidence man who has deserted gold bricks and green goods for the more inviting opportunities offered in selling worthless securities.

It is difficult to explain how it is that a people, nor-, mally intelligent as a class, permit themselves to be victimized each year out of such an enormous toll. Greed alone is not responsible for their credulity. A more logical reason is to be found in the great ignorance shown by the average investor of the character of securities. The majority act upon the assumption that everything is right without first investigating. They rest their faith in the honesty of the men who are asking them to invest their money. They assume that the public authorities would never permit these men to carry on their business were they aware beforehand of their dishonesty and that the powerful newspaper press would never allow them to use their pages to advertise their securities unless their backers were honest.

Unfortunately the authorities generally proceed upon the theory that it is none of their business to act upon the initiative when they suspect a fraud is being perpetrated. They contend that more pressing duties occupy their time and they cannot afford to investigate all the investment propositions as soon as they make their appearance. They, therefore, wait until a complaint is lodged with them before bestirring themselves, and in most cases a swindle has by that time gone too far and the greater part of the mischief has been perpetrated before some victim has become suspicious enough to lodge a complaint.

As far as some of our powerful newspapers are concerned, it is unfortunate that their morality is no more than a cold business morality. Some of the publishers maintain that their readers must exercise their own intelligence about the investments offered in the advertising columns. They say they do not recommend them. They require and desire the large revenue derived from illegitimate financial advertising, running into the thousands every year, and are perfectly willing to salve their consciences by assuming a lack of knowledge as to the real character of the propositions offered. Figure 3 is an example of such an irresponsible advertisement.

A prominent government official has severely arraigned the newspapers which accept this class of advertising for their share of the guilt in the annual loot which the dishonest investment scheme takes from the public. He has charged that these swindles could not exist without the co-operation of these newspapers. But this is not entirely true. The liberty to use the mails for the distribution of prospectuses, literature, and letters is equally responsible for their existence and success. If the newspapers were not as accessible as they are, these schemes would still be carried on through the mails.

If it were possible, without encroaching upon the liberty of the press and the use of the mails, to bring about an intelligent co-operation between the newspapers and the postal authorities to surround investment propositions with proper restrictions, there can be no question that the harm they do could be materially curbed. Even then unsuspecting and uninquiring investors could not be wholly protected against their own ignorance. There is but one way for them to guard themselves against outright swindles, and that is by the exercise of a little common intelligence.

The brief investigation before investing will, in the majority of instances, save the investor his money. But the usual practice is to invest first and investigate afterwards. At least this tendency is shown by my experience in correspondence with investors who have bought doubtful securities. I purpose here to outline some of the essential factors relating to every enterprise about which investors should fully inform themselves. If they follow the course laid down, there is little chance of their being duped by swindles.

Nature Of The Enterprise

It is important to consider seriously the nature of the enterprise. If its basis is sound, the prospect is good for its success under a capable management. This may be determined by a comparison with undertakings of a similar character, by which it can be shown if they are profitable elsewhere. Competition is also an important factor to consider. What sort of competition will be met with and what degree of opposition must be faced? Has the enterprise peculiar advantages over others in a similar line? This should be brought out, as well as all the advantages indicating that the enterprise can be profitably conducted under existing conditions. These are the general problems to which investors would do well to give serious consideration.

The Plan Of Organization And Control

When one is satisfied in this regard, the next step is a careful examination of the plan of organization. Corporation laws differ. Some states are more liberal than others, some even going so far as to invite the incorporation of enterprises by loose laws, none of which is for the benefit of the stockholders.

The corporation laws of some states are so framed as to vest the management of a corporation with such discretionary power and secrecy that it works the greatest harm to the stockholders. The stricter the laws under which an enterprise is incorporated the greater are the interests of the stockholders safeguarded. The amount of capital is very important. The more reasonable, the greater are the chances of success. No less important is the manner of the issuance of the stock. Has it been issued in whole or in part in return for the property turned over by the incorporators? If so, in what proportion and for what property? A knowledge of this will throw some light upon the question whether the money of investors will be used for the legitimate development of the enterprise, or flow into the pockets of the promoters.

Is the stock offered for sale full paid and non-assessable? It is the law of some states that stock bought for less than its par value places on shareholders the liability for the difference in case of insolvency. Suit can be started by the creditors for the recovery of the difference. Corporations evade this statute by turning over the assets for the shares, in this manner making them full paid non-assessable. Part of this stock, if not the whole, is then put into the treasury to be sold to secure working capital. It should also be determined whether any of the stock has preference and of what this preference consists. Foreknowledge in this respect is a security against any surprises. By knowing what stock, if any, remains unissued and held in the treasury, one may tell the sources of new revenue open to the corporation, as new capital can be raised as it is needed by the growth of the business. A copy of the by-laws should be examined carefully, as from them the prospective shareholder can determine the extent of the powers vested in the officers and directors of the corporation.

Who has the stock control? The character of the men is so important that it can either make or break a corporation. In their hands rest the rights of the smaller stockholders. Are they men whose past conduct in the management of corporations is such as to make it certain that the rights of the minority shareholders will be fully maintained? Finally, in the plan of organization are there any unusual features in the charter of the by-laws which may be employed in the future to the detriment of the stockholders!