Finance
Protecting the Investor
SOMEWHERE near the top of almost all Prospectuses of new Issues of Capital, the Investor will find a statement to the following effect : " Application will be made to the Committee of the Stock Exchange, London, for permission to deal in, and in due course for an official quotation of, the Shares now issued." The importance of this par- ticular sentence to the Investor lies in the fact that however good the security may be as a permanent invest- ment the holder will probably desire to know that he is likely to be able at any time to obtain a free market in the shares, and to sell the whole or part if he so desires. And this in its turn will mainly depend upon the necessary " permission to deal " being given by the Stock Exchange Committee. It does not, however, always follow that the necessary permission is given, and it will occasionally happen that the Investor may find after he has taken up and paid for his shares that this permission has been refused, and therefore that he has difficulty in obtaining a Market for the Shares or Stock which he may have pur- chased. • It does not necessarily follow that because of this refusal he may have acquired worthless shares, but it probably does mean that for some time at all events he is unable to obtain a Market for them. In some quarters, however, the point has not unnaturally been raised as to whether it would not be possible for this question of " permission to deal " being settled before a Prospectus comes into the hands of the Investor, so that he or she might be sure at all events of the Stock or Share in question obtaining a quotation, together with per- mission from the Stock Exchange Committee to deal in the Stock or Shares.
THE WORK OF THE COMMITTEE.
Before attempting to answer this question whether it would or would not be possible for the Stock Exchange Committee to give or refuse permission to deal before the issue of the Prospectus, it may be useful, perhaps, to explain --what- ia- -generally-- believed - -to --be the -atti- tude of the Stock Exchange Committee towards their responsibility to Investors in this matter, and also to say something as to the procedure adopted for safe- guarding so far as may be possible the interests of the Investor. Now in the first place it must be obvious that no Committee, however expert, can place as it were a kind of hall-mark on the Prospectus guaranteeing the ability of the promoters to fulfil its forecasts, or still less to assure the intending Investor as to the precise merits of the proposals set out before him. That is for the Investor himself to decide, after careful consideration and perhaps some investigation.
THE INVESTOR'S RESPONSIBILITIES If, for example, the issue relates to some new patent or process, it is obvious that there will be much in the way of experiment, and that the project may be one offering the risks of loss as well as the chances of considerable profit. These are matters which the Investor must con- sider for himself. Again, the Investor will usually be wise in considering carefully the names of the Directors, and in this connexion I would like to suggest that those who are in the habit of investing considerable amounts in new issues of Capital, but who are not in touch with financial and business circles, should purchase a copy of the Directory of Directors, or, if a copy is not in their possession, should try to consult one at a Public Library. It will then be possible to see whether the Directors on the Prospectus are associated with other companies, and if so enquiry can be made as to whether those companies have a good record. It does not follow, of course, that if the name of one or more of the Directors should not be found in the Directory of Directors that the Prospectus is therefore an undesirable one, but I think that almost in nine eases out of ten it will be found that at least one member of the Board is to be traced through this useful work of reference.
FREE MARKETS ESSENTIAL.
Not only, however, is it impossible for the Stock Exchange Committee to take any course, before the issue of the Prospectus, which might be regarded by the public as indicating special approval of the document, but also the Committee is compelled, quite wisely, to take a broad view of the whole subject of raising fresh Capital. In the first place, and making all allowances for undesirable Capital flotations, it is nevertheless true that the raising of Capital should be facilitated in every way possible, for it must be remembered that for every unsound flotation there are probably one hundred where the results are beneficial to the Investor, and for the good of the country, Equally, however, if the raising of Capital is to be facili- tated, free Markets must be ensured, for -ninety-nine out of every hundred Investors will need the assurance- of a free Market, giving opportunity of realizing their holdings, not necessarily because they are unsound, but because money may temporarily be required for other purposes. Therefore if the Stock Exchange Committee were to take a narrow view- of their responsibility in the matter of giving " permission to deal in new securities we might easily have an undue restraint placed upon perfectly legitimate and even desirable public issues of Capital.
WISE PRECAUTIONS.
Nevertheless, the precautions taken by the Stock Exchange Committee arc undoubtedly of a character tending to safeguard the interests of the Investor. Those promoting the Capital issues know quite well that search- ing enquiries will be made by -the Stock_ Exchange Com- mittee with regard to various points affecting the bona fides of the Prospectus, and even in the case of those Pro. spectuses which deal with what is known as "private placings "—that is where the Shares or Stock are not offered directly to the public; but are placed privately in the Market—the Committee insist that the particulars of the issue should be publicly advertised in at least two leading newspapers. Indeed, I think that the main protection offered to the investor by the precautionary measures taken by the Stock Exchange Committee with regard to new capital issues lies in the probable prevention of many undesirable Prospectuses ever seeing the daylight.
Still it may be asked whether it is not possible for the decision concerning permission to deal being reached before the-Prospectus- comes into the hands of the public. I do not think that it is because among the reasons which actuate the Committee in their` final decision with regard to " permission to deal " are those. relating to the nature of the allotments themselves ; for that cannot be determined until after the Prospectus has been issued, and the applications have been received. Therefore I am disposed to suggest—though I know the suggestion will be regarded as an impracticable one— that applicants should have the right to make their applications conditional upon the permission to deal being given in due course.
In a subsequent article I shall hope to deal with other matters concerning the protection of the Investor, but for the moment I Would simply emphasize the following points. First, that the Stock Exchange Committee have the exceedingly difficult task of doing nothing that shall impair the free flotations of all legitimate Capital issues. Second, that so far as may be possible they shall protect the Investor by obstructing the marketing of what in their judgement they -may consider to be undesirable flotations or flotations which do not conform to certain requirements which have been laid doss-a as being in the public interest: Unquestionably,- how- ever, the greatest protection of the Investor must come from the public itself, and with that aspect of the matter. I shall endeavour to deal at a later date.
ARTHUR W. KIDDY.
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