Finance

Prospectuses—if

'INVESTORS scarcely need to be told that just as the purchase of industrial, speculative or semi-speculative share; in the market requires more careful consideration snd investigation than in the case of what are known as kilt-edged securities, so the prospectuses of industrial ompanies, mining companies and of speculative issues irenerally call for a more careful examination than those of some Government or Corporation loan. And, before dealing with some of the details which should be '!examined in prospectuses of this 'class, there is one .general observation which may be made.. • During ;periods of .cinnparative dulness, and when, perhaps, there has been a. prolonged pause in issues of industrial f.Or speculative shares, it usually happens that the :renewal of ':activity is marked by the appearance prospeettika 'Of a thoroughly satisfactory character. The public is 'known to be in a " shy " Mood, and if is .0ecognized that this shyness will take the form of A very Careful examination of the prospectus. Later on, when activity in capital creations has assumed the dimensions of a boom and the public is far more keen to discern the chances of . snatching quick profits on premiums immediately after the issue is floated, there is, unfor- tunately, far less tendency to 'examine the details of the .prospectus with the object Of 'deciding as to the 'intrinsic :merits of the proposition, and not infrequently the quality of the. prospectus consequently tends to deterior- 'ate.

SOME POINTS TO NOTE.

The points which call for attention on the part of the potential investor in the prospectus of industrial C0111- Panics are so numerous that they can scarcely be covered within the space of a brief article.. I will mention, ;therefore, a' few of the more important. In the first 'Place, the investor will, of course, discover whether the industrial concern in which he' is asked to' invest is an Old-established business or some entirely new concern. ;In the former case the prospectus should 'contain full fietails of average profits over at least five years, and preferably over ten years. If there has been a tendency for the profits to decline within the later years of the Period, sonic explanation should be given, though it is, perhaps, just as important in the case of a great rise in profits during tlidC later years for the investor to determine whether the cause is' a temporary one. the issue is in the form of Preference shares, ic investo' r Must note whether there are Debentures r other forniS Of loan capital ranking in front of 'his iAaim to interest, and if there .are Debentures -he shOuid 'tKo whether after paying the interest on such Debentures there is an ample margin of profits available for the Pre- ference shares. If, on the other hand, the offer consists of Prdinary shares, it is equally important to note what prior Charges there may be. in the way of interest on Debentures Or Preference shares to be met before the Ordinary share- holders obtain the balance of profits. Moreover, in this con- nexion it is usually well to note whether the contral of the company is sufficiently in the bands of those invited to take up Ordinary capital, for it sometimes happens that so large a total of Ordinary shares goes by way of paynientto the vendors that the control is virtually in their hands. On the other hand, it is usually a good point if the vendor takes a considerable part of the purchase priee in Ordinary shares, thereby offering some guarantee of his faith in the undertaking.

, DEBENTURE ISSU.ES.

Assuming that the company is making an offer of Debentures, then, cif' course, the investor will scrutinize the prospectus still. more closely from an'investment point of view, and if the Debenture is secured on freehold property, such property should be valued at a figure well ahead of the amount of the Debenture stock itself. It may, for example, sound very, safe if ih the case, say, of an issue of 1500,000 of 4 per cent. Debenture stock the main security consists of a first charge on freehold property valued at, say, 1750,000.- It does not follow; however, that in any forced sale anything like the amount mentioned could be obtained. Again, the investor will notice carefully the standing of. the company or individuals appointed as trustees to the Debenture stockholders, while the date of maturity of the Debentures and the provision for sinking funds are important con- siderations.

PERSONNEL.

Nor, of Course, Will the investor be unmindful of the importance to be attached to the names of the directors on the board of the company to which he is invited to subscribe. Sometimes it will happen in the ease of the more important companies that the chairman and other directors are so well and favourably known as to constitute. in themselves a guarantee to the invester of good faith and probably also of ability. More often, however, the names of the directors will be more or less unknown to the ordinary individual, and some pains should be taken to form an opinion with regard to their qualifications for the discharge 'of their respon sibilities. How can this be done ? In the first pliie(;; and assuming that the company is an :old-cstablislicil one, it would be usual and also desirable to find that one or more of those concerned in the past Management are placing' their experience at the service Of the ne).irt company by becoming directors. I need 'scarcely sa3t that the mere question of titles is no guide at all to the investor as to the suitability of the type of individuaI for a ' position on -the board. And, indeed, it must be well known now that many titled men are sought bi- the company promoter as a mere lure to the unsophisti cated, ,investor., A further point, however, on which the investor should endeavour to seek guidance concerns the question of whether any of the directors are in what is sometimes described as the " guinea-pig " class, whose names are to be found on boards of innumerable com2. panics, where, however, they are sometimes more ornamental than useful.

In this connexion there is a volume published each year by Thomas Skinner and Company, entitled ..The Dire dory of Directors, which will be' found extremely useful for those who are careful to study the details of the published prospectus. This book contains a complete record of all directors together with a list of the tornpanies with which they are connected. I need not,' however, say that it does not follow that because a director happens to be connected with several companieS that he is necessarily a "guinea-pig." Many of our leading business men, both by reason of their great capabilities and the ramifications of btishiess under- takings with which they are connected, are greatly sought after as valuable company-directors. All the same, and unless the name is a well-known one, the intending investor may well ask whether, if the directors on the prospectus are already associated with a vast number of companies, they will have, the necessary time to attend to the affairs of the particular company tO which the investor has been asked to subscribe.

" FASHIONABLE " ISSUES.

. .

Even in the matter of company promoting there is A_ 'tendency to follow the fashion. One day it is gramophones 'and wirekss, another day it may be aircraft undertakings; or at another time it may be cinemas, which have a special fascination for the financing public. One or more concerns engaged in these industries—probably pioneer companies—achieve great success, and there is a rush to bring out similar undertakings of the same character. 'When the boom in these issues is at its height it sometimes happens that the chief point in the prospectus is the allusion to the great profits which have been made by concerns of a kindred character, as indicating the great scope afforded by the latest entrant into the field. In this class of prospectus, therefore, it is of the utmost importance that the standing of the directors should be such as to command confidence, while unquestionably a very large proportion of the 'undertakings of the, kind I have described must be regarded as offering highly .(Continued on page 132.)

Finance

(Continued from page -131.) speculative risks, even though, admittedly, there may be prizes amongst them. -

TIME FOR EN:WIRIES.

There is one good feature as regards the present activity in new capital creations which cannot be too strongly commended, namely, that of the advertisement of the .prospectus appearing in the newspapers a good 24 hours ahead of the date for receiving applications. This gives the investor at least some opportunity of study, ing the prospectus carefully, and of making some necessary enquiries. In almost every prospectus it will be found that par- ticulars are given—usually on the third page—of various contracts which may have been entered into in con- nexion with the flotation, with information also of the extent .to which the directors themselves are interested in the promotion. These details, together with the Articles of Association, have, by reasons of space, neces- sarily to be printed in very small type, and it is to be feared that the smallness of the type causes many investors to disregard the paragraphs as unimportant. That, however, is far from true. They are there in accordance with the requirements of the Companies Act, designed to protect the investor, and they should be carefully studied by the intending subscriber. • Finally, I would say to those who feel themselves incapable of determining the merits of a prospectus never to hesitate to seek the advice of their banker, because, however small may be the amount which it is intended to invest, the banker will either be ready to give advice himself or to put the enquirer into the way of obtaining such advice from a reliable stockbroker.

ARTHUR W. KIDDY.