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LIBRARY VERITAS
SCIENTIA
OF THE
UNIVERSITY OF MICHIGAN
TS UNUM
SAC PLURIOUS
TUEBOR
SI QUERIS-PENINSULAM AMŒNAM
CIRCUMSPICE
INHIMIG
Makers
Gaylord Bros.
PAT. JAN. 21, 1908
Syracuse, N. Y.
UNIVERSITY OF PENNSYLVANIA
STATE REGULATION OF THE SECURI-
TIES OF RAILROADS AND PUBLIC
SERVICE COMPANIES
BY
MARY L. BARRON
A THESIS
PRESENTED TO THE FACULTY OF THE GRADUATE SCHOOL IN
PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE DEGREE OF DOCTOR OF PHILOSOPHY
Reprinted from Vol. LXXVI of THE ANNALS of the
AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE
Philadelphia, March, 1918
UNIVERSITY OF PENNSYLVANIA
STATE REGULATION OF THE SECURI-
TIES OF RAILROADS AND PUBLIC
K
SERVICE COMPANIES
حمت
BX ise
BY
LO
MARY L BARRON
A THESIS
PRESENTED TO THE FACULTY OF THE GRADUATE SCHOOL IN
PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE DEGREE OF DOCTOR OF PHILOSOPHY
Reprinted from Vol. LXXVI of THE ANNALS of the
AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE
Philadelphia, March, 1918
lus 81-9-11☺
Reclass, 4-1-30 A.V.M.
Part I.
CONTENTS
Powers and procedure of the public service commissions in relation
to security issues of public service corporations.
1. Powers of public service commissions..
2. Procedure..
Part II. State statutory limitations on the issue of securities.
1. Security issues defined...
2. Limitations on the proportion between stocks and bonds.
3. Legitimate purposes for which securities may be issued.
4. Limitations on scrip dividends..
5. Form of payment for securities prescribed.
6. Limitations on the par and selling price..
Part III. Summary and conclusion.
•
PAGE
5
5
6
11
11
•
14
16
19
21
223
25
23
STATE REGULATION OF THE SECURITIES OF
RAILROADS AND PUBLIC SERVICE
COMPANIES¹
1
I
POWERS AND PROCEDURE OF PUBLIC SERVICE COMMISSIONS IN
RELATION TO SECURITY ISSUES OF PUBLIC SERVICE
CORPORATIONS
State control of the security issues of public service corporations
has grown by slow stages from an almost complete absence of any
checks in the era of special charters to the recent concentration, in a
few states, of absolute power in the hands of a commission. The
present state laws governing a public utility's security issues are to
be found in a few special charter acts, in general statutes, and in
special public service commission acts. As the latter represents the
most complete method of supervision, particular emphasis is placed
on the analysis of this group.
1
In answer to a deeply felt need of an administrative body to
enforce the general laws in regard to railroads and public utility
corporations, public service commissions have become so widely
established that in 1917 there is only one state which has no kind of
public utility commission-Delaware. Twenty-four states, how-
ever, have failed to confer on their commissions power to regulate
the issuance of securities.2 Commission control of securities is,
therefore, absent from twenty-five states.
All degrees of power from publicity to absolute control have
¹ No secondary material has been used in the preparation of this article. The
Public Service Commission Act (summarized in Table I) and the codified laws
(Table II) of each state have been analyzed to discover in what manner the
security issues of railroads and of public service companies have been subjected to
regulation. Since the tables have been arranged so that the exact citation for any
subject is easily found, footnote references have been omitted when a statute is
analyzed in the text.
2 Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Iowa, Kentucky,
Louisiana, Minnesota, Mississippi, Montana, Nevada, New Mexico, North
Carolina, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota,
Tennessee, Utah, Washington, Wyoming.
5
6
POWERS AND PROCEDURE
been conferred over securities on the remaining commissions.
Rhode Island's one-paragraph provision covers only the stock, and
not the bond, issues of street railways. The powers and the work of
this commission in the matter of securities are so slight as to amount
to non-regulation. The Pennsylvania and Virginia commissions
are of the pure publicity type, their work consisting of the filing of
notices of increases of securities. There are ten commissions that
are limited to inquiring into the truth of the statements in the corpo-
ration's application for approval. Texas has a very stringent law,
but one that is enforced not so much through the powers conferred
directly on the commission as through the severity of the penalties
imposed upon the corporation for any infringement.
3
Some initiative is permitted all the other commissions by
statute. Besides determining the truth of the statements in the
application, the commissions of Massachusetts, New Hampshire
and New York have power to specify the purposes and to determine
the amount of securities reasonably necessary. The commissions of
Ohio and Wisconsin have the additional power to decide the char-
acter of the securities and to define the terms of issue.
Four commissions have complete and unrestricted power over
security issues, that of Vermont deriving its authority from a general
provision to prevent overcapitalization, and those of Arizona,
California and Illinois from detailed provisions in special public
service commission acts.
Less than 20 per cent of the public service commissions have
any discretionary powers on questions of capitalization. So in-
complete are most of the laws that many commissions, though not
permitted by law, have imposed conditions in order to make their
control effective in any degree. Commission control over the capi-
talization of public service corporations, and particularly of rail-
roads, is neither universal nor uniform.
The public commission acts provide for the enforcement of
commission control over the security issues of public service corpora-
tions and of railroads by prescribing the proceedings necessary to
validate an issue.
Previous permission of the commission, evidenced by a certifi-
cate of authority, must be had in eighteen states for all securities
• District of Columbia, Georgia, Indiana, Kansas, Maine, Maryland, Michigan,
Missouri, Nebraska, New Jersey.
STATE REGULATION OF SECURITIES
7
TABLE I.—ANALYSIS OF THE PROVISIONS OF STATE LAWS RELATIVE TO THE REGULATION OF SECURITY ISSUES BY PUBLIC
SERVICE COMMISSIONS
Statute conferring
State
power over
security issues
Power
to issue Previous
securities permission
a special required
privilege
Previous
application
necessary
Recording Accounting
Previous
the
for the
investiga- certificate proceeds
tion
required required
Approval
Penalties
as a
guarantee
Arizona
1912, c. 90, sec. 52
52&
52b
52b
52c
52 d, e, f
52g
California
1911, c. 14, sec. 52
52&
52b
52b
District of Columbia
1913, sec. 8
72
72
Georgia
1911, 8
8
8
:::
52c
52 d, e, f
52g
74
78-80
12
Illinois
1913, 20-31
20
21
21
23, 24, 25
26
Indiana¹
1913, 88-93
92
ġi
92
93
Kansas
1911, 24-27, 34-38
248
25
25
34
Maine
1914, 35-38
35
35
35
36
•
Maryland
1910, 180, sec. 27
27
27
•
Massachusetts
1913, c. 784, secs. 15, 16|
16
16
Michigan
1911, 1
1
1
i
Missouri
Nebraska
1913, 54-58
57
58.1
59.1
1909, 1-3
1
I
New Hampshire
New Jersey
1911, 14
14a
14a
1911, 18-19
18e
New York
Ohio
1912, 55, 56
55
1911, 56-63
56
57
::100
58
80:: NONEN: 2:
26
•
28
16
2,3
59.2-4
59.5
2, 3
56
60
Pennsylvania
Rhode Islandª
Texas
Vermont
1913, 4
4a, b
1909, c. 216, 4
4
1895, a 4584, a-m
4584, &
1908, sec. 16
4584, f-h
16
4584, f, g
4584 j, k, l
4584 m
Virginia
Wisconsin
Constitution 1902, 167
1913, 1753, 1-22
1753, 2
16
167
1753, 9.1 1753, 9.4, 6, 8
16
1753, 9.2
1753, 13 1753, 17, 18, 19
All references are to the public utility act of the respective states, passed in the year indicated.
¹ Does not apply to steam railroads.
'Applies only to street railroads.
8
POWERS AND PROCEDURE
issued by a railroad company. The public utility corporations of
the same states, with the exception of Texas, are subject to the same
provision, and also those of the District of Columbia and Indiana.
Rhode Island requires such authority for the stock issues of street
railways. The Pennsylvania commission has no power on its own
initiative to certify to an issue, but must do so if the corporation
applies for a certificate of valuation. In Texas, the certificate is in
the form of a notice to the Secretary of State that the law has been
complied with, especially that the particular issue does not exceed
the value of the property covered by it. The certificate of the other
commissions states the amount, purposes and character of the issue;
that the amount is not in excess of the amount required for the
specified purposes; and that no part of the amount, except when
permitted in reference to bonds, is chargeable to operating expense
or income. When the commission has power to impose conditions,
these are also set forth in the certificate.
6
5
A necessary prerequisite to the issue of a certificate is an applica-
tion by the corporation for approval. The Texas law does not
require a previous application, but the rules of the commission call
for it in all cases. The laws of several states contain only a very
general clause, demanding a written application to be made,
while others prescribe the contents of the application. The ap-
plication contains information on the same subjects to which the
commissions must certify in their certificate of authority, namely, the
amount, character and purposes of the issue, the terms of the issue,
and a description and estimated value of any property or services
that are made a basis of the issues.
In two states, Pennsylvania and Virginia, the filing of a similar
statement, called a Certificate of Notification in Pennsylvania, meets
all the requirements of the law, and the corporation is subject to no
further control in matters of capitalization. The duty of the com-
missions of these states is fulfilled by placing this statement on
public file.
Previous investigation of the statements in the application is
definitely provided for in the statutes of many states, and in the
• Arizona, California, Georgia, Illinois, Kansas, Maine, Maryland, Massachu-
setts, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New York,
Ohio, Texas, Vermont, Wisconsin.
• Georgia, Maine, Massachusetts, Michigan, New Hampshire, Vermont.
⚫ Indiana, Kansas, Ohio, Wisconsin.
STATE REGULATION OF SECURITIES
9
}
case of almost every application the commission conducts an in-
vestigation." The commission must hold a public hearing, and is
empowered to make additional inquiry, to make a valuation of the
property of the corporation, and to examine such witnesses, books,
documents and contracts, and to require the filing of such data as it
may deem of assistance in reaching a determination.
If the commission decides to permit an issue of securities, its
certificate must, in several states be recorded on the books of the
company before securities may be issued. In other states, the
certificate must be filed with the Secretary of State."
To insure the proper disposition of the proceeds of authorized
issues, various provisions are found in the state statutes. Wisconsin
may require the utility to perform any act necessary to carry out the
provisions of the law. Some states permit their commissions to
establish any rules or regulations in their judgment reasonable and
necessary to prevent the disposition of the proceeds for any purposes
except those designated in the order. 10 A detailed accounting of the
proceeds is called for by some laws,11 and, in practice, by all com-
missions.
Failure to observe any of the provisions in the act is punishable
by penalties that operate against the security issued, the corporation,
and the officers and employes. The laws of nine states declare all
securities void, which do not conform to the law.12 There is a
conflict of opinion as to the power of the commission to validate such
illegal issues. Texas, 13 California¹ and New Hampshire¹ require
new applications, but Nebraska¹6 and Indiana" validate the issue.
7 Arizona, California, Georgia, Illinois, Maine, Maryland, Michigan, Mis-
souri, Nebraska, New Hampshire, New York, Ohio, Vermont, Wisconsin, and
Pennsylvania in case of a Certificate of Valuation.
• District of Columbia, Kansas, Missouri, Wisconsin.
• Texas, New Hampshire, Massachusetts.
10 Arizona, California, Illinois, Missouri, Wisconsin.
11 Arizona, California, Illinois, Missouri.
12 Arizona, California, District of Columbia, Illinois, Kansas, Maine, Ohio,
Texas and Wisconsin.
13 Public Utility Reports Annotated (hereafter referred to as P. U. R.), 1915,
E531.
14 Id. A643, 1071.
15 Id. E931.
1º Id. C24.
17 Id. B55.
10
POWERS AND PROCEDURE
If there is no need to change the terms of the issue, a validating order
would seem sufficient, without compelling the corporation to recall
the unauthorized securities and issue an identical new series, with
only the authority of the commission added. The penalty im-
posed on the utility is usually a fine, ranging from $500 to $20,000.
The agent may be fined $500 to $10,000 or imprisoned on a mis-
demeanor charge in some states, on a felony charge in others, for a
term of one to fifteen years, and, in Texas, is personally responsible
to the creditors for the full amount of any damage sustained.
The administrative control of security issues is provided for in
state statutes by requiring previous permission of a public service
commission, which is granted upon application and after investiga-
tion. This permission must be recorded in some states upon the
books of the corporation or with the Secretary of State. The pro-
ceeds from authorized issues must be strictly accounted for. For
any failure to obey the law severe penalties are imposed, the least
of which is sufficient impetus to a close observance of the provisions
of the statutes.
Compelled in twenty-three states to submit to some measure
of supervision by a public commission, the public service corpora-
tions and railroads are served with a notice in almost all states that
the approval of the commission carries no guarantee.18 The orders
of the commission often contain the further condition that such
authority shall not be binding upon the commission or any other
tribunal as a finding of the value of the applicant's property19 in any
rate or other proceeding. These emphatic declarations that the
commission's approval carries no guarantee of value or dividends
would seem to uphold the frequently repeated assertion that securi-
ties have no relation to rates. In practice, however, the same
commissions have considered the return on investment which a
particular rate will yield before making any change.20 Inversely the
ability of a company to meet interest charges has been the justifica-
tion for authority to issue securities.21
In rate valuation proceedings, the security issues almost in-
variably have weight, even in states where there is no power granted
18 Arizona, California, Illinois, Indiana, Missouri, Pennsylvania, Texas.
19 P. U. R. 1915, B1072, A557, F795; id. 1916, B583, A514.
30 P. U. R. 1916, A227, A594, C281, C1020, D25
" Id. 1915, A744, 749.
STATE REGULATION OF SECURITIES
11
to a commission over securities.22 The general assurances that
securities will be considered have been translated into positive action
by many commissions, rates being maintained or even raised in order
to give a favorable return on the securities.23 The Massachusetts
Public Service Commission has taken the most definite stand in this
matter, holding that capital honestly and prudently invested must
be taken as a controlling factor in fixing a basis for fair rates,24 and
that the approval of the commission is conclusive evidence that the
issue represents legitimate investment.25
The consequence of a change of rates upon the market value
of securities should be carefully considered by all commissions. If
strict observance is required of the provisions that securities are to
be issued only in amounts necessary for proper purposes, and that
full value in assets is turned into the corporation, the commissions
will best guard the public's interests by being generous and fair in
rate questions. The ordinary risks of business, however, should
not be insured against because of commission approval of securi-
ties except that rates should always be sufficient to provide for
obsolescence as well as depreciation. The best relationship between
the corporation and the public is maintained when a fair return is
permitted upon a fair investment, without removing the spur of
responsibility for conservative management from the officers of the
corporation.
II
STATE STATUTORY LIMITATIONS ON THE ISSUE OF SECURITIES
The security issues of public service corporations that are sub-
ject to control are defined to be stocks, stock certificates, bonds,
notes, trust certificates, or other evidences of indebtedness, payable
at more than twelve months after date. No one of the public
service acts enters into more detail. The lack of exact definition
has been a marked deficiency of all the laws. What constitutes an
issuance of such securities was also left for the commissions to de-
termine. As interpreted in the various states, control has been
extended far beyond the original issue to bona fide purchasers, or
22 P. U. R. 1916, D976, 1915, A618.
23 Id. 1916, A349, 276, 506; 1917, A255.
24 Id. 1915, B362; 1917, A331.
" Id. 1915, E370, F264.
12
STATUTORY LIMITATIONS
TABLE II.—ANALYSIS OF PROVISIONS OF STATE STATUTES CONCERNING REGULATION OF THE ISSUE OF
State
Code¹
Purposes
of issue
defined2
Payment
required
to be in
money,
RAILROAD SECURITIES
Corporate Right granted to issue
power to
increase
or
Par of Selling Provisions
Ratio of
property,
labor, or
stocks
defined
price concerning
bonds to
defined
scrip
dividends
stocks
Liability
of stock-
holders
decrease
stock Preferred
Bonds
services
defined
stock
Alabama
1907
3467
3468
3480
3479
Alaska
1913
811
810
814
811
815
Arizona
1913
52b
2133
52b2
52b¹
2109
2102
2159
•
Arkansas
1904
6721
6686
6686
California
1915
52b
359
52b2
52b¹
322
322
1905, a. 330
290.6
6686
456
Colorado
1911
863
850
900
883
5415
Delaware
C. ix, 3
1915, 35
1915, 115
1915, 20
1915, 26
1915, 13
1915, 115
Florida
1914
2653
2802
2681
2673
2803
Georgia
1911
∞
2583
2585
Idaho
Illinois
1913
21
Indiana
1914
Iowa
1913
Kansas
1915
25
Kentucky
1915
Louisiana
1897
Maine
1903
Maryland
1910
Massachusetts
1908
Michigan
1913
Minnesota
1913
Mississippi
1906
:: LENG:: &:: ~:
1913, S. 100
8756
id.
1909, $100
id.
id.
id.
1911, c. 11g
8756
8751
8749
8754
5084
5322
5319
5182
5245
....
1641b
568
C. 266
1641b
1641b
2044
2328
2153
2111
2129
547
553
564
771
143
C. 267
c. 47, 87
c. 47, 33
o. 51, 32
372
c. 55, 9
c. 47, 86
c. 51, 5, 19
c. 47
c. 52, 32
27
a. 23, 35
a. 23, 264
15
a. 23, 276
c. 620, '1
a. 23, 267
|
a. 23, 34
a. 23, 267
1915, c. 299
6691
6576
6687
6691
C. xii, 4
6616
6687
6893
6181
6193
6223, 21
C. x, 3
6229
6223
4102
4076
58.21
4083
4083
4084
4084
Missouri
1906
57
962
1909, 2981
985
962, 1049
1050
1035
Montana
1907
3894
3894
3853
3828
3889
Nebraska
1913
i
68
569
C. ix, 4
551
572
Nevada
1912
1155, 6
3512
3526
1135
1142-
1114
3526
New Hampshire
1901
14a
c. 156, 4
c. 149, 9
c. 150, 4
c. 150,18
c. 156, 17
New Jersey
1910
1913, c. 15
p. 4221, 5 p. 1610, 21
p. 4221, 5
p. 4221, 6
New Mexico
1915
940
4697
697
914
4697
New York
1913
55
1910, c. 481
North Carolina
1905
1159
2556
2555
1159
2567
North Dakota
1913
4528
612
4543
4554
4557
4558
4613
Ohio
1910
56
8793-4
8686
8815 '
8667
8793
Oklahoma
1910
1266
1263
1381
1383
Oregon
1910
6696
338
6696
6701
...
Pennsylvania
1887, 94
1849, 82
1887, 94
1887, 94
1814, 80
1868, 64
1887, 94
1887, 94
Rhode Island
1909
c. 214, 12
c. 214, 1, 11|c.
212, 7-8
South Carolina
1912
2889
2887
3110
2883
South Dakota
1913
443
436
441
486
489
Tennesee
1896
2052
1915, c. 108
2049, 2054
Texas
1911
6469
6469
1198
6458
6544
Utah
1908
316
331
338
434
....
....
Vermont
1906
1910, 143
4335
4376
4313
4308
4348
4371
4382
Virginia
1916
1108
1106
1124
1105b
1105
Washington
1910
3697
3698
3698
3704
3699
West Virginia
1906
2857
2848
2958
2958
2946
2944
2849
2949, 2989
Wisconsin
1911 1753-5
1753
Wyoming
1910
3989
3992
3988
3997
3984
4194
¹ All references are to sections in the codes, revised statutes, or compiled laws of each state of the date given in this column, unless otherwise in-
dicated by: 1. A different date, when the reference is to the general statutes for that year. 2. "C" refers to the constitution. 3. "c" refers to the
chapter, and “a” to the article in the law.
• References are to sections in the Public Service Act, see Table I.
STATE REGULATION OF SECURITIES
13
1
•
for retention in the treasury to pledged26 and reissued 27 securities
and to issues to effect a reorganization28 or consolidation.29
All securities issued for periods of less than twelve months are
exempt from regulation. The Pennsylvania commission may, in its
discretion, extend to such securities the provisions that require a
certificate of notification to be filed. Wisconsin limits such issues
to those that are made for money, requiring the consent of the
commission if issued for property or services. Michigan permits an
original issue for twenty-four months without consent of the com-
mission. The other states place no restraints upon the issue of such
securities. In some states the refunding of such securities, if in the
form of an issue running for more than twelve months, must not be
carried out without the consent of the commission.80 In other states,
the refunding in whole or in part by any issue of securities of what-
ever term or character requires the consent of the commission.31
Illinois further forbids their renewal from time to time, without
consent, for an aggregate period of longer than two years. All other
states require consent for any refunding issue that is to run for
longer than twelve months.
The interstate character of the corporation or of a particular
issue may also have the effect of a partial exemption. Some state
laws confine supervision to domestic corporations,32 in which case
no part of the securities of a foreign corporation need to be approved.
Other states apply the law to all corporations transacting business
within the state.33 The Georgia act could receive the last interpre-
tation, but the commission has refused to take jurisdiction over the
stock issues of foreign corporations, or over the bond issues of a
corporation engaged in interstate commerce.34
The location of the property that is the basis for the issue is
26 P. U. R. 1916, A42.
27 Id. 1916, C1178.
28 District of Columbia, New York, Ohio, Wisconsin, Illinois, Texas.
29 All Public Service Acts, except those of Georgia, Michigan, Texas and
Vermont, specifically provide for control over consolidations of railroads or utilities
* Georgia, Indiana, Maryland, Michigan, Missouri, Nebraska, New York,
Ohio.
11 Arizona, California, Illinois.
"Maine, Maryland, Nebraska, New York, Vermont.
" District of Columbia, Kansas, Michigan, New Hampshire, Ohio, Wisconsin.
* National Association of Railroad Commissioners, Proceedings, v. 25, p. 172.
14
STATUTORY LIMITATIONS
more commonly made the measure for jurisdiction. The acts of
Arizona, California and Missouri and the commission ruling of
Illinois apply the act to all issues that are based upon property
within the state. The Arizona commission interpreted this provi-
sion so broadly that it claimed jurisdiction over the bond issue of a
foreign corporation, although there was no lien on any property
within the state and none of the proceeds were to be spent within the
state, because it was not clear that in the event of a foreclosure a
deficiency judgment might not be taken against Arizona property.35
If the proceeds are to be spent without the state, many com-
missions lose control. The acts of Massachusetts and of New
Hampshire exempt such part of an issue as represents expenditures
outside the state. The Massachusetts commission, however, does
pass upon all issues by domestic corporations and must be notified
of the details of the entire issue by a foreign corporation, if any part
of the proceeds are to be spent in Massachusetts. The Ohio com-
mission grants, but does not require, its approval if expenditures are
to be made without the state. The Maryland commission claimed
full jurisdiction over all issues of securities by domestic corporations,
but the courts held that it had no control over securities the proceeds
of which were to be spent outside the state.36
With these excep-
tions, the laws governing the issuance of securities apply to every
form of issue, including pledge, whether by a new, existing, reor-
ganized, or consolidated company, and whether for property, privi-
leges, or services.
There are various limitations as to the kind of security that
may be issued under certain circumstances. Those states which
permit the issue of securities for operating expenses and replacement
require them to be in the form of bonds or notes. Refunding issues
must be in the same form as the securities they are retiring, unless a
special order is obtained permitting a change.
The most widespread limitation on the class of security to be
issued is that which defines the proper proportion to be maintained
between bonds and stocks. There is no limit to bond issues in Missis-
sippi, and several other states give the directors full power to de-
termine the amount. Arizona, California and Illinois permit their
commissions to authorize issues of bonds in an amount equal to,
25 P. U. R. 1916, B8.
88 Atl. 348.
STATE REGULATION OF SECURITIES
15
less than, or greater than the capital stock. The Arizona commis-
sion has favored the restriction of bonds to the amount of stock,
while that of California has declared that 70 per cent of the capital
in the form of bonds is the maximum to be authorized.87 Bonds were
limited to 50 per cent of the capital in the case of a California water
company owning wells that might not be permanent.38 A Con-.
necticut law prevents the issue of bonds in excess of one-half the
amount actually expended on the railroad. The Texas law makes
the value of the property the limit for bonds. The laws of Indiana
and Wisconsin declare in general terms that the indebtedness of the
corporation shall bear a reasonable proportion to the stocks issued
by the corporation.40
尊
​The definite proportion that must be maintained between stocks
and bonds is prescribed in many states.40 The most common re-
quirement is that the bonds 41 or total indebtedness 2 shall not ex-
ceed the capital stock, modified in Montana and New Mexico by the
amount subscribed. Connecticut43 and New Jersey limit the total
indebtedness to the stock paid in, but bonds to twice this amount
may be issued in other states.44 The maximum amount of bonds is
limited to two-thirds of the capital stock in Iowa, Nebraska and
Utah. In Minnesota, the indebtedness exclusive of mortgage bonds
must not exceed two-thirds of the capital stock, but the total in-
debtedness may be three times the capital stock. An interstate
corporation may find itself conforming to the laws of one state only
to defy those of another. An established proportion between stocks
and bonds is necessary to compel the owners to put into the business
enough to make it to their interest to maintain the property in an
efficient condition, rather than to exploit it to secure dividends.
Merely to condition the amount of bonds on the total securities
does not meet the situation, especially if the stock is not fully paid.
The bonds should be in proportion to the total value of the assets
and not to any quality of the capital stock. In quantity, there is
87 P. U. R. 1915, A787, D347.
88 Id. 1915, B38.
39 Code 1902, sec. 3804.
40 For exact reference see Table II.
41 Arkansas, Idaho, Maryland, Missouri, Nevada, Ohio.
42 Idaho, North Dakota, Oklahoma, South Dakota, Washington, Wyoming.
43 Code 1902, sec. 3804.
" Delaware, Massachusetts, Pennsylvania, Washington.
16
STATUTORY LIMITATIONS
already an overabundance of legislation, but there is need of the
adoption of a basis that will give greater definiteness.
47
Securities of whatever character must be issued only for
legitimate purposes. The chief duty of the commissions is to see to
this requirement. To leave no doubt that the commission's deci-
sion is final, many states forbid the utility or railroad to apply the
proceeds of securities to any purposes not specified in the commis-
sion's certificate,45 nor in excess of the amount authorized.46 The
majority of commissions are limited at the outset to inquiring
whether the issue under consideration is for purposes in accord with
the nature of the business carried on by the particular corporation.
The unnecessary duplication of facilities by competing companies
may continue unchecked. The commissions of Ohio and Vermont
have been given the right to reject the applications if not convinced
that the proceeds will be spent for the general good of the public,
and the acts of California, Arizona and Illinois permit of the same
broad interpretation. A few other commissions, as Maine,48 by a
liberal interpretation of their power in regard to certificates of con-
venience and necessity, may prevent duplication of plants in the
interest of the public. Every unnecessary duplication of any part
of a public service corporation's plant, used solely for competitive
purposes, results in reducing to scrap value that much of the prop-
erty of one or both companies. Where the evils of competition and
its wasteful extravagances are not prevented by public control, the
burdens of the utility are unjustly increased and the public in no
manner benefited. Every commission should have the power, and
it should be its duty, to coördinate the corporate with the public
needs, by preventing the issue of securities for unnecessary construc-
tion.
The purpose for which securities may be authorized, as set
forth in the laws, fall into five general classes:
1. The acquisition of property.
2. The construction, completion, extension, or improvement of its facilities or
properties.
45 Arizona, California, Illinois, Kansas, Massachusetts, Missouri, New Hamp-
shire, New York, Ohio, Wisconsin.
46 Arizona, California, Illinois. See Table II.
47 P. U. R. 1915, B55, D160; 1916, C42.
" Id. 1916, A418.
STATE REGULATION OF SECURITIES
17
3. The improvement of maintenance of its service.
4. The discharge or lawful refunding of its obligations.
5. The reimbursement of the treasury49 for moneys actually expended from
income, or from any other moneys in the treasury not secured by the issue of
stocks or bonds.
The first group, the acquisition of property, includes the
purchase of rights of way and of other necessary real estate, and the
acquisition of the property or securities of related systems. The
securities must represent a permanent addition to the facilities of the
railroad or utility. The public service acts of ten states forbid the
capitalization of the right to be a corporation, or the capitalization
of any contract for consolidation or lease.50 If issues were allowed
for such purposes, they would rest upon anticipated earnings and
not on present assets, always a doubtful proceeding, particularly
unjustifiable in the case of railroads and public utilities.
The second group covers all the basic equipment that directly
furthers the company's business, including the cost of welfare build-
ings, when not directed beyond suitable provision for the health and
safety of employes.51 What proportion, if any, of the securities
authorized for construction costs should be credited to promotion
fees has not been decided uniformly by the state commissions.
In recognition of the value of the services of the promoter, Iowa
passed a law in 1911 requiring the labor performed in effecting the
promotion of steam and electric railways to be taken into account in
fixing the amount of capital stock. The Maine commission author-
ized the issue of stock to the promoter of a railroad, although only
preliminary organization work had been done.52 The California
commission authorized stock to the par of $75,000 for promoter's
services in projecting a railroad that could be financed at a sum not
to exceed $750,000.58 These rulings partake of extremes in expres-
sing appreciation of the work of the promoter, but are based on a
correct principle, for the work of the promoter in the field of modern
49 Arizona, California, Illinois, Indiana, Missouri, New York, Ohio, Wisconsin.
The other four groups are mentioned in the laws of these states and of Georgia,
Kansas, Maine, Maryland, Massachusetts, Michigan, Nebraska, New Hampshire.
50 Arizona, California, Illinois, Indiana, Maryland, Missouri, Nebraska, New
York, Ohio, Wisconsin.
51 P. U. R. 1915, B582.
52 P. U. R. 1916, D260.
58 Id. 1915, F311.
18
STATUTORY LIMITATIONS
industry is co-important with the work of the engineer, and a condi-
tion precedent to the latter's employment. Less favorable consider-
ation has been accorded the promoter in Arizona,54 Massachusetts,55
New Jersey and Ohio. The Maryland commission has declared
that the cost of financing through promotion agents is a proper
operating expense.57 There are few commissions that do not take
this factor into account, although they may refuse an award under
that name. All states permit of the issue of securities to meet
engineering costs. The large engineering firms are taking a lead in
the promotion field. Their work of organizing and financing the
project is distinct from the work of actual construction, but a single
fee may be received for the completed project, the promotion costs
being absorbed in the engineering costs.
The third group, improvement or maintenance of service, places
a heavy burden of interpretation upon the commissions, in determin-
ing what may properly be included under this classification. Working
capital falls under this division. The Massachusetts Railroad Com-
mission refused to authorize securities for this purpose. To meet
the special need of street railways, a law was passed permitting the
issue of stock to provide working capital, not to exceed 5 per cent of
outstanding stock, or an issue of bonds to an amount determined by
the commission.58 In general, the commissions authorize securities
to provide working capital, in an amount varying with the nature
and extent of the business.59 Operating expenses and replacements
also belong in the third group. They may not be capitalized in the
form of stocks in any part of the Union It lies, however, within
the discretion of several commissions to concur in the issue of bonds
or notes for these purposes.60 In every state, permission is with-
held unless the corporation proves its ability and willingness to make
P. U. R. 1915, B1043.
55 Id. 1915, A15.
56 Id. 1916, D77.
57 Id. 1916, B925.
58 Acts of 1909, C. 485.
59 California, P. U. R. 1915, E834; Illinois, id. 1915, F235, 1916, C281, 704;.
Indiana, 1915, C561; Missouri, id. 1916, F49; Nebraska, id. 1915, B416, D160,
1917, A907; New Jersey, id. 1915, B601; New York, Public Service Commission
Reports, Hearings and Decisions, I, 166.
60 Arizona, California, Illinois, Missouri, New York, Ohio, Wisconsin; see
Table II under "Purposes" for references. Massachusetts, Acts 1914, ch. 671
(street railways).
STATE REGULATION OF SECURITIES
19
good out of earnings the amount, either by direct payments to a
sinking fund, or by investments in capital assets. 61 The New York
Second District Commission has well summarized the advantages
accruing from permitting issues for operating expenses, declaring
that:
this policy enables the companies to absorb early losses
⚫ to continue
to serve the public without interruptions uniformly attendant upon receiverships
and makes them comparable to industrials and other unregulated fields
for investment, so far as the possibilities attendant upon external development are
concerned.62
Where the power to authorize issues for replacements and operat-
ing expenses is conservatively exercised, it may prove of public
benefit in those cases where an insufficient depreciation fund has
been carried, and an inefficient service will result from a continued
use of obsolete or worn out equipment. The requirement of a
restoration to the capital account of an equal amount reduces the
measure to a purely temporary expedient. The railroads, as a whole,
have no need of availing themselves of this privilege. The en-
forcement of present day stringent accountancy rules will soon
obviate the need of any utility resorting to this method, by compel-
ling the maintenance of adequate depreciation funds.
The fourth group, the discharge or lawful refunding of the
company's obligations, presents no particular problem of interpreta-
tion.
The fifth group, reimbursement of the treasury for funds em-
ployed in the extension, improvement and betterment of the proper-
ties of the utility corporation or railroad receives unanimous ap-
proval by all commissions, when the securities are to be sold and the
funds turned into the treasury.63
When such securities are in the form of stocks to be distributed
in lieu of a cash dividend, there is a decided divergence of opinion as
to the propriety of consenting to their issuance. The act creating a
commission for the District of Columbia, and the laws of Massachu-
setts, New Hampshire and South Carolina forbid scrip dividends.
The courts of South Carolina, however, have held that the capitaliza-
tion of a new company formed to purchase the property of two exist-
61 P. U. R. 1916, C769, D551; id. 1917, A889.
62 New York, Public Service Commission, Second District Ninth Annual
Report, v. I, p. 7.
" 94 Atl. 193.
}
20
STATUTORY LIMITATIONS
ing companies at full value, though in excess of the capitalization of
the existing companies is not in violation of this statute, even if the
securities are to be taken by the stockholders of the old corpora-
tions.63 According to this decision, the law may be circumvented
without very great inconvenience and is practically nullified. Some
commissions, as Ohio, favor the sale of such securities, in place of a
direct issue to the stockholders, and the distribution of the funds as
a cash dividend.64
Many state laws permit stock dividends in an amount rep-
resented by actual investment in the corporation of net earnings.65
The commissions of California,66 Illinois,67 Indiana68 and New Jer-
sey⁹ have rendered decisions to the same effect. The advantages of
permitting stock dividends are several. Some surplus is essential to
every corporation to provide for emergencies and to stabilize divi-
dends. To keep this in the form of idle cash is an economic waste.
To put it entirely into outside investments, which the management
cannot control, is a risk, to lessen which unusually small returns must
be accepted by investing in preferred securities. By the employ-
ment of the surplus in its own business, a corporation is enabled to
make improvements when needed acting independent of conditions
in the money market, and to do so without the payment of interest.
The public is saved this interést charge, since the corporation may
not exact interest on its own funds, but may only issue securities to
the amount of the net property addition. With the present powers
of investigation possessed by commissions, there is no danger in
permitting the investment of a corporation's surplus in its own prop-
erty, and the distribution of a stock dividend when the improve-
ments are completed. This is particularly just when the owners
have refrained from all dividends in order to build up the credit of
the corporation.
The legitimate purposes as defined in the laws are sufficiently
broad not to check the healthy expansion of public service corpora-
tions entirely intrastate, but the conflicting interpretations by the
64 P. U. R. 1915, A483.
6 Kansas, Maine, Missouri, Ohio, Wisconsin, West Virginia (see Table II).
6 P. U. R. 1915, C324.
66
67 Id. 1915, A205.
68 Id. 1915, A540.
" Id. 1915, E72.
STATE REGULATION OF SECURITIES
21
different state commissions retard the fullest development of inter-
state corporations.
Railroads and public utilities are limited not only as to the
character of the securities and the purposes for which they may be
issued, but also as to what may be received in payment for securities.
Many states have constitutional provisions to the effect that stocks
or bonds may not be issued except for an equivalent in money paid,
labor done or property actually received and applied to the purposes
for which the corporation was created; that all fictitious increase of
stock or indebtedness is void; and that neither labor nor property
may be received in payment at a greater value than the market
price at the time such labor was done or property received.70 The
same provision is incorporated in the statutes of many states."1
The purpose of such statutes is to restrict issues to actual invest-
ment, and they are therefore constitutional.72
The enforcement of these provisions is left entirely to the
directors in several states, and their judgment may be reversed only
in fraud proceedings.73 If the issue is for other than money, Iowa
requires the consent of the Executive Council of State, which, if
necessary, may make an investigation and ascertain the real value
of the property to be transferred.74 In Vermont the issue of shares
of stock for property is subject to special approval by the share-
holders, to whom all particulars must be submitted.75 Other states
have made it the duty of their commissions to enforce the provisions
as to the form of payment. In Virginia, if the securities are issued
for property or services already received, the commission may in-
vestigate the value of the property. Texas requires special approval
of the commission if bonds are to be issued in advance of the com-
pletion of a railroad. In Wisconsin, a railroad or utility is restricted
in the issue of securities for services or property to the true money
value, as determined by the commission, in an amount equal to the
70 Alabama, sec. 234; Arizona XV, 4; Arkansas XII, 4; California XII, 11;
Delaware IX, 3; Idaho XI, 9; Illinois XI, 13; Kentucky, sec. 193; Louisiana, sec.
266; Mississippi, sec. 196; Missouri XII, 8; Nebraska XI, 5; South Carolina IX,
10; South Dakota XVII, 8; Utah XII, 5; Virginia, sec. 167.
71 See Table II under payment.
72 P. U. R. 1915, A618 (Massachusetts).
78 Delaware, Pennsylvania, South Dakota, West Virginia.
74 Code 1913, sec. 1641b.
75 Laws of 1910, 143, sec. 6.
22
STATUTORY LIMITATIONS
face value of the stocks and not less than 75 per cent of the face
value of the bonds.
The decisions of the commissions conflict as to the proper
measure of the value of the property, whether actual cost, reproduc-
tion new, or present value. The Maryland commission refused to
authorize the issuance of securities beyond the value of a public
service company's property, although the company had actually
expended in the plant a larger sum than it sought to capitalize."
In contrast, New Hampshire granted authority to issue securities to
cover the actual cost of construction, although a valuation showed
a present cost of reproduction new somewhat less than the actual
cost." The Texas law permits the purchasers of a railroad to issue
securities to the full value of the property, irrespective of the pur-
chase price. The California commission gave consent to a reorgani-
zation plan that involved the issue of securities beyond the value set
by the company.78 In Maine, a company was denied the right to
capitalize more than the purchase price.79 Extreme liberality was
displayed by the Maine commission in another case, when it author-
ized the issue of bonds, although the company had no physical
property.80 Such inharmonious decisions introduce a measure of
uncertainty that is particularly disturbing in the case of railroads
that are national in scope, whatever the length of line in any one
state.
These same principles apply to reorganizations and consolida-
tions. Georgia and Wisconsin limit issues of securities in such
cases to the fair value of the property. The California commission
has not been strict in valuations for this purpose, in one case making
no effort to eliminate undue expense in connection with the property.81
Several states provide that the stock of consolidated corporations
must not exceed the aggregate capital, stock of the corporations
consolidated at the par value and any additional sum paid in cash.82
The total amount of securities that may be issued upon the re-
76 P. U. R. 1915, A812.
77 P. U. R. 1915, E931.
78 Id. C807.
79 Id. E109.
80 Id. 1916, D260.
81 Id. 1915, F569.
82 District of Columbia, Illinois, Maryland, Missouri, Nebraska, New York,
Ohio.
STATE REGULATION OF SECURITIES
23
organization of a corporation is limited to the fair value of the prop-
erty in Pennsylvania, as determined by the commission in Illinois,
New York and Texas. Ohio permits an issue to the full value of the
old securities. When the amount of securities is conditioned
on the sum of the securities of the separate companies the new
issues partake of all the evils of the old. If the par of such securi-
ties is more than the real value of the properties, the "water"
is not eliminated. If the par represents less than the real value, the
owners are penalized to the extent of the difference, when they should
be rewarded for their thrift in increasing the assets of the corporation
out of savings. The issue of securities to the fair value of the prop-
erty, as determined by the commission, whether greater or less than
the par of the old securities, is the most just method, and the only
one really ensuring value received.
PAR VALUE AND SELLING PRICE
If the many state laws which limit securities to a reasonable
amount for lawful purposes and require the corporation to receive
value in full, were universally executed, no stock would sell for less
than par and bonds would sell for their exact value, a condition only
approximated in a few states.
The par itself, as prescribed in the statutes, is far from uniform.
Some states leave the decision to the board of directors. In Ten-
nessee, railroad stocks may be issued with a par of $100 or less. In
Colorado, the par may vary from $1 to $100, in Maryland and
Pennsylvania it must be $50, in the majority of states it is placed
at $100.88 Railroad bonds may have a par of $50 in Iowa, $100 in
Massachusetts and Vermont, $500 in Nebraska, and $1,000 in
Wyoming. The maximum interest on bonds, which partly deter-
mines market price, is fixed at 6 per cent in Texas, 7 per cent in
Arkansas, Massachusetts and Ohio, at 8 per cent in Iowa, and at 10
per cent in Michigan, Nebraska and Wyoming.
The par of the securities of many corporations has no relation
to the value of the property, and consequently the selling price and
the par value are rarely equivalent terms. The states which have
not conferred on their commissions power to regulate securities give
83 Arizona, Connecticut, Florida, Georgia, Massachusetts, Michigan, Missis-
sippi, Montana, Nebraska, New Hampshire, Vermont, Virginia (See Table I,
"Par").
1
24
STATUTORY LIMITATIONS.
1
Virginia also leaves the
Some commissions have
the directors full power to set the price.
price to be determined by the directors.
unlimited power to fix prices.84 Ohio has agreed to a price as low
as 80 for stocks, the policy of the California commission is not to
allow a price less than 80-85 as a minimum, 85 and Illinois requires
par to be received. The sale of stock at less than par is permitted
in Indiana and Georgia if agreed to by the commission, which,
except in such a case, does not have power to fix the price. Railroad
stocks may not be sold for less than par in Maine. In the case of
other utilities, the commission will not authorize the sale of a stock
at less than par by a new corporation, but holds itself free to do so
in the case of an existing corporation.86 Other commissions require
all stock to be paid in full.87
An exception to the requirement of all sales at par is made in
New York in the case of convertible railroad bonds. The New York
law authorizes the conversion of railroad bonds into stock at less than
its par value, but not less than the market price at the time of the
stockholders' consent to the bond issue. 88 In Maine, Massachusetts
and New Hampshire railroad stocks must be sold neither for less than
par nor less than the market price.89 The same law holds for public
utilities, except in Maine where the commission may permit the sale
of such stock for less than par, but has refused to do so in the case of
any new company.⁹⁰ In these states the stock must first be offered
to the stockholders, and all shares not so disposed of must be offered
at public auction under the same restrictions as to par and market
price. With the exception of the New England states, it is not
customary for the commission to set the price, if above par, but the
rule is that the sale be made at the highest price obtainable, not less
than par.
To require bonds to be sold at par is the exception. The Mas-
sachusetts commission discourages the sale at less than par. The
Maine commission, however, holds that it is not its policy to refuse
84 Arizona, California, Illinois, Ohio.
85 P. U. R. 1916, C779.
86 Id. 1915, C361.
87 Michigan, Missouri, New Jersey, New York, Texas, Wisconsin.
88 Railroad Law, sec. 8, sub. 10.
89 See Table II under Selling Price.
90 P. U. R. 1915, C361; also Maine, Public Utility Commission Report, v.
II, p. 298.
STATE REGULATION OF SECURITIES
25
·
to authorize issues of bonds for less than par.89
The minimum price
Texas requires that
in Indiana and Wisconsin is 75 per cent of par.90
'full value be received for bonds, preventing a sale for less than par."
Some states permit the sale of bonds at the price determined by the
board of directors.91 Missouri has allowed bonds to be sold as low
as 70, and Illinois for 73. New Jersey and Michigan favor a mini-
mum of 80. The price of bonds is determined by such factors as
the rate of interest, the life of the bond, the degree of security,
the method of payment and any privileges, such as the right to
convert into stock. The price is determined by the current rate for
money for similar investments, and a uniform price is neither possible
nor desirable.
The difference between the face value of the bonds and the
selling price measures the cost to the corporation of obtaining money
at a given rate of interest. The Iowa law is based on a false founda-
tion, which authorizes the bond discount to be taken into account
as an element of value in fixing the amount of capital stock that
may be issued.92
Bond discount is an expense, which the state
commissions, in all valuation proceedings, require to be amortized
out of income. 93
III
SUMMARY AND CONCLUSION
(
The charges of incompleteness or inadequacy or both may be
placed against many of the laws controlling the security issues of
railroads. Where no special administrative body is entrusted with
their enforcement, they remain inoperative, unless some noteworthy
misapplication of power by the directors arouses public opinion.
The pure publicity provisions in the public utility acts of Pennsyl-
vania and Virginia are no improvement over all absence of com-
mission control. Filing as a public document is not synonymous
with making public. More complete information is more readily
obtained from banker or stockbroker. The expenses of manage-
ment of railroads and public service corporations are increased with-
out any benefit to the public, the investor or the corporation.
9¹ Delaware, Iowa, Louisiana, Nebraska, Utah and Wyoming, see Table II,
final column.
92 Code 1913, sec. 1641b.
93 California P. U. R. 1915, E197; District of Columbia id. 1915, B546;
Illinois id. 1915, A804; Massachusetts id. E370, Missouri id. 1916, E544; Ohio id.
1916, E670.
.26
SUMMARY AND CONCLUSION
Slightly more justifiable are the statutes which require the
commission to investigate the statements made in the application.
The mandate resting on these commissions, however, either to
accept or reject the application in the form submitted, has caused
them to exercise extra-legal powers by imposing conditions. Such
action is proof of the inadequacy of the law. It is the law as it
stands, and not as enlarged by the dangerous practice of reading into
it increased powers, that is to be criticised. Judged on its own
merits this type of control is highly deficient, for it imposes more
burdens than pure publicity, while the gains are only problematical,
certainly not proportionately greater.
Some power should be granted the commission to modify the
application, with due recognition that the danger from extremes is
not less in granting too much than in granting too little discretion.
So long as salaries are low, qualifications for public office less, and
the power of appointment exercised to distribute political plums
rather than to reward ability, it is inviting disaster to substitute un-
conditionally the judgment of public officials for that of persons of
long special training. The value of commission control rests upon
the ability of the commissioners to act as detached, impartial ob-
servers, checking but not replacing the decisions of corporate offi-
cials, whose judgment may be warped by too narrow attention to a
single interest.
Present legislation is, as a whole, unsatisfactory, protecting
neither the public nor the corporation and its investors. Despite
its imperfection, this legislation has been in response to a rapidly
growing realization that the physical plant of a railroad or public
utility is not a gift out of the clouds; that regulation of rates and
services is only partial regulation, necessitating the inclusion of
securities to round out the circle.
Control of securities is necessary to protect the corporation
against itself. In fact, "Chapters in Erie," the Chicago and Alton
deal and similar abuses of corporate powers gave rise to the agitation
for the control of securities. The recent financial troubles of the
Rock Island, the Frisco and other railroads are modern evidences
that the corporation might profit from a review of the directors'
decisions by an impartial tribunal.
Protection of the investor is also of vital interest. Until re-
cently his claims were disregarded. Existing investments could be
•
STATE REGULATION OF SECURITIES
27
submitted to any number of burdens without the possibility of
escape. The holder of free funds, however, notes all such tendencies
and is quick to divert his money into more promising channels.
With a dull market.for railroad or other public utility offerings, the
public fails to acquire needed facilities, and is thus impressed with
the justness of the investors' claims.
The public itself is most directly benefited by security control.
It is often asserted that securities have no bearing upon rates, and
commissions declare that they do not take them into account.
But a careful investigation of the proceedings of any commission
will reveal instances in which the rate was based upon the condition
of the corporation's securities. Always a return is insisted upon.
"It is the setting in which the problem (of rates) is most frequently
submitted for judicial consideration," the Interstate Commerce
Commission has declared. Aside from rates, every reorganization,
the direct product of unwise security issues, upsets the business
equilibrium of the entire country. Unwise security issues also react
to the detriment of the public by poorer service, inadequate main-
tenance and depreciated equipment.
Present regulation does not solve the problem of proper security
control, yet some regulation is expedient. The first step needed to
clarify the situation is to distinguish between corporations that are
interstate and those which are intrastate or local in character.
Railroads and corporations controlling facilities essential to the
efficient operation of the railroads are of chief interest in the first
class, but whatever corporations are placed under the control of the
Interstate Commerce Commission should be included. A rail-
road's securities are the sine qua non of its establishment and exten-
sion, are co-existent with each foot of its line, and cry out for uni-
form treatment, possible solely through national control. More
detailed consideration of federal control is not required here, except
to remark that the securities of interstate corporations should be
placed under the sole and exclusive control of a central federal body,
an adjunct of the Interstate Commerce Commission, and forming a
part of a rational scheme of complete federal regulation.
Federal regulation of only interstate corporations leaves a very
wide field to the states. Light, heat and water companies and
street railways are a few of the corporations whose securities should
4 Interstate Commerce Commission, 22d Annual Report, p. 86.
28
SUMMARY AND CONCLUSION
be regulated by state commissions. Appointment to such com-
missions should have some more efficient base than political prestige.
Commission control should be positive, for there is no need to
regulate the well managed corporation, and the fear of publicity
will prove inadequate to prevent the unscrupulous from enriching
themselves.
The bread pill stage of regulation must be put behind, whether
the regulation is to be by state or federal commissions. Thorough
investigation and valuation should be made before approval is
granted. Restrictions should be placed upon the power of the
commission as well as upon the corporation. It should be unlawful
for the commission to authorize issues far in excess of the value of the
property. There is no reason for the commission to decide the kind
of security, except to prevent an unsafe proportion of debts to owner-
ship shares. Supervisory power over prices is sufficient, although a
minimum price for bonds and no par for stock might add efficiency
to the legislation. The duty of the commission to follow up the
disposition of the proceeds from the sale of securities is no less im-
portant than the approval itself. Finally, uniformity is desirable
for all security legislation, since the investment market is national.
The beneficial results of the right kind of legislation are in-
calculable. No legislation causes a haphazard, mushroom growth.
Irrational legislation destroys the fine network of confidence with-
out which the inflow of funds will soon cease and development come
to a standstill. Rational legislation instills confidence, so that the
full complement of needed funds is secured quickly and cheaply.
1
UNIVERSITY OF MICHIGAN
3 9015 07374 9676