Hundreds of requests have been received by the editors of Photoplay
Magazine from persons who contemplate investment in moving picture companies
and who seek advice on the subject. In many cases investigation showed
that these people were being solicited to invest money in concerns that,
in the face of existing conditions, did not have one chance in a hundred
to succeed. Mr. Davis will be glad to answer any inquiries from readers.
This time I want to take another gentle swing at motion picture promotion.
There are a number of companies that have been and are being organized, that may be good risks. Some of these concerns have a reasonable chance of success. But, along with the good, there are some that won't stand the acid test.
Here is a typical advertisement that the prospective investor receives. (This is not a copy of any particular company's circular.)
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You see everywhere the interest that the public
is taking in the motion picture business. Would you now like to share in
the enormous profits? All you have to do is to get into the business now.
We advise that you purchase at once shares in the A No. 1 Motion Picture
Company, which is organized to manufacture and distribute motion pictures
of the highest order. This company has as President, Mr. John Brown, a
motion picture expert; as Vice President, Mr. James Smith, a capitalist;
as Secretary, Mr. Henry Black, an attorney; as Treasurer, Mr. William White.
This company is organized with a capital stock of $500,000- par value $100.00
a share. Of this stock there is only $100,000 available for the public.
The price is $100.00 a share if bought now. If you want to get in on this
proposition do go at once. You had better wire for a reservation of stock.
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| "Here is a typical advertisement that the prospective investor receives . . . In this case 'obey that impulse’ is a mighty poor slogan to follow." |
The circular also sets forth in sparkling style the enormous earnings and dividends of few well known companies that are generally thought to have been highly successful, with the implied suggestion that the A No. 1 Company will do as well.
This looks alluring. All of us are tempted to rush for the Western Union. In this case "obey that impulse" is a mighty poor slogan to follow- "Stop- Look- Listen" is more to the point.
If you buy a share of stock in the A No. 1 Company you virtually become a partner in business with Mr. John Brown and the other stockholders. You want to be sure that they are the kind of men to keep company with. The President is billed as a headliner in the motion picture business. Is he- or does he just say that he is? Has he a reputation for honesty; has he been a successful motion picture man? Ask someone in the business. Your local theatre manager may be able to help you. The cashier at the bank where you keep the money you might invest can doubtless check up the capitalist- and any law directory will give you a line on the attorney mentioned as one of the officers.
As you know the A No. 1 Company, before it can sell real stock, must have been incorporated in some state. It must have a charter that establishes it as a corporation. You will want to know that this detail work has been properly done by some reputable attorney. If the A No. 1 Company is perfectly legitimate the officers will give you this information.
You should see that the by-laws of this corporation are such that you, as a stockholder, are considered. I know of one company for instance that had its by-laws so worked out that as fast as the company earned profits the officers increased their salaries and dividends were always something to expect but never to get.
This A No. 1 circular states that only $100,000 of stock is available for the public. In other words- the company is offering one-fifth of its stock and hopes to receive $100,000 in cash. The question that at once arises in your mind is- What becomes of the rest of the stock? Now some of it may be held in the treasury of the company to be sold for future developments; some of it may have been already sold before the public offering is made. But there is a chance that a large part of the $400,000 remaining has gone to insiders. It is perfectly legitimate and recognized that the promoters of a company have a right to receive for their services in promoting and organizing a fair remuneration. You must be sure, however, that the remuneration they receive is in keeping with what they do- not legalized graft. If the A No. 1 insiders plan to take four-fifths of the company and give you, the public, one-fifth for $100,000, using the money that you pay in as their entire working capital, you may be the goat. Since the A No. 1 Company is so anxious to let you in on a good thing gently ask if you are holding the financial bag with the expectation of getting one-fifth of the profits when and if earned.
Here’s a real test. Are the officers and close friends of the company putting real money in the proposition, other than paying for the advertising and stationery which enables them to interest you? Ask Mr. Brown how much stock he has bought with actual cash.
If you ask this question he may say that he and his associates have done their part by creating the big idea. He may add that his stock has been paid for by valuable contracts with actors, directors, exchanges and the like. You must be sure that these contracts are bona fide and are worth the amount of stock that is being paid for them, otherwise it may work very seriously to your disadvantage in the future.
In most states the common stock of a corporation must be fully paid. Now "fully paid" means something more than having that statement printed on the stock certificate. It means that for each $100.00 of stock there must be assets in the corporation worth $100.00, either in the form of cash or contracts, or other valuable property. If there has been any fraud or gross negligence in valuing the contracts or services or the like that paid for the common stock there is a chance that, if the company ever goes bankrupt, you, as a stockholder, may be called on by the creditors to make up the difference between what the stock was actually worth and its par value.
There have been companies where the organization from a technical standpoint is very satisfactory, but where the money paid in by stockholders never actually reached the treasury of the company intact. Sometimes a syndicate of insiders will underwrite the stock at an exceedingly low figure, and sell it to you at par. The money you think goes to develop the business lines instead the pockets of the promoters. A reasonable commission in a case like this is legitimate- but there is opportunity here for a holdup. It is also a mighty good thing to find out from the officers of the A No. 1 Company what they are going to do with the money they get from the sale of stock. It might be legal for the officers to pay themselves fat fees for services out of the cash they receive from the sale out the financial program before you sign your check.
The A No. 1 circular, like all the rest, inspires we will say by enthusiasm, bids you rush into the business before it is too late. They all dwell at length on the enormous earnings of the business and the great need for haste in making an investment. As a matter of fact, while the motion picture business has not attracted a great deal of attention from the standpoint of the investor until recently, the business itself is not new. Men high up in the business say that it his passed out of the stage where anyone can break into the game and make an enormous profit- "Just like that."
When these circulars quote the established companies and mention their great earnings they, of course, attempt to draw a parallel between the older companies and the new concern just being promoted. This is most misleading. It would be the same is to say that because John D. succeeded in building an enormous fortune anyone can do the same. It is possible but hardly, probable.
Experience has shown that nearly all motion picture stocks can be purchased as cheaply, if not at a lower figure, some time after the corporation has been organized than it can the time the promotion is in full swing. There is one large distributing concern that is looked on as being highly successful. The stock of this concern was originally sold at $100.00 a share for the preferred stock, each share of preferred carrying a bonus of one-half a share of common stock. At the present time the market on both the preferred and common stock is about $50.00 a share. If a man attempted to sell his stock now, having bought it at the time of the promotion, he would lose about $25.00 on each $100.00 invested, yet this concern does a business running into the million, and until recently has paid dividends at a high rate. The same can be said of several other companies that have been successful. There have been scores of companies promoted that have not been successful, that have entirely died out of the business, leaving nothing for the stockholders.
A conservative way to promote a motion picture company would be for a small group of insiders to get together, organize their company, pay up the necessary money to get the business started and, having demonstrated what the possibilities of the business were, then recapitalize and offer as much stock to the public as their financial needs require. The investor would then have the past experience of the company on which to base a judgment as to the value of the shares. Unfortunately this method has been followed in only a few cases.
One of the companies that is quoted in nearly all stock circulars is a concern that distributed a serial film in a most profitable way. The stock of this concern was never offered generally to the public. A small group of people who understood the inside working of the business put up all the money that was necessary to handle the situation.
If you stifle that impulse to wire for an allotment of stock you will have done much. And if you miss getting A No. 1 stock you will doubtless have a chance next week to invest in another company equally good. Any legitimate concern organized with the idea of making money out of the motion picture business, not out of stock promotion, will be glad to give you all the detail information you want about its organization and scope- providing you ask seriously and intelligently. You will not lose the real opportunity you are waiting for by taking time to investigate.
Paul H. Davis, "Investing in the Movies," Part Five, Photoplay Magazine, December 1915, pages 155-157.
© 1999, David Pierce, on editing and revisions (if any)
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