Evening star., 1933-03-30
Let the Seller Beware!

President Roosevelts recommendation
to Congress, conveyed yesterday in a
brief message, that legislation be en-
acted for Federal supervision of traffic
in investment securities in interstate
commerce is in effect that national
"blue sky law be written, based upon
the principle embodied in statutes en-
acted from time to time in the States.
It contemplates an extension of the
ancient rule of caveat emptor, which
means that the buyer should beware.
The President declares that the seller
should also beware, bearing the burden
Of telling the whole truth regarding the
securities which he offers. In short, in
the language of the oath administered
to witnesses in the courts, he should in
his proposals tell the truth, the whole
truth and nothing but the truth.
The enactment of blue sky laws" was
begun in the States in 1911, when the
Kansas Legislature passed all act pro-
hibiting the offering and marketing of
securities based upon speculative enter
prises, the validity of which was
doubtful A remark by member of
that Legislature while this measure was
under consideration gave the name to
this line of enactments, he saying that
the restriction to be placed upon in
vestment concerns should be as far
reaching as the blue sky itself.
Some of the laws thus passed in the
States failed to meet the test of court
consideration and were declared in
valid Others were sustained In 1917
the Supreme Court of the United States
upheld as constitutional such laws en-
acted by Ohio, Michigan and South
Dakota, the decision affecting similar
legislation in twenty-six States. The
Court declared that prevention Of de-
ception is within the competency of
government and concluded:
The statutes burden honest business,
1t is true, but burden it only that
under its forms dishonest business may
not be done. Expense may thereby
be caused and inconvenience, but to ar
rest the power of the State by such
considerations would make it impotent
to discharge its functions. 1t costs
something to be governed.
When business is brisk, when money
is plentiful. as for a few years prior
to the Autumn of 1929, speculative en-
terprises flourish and investment oppor-
tunities, so called, are offered in great
number, often with little actual basis
and with slight chance of gain or profit
save to promoters. Shrewd salesman
ship effects the transfer of enormous
quantities of stock certificates to people
without experience in business and
without Judgment as to values. A buy
ing fever prevails. Stocks in the
veriest Of wildcat schemes are floated
in terms of tens of millions. Perhaps
for a little while dividends are paid
and with an active stock market pre-
vailing the quotations soar. Some peo-
pie make profits by quickly selling,
others hold on for the sake of the
promised greater returns and even
higher prices for their securities. Then
comes the slump in general conditions
or the collapse of the fraudulent or
insecure enterprise and all is lost.
1t Is now proposed to protect the
buying public by subjecting the issue
Of securities offered for general or in
terstate sale to Federal control or SUI
pervision, With regard to the validity
OF the enterprises or projects upon
which they are based. There can be
no honest objection to such a safe
guard against fraud. OF course, the
matter of the honesty of the offering
must be judged by authorities whose
judgment may be at fault, but at least
a check can be thus imposed upon
actual fraud, in either the organization
of the enterprise or in the manner of
its exploitation.
Let the seller beware!' That princi-
pie should be declared as the basis
for any business for which the capital
OF the people is required for invest
ment.