Cheap Money

Bewailing the dearth of risk capital, many a U.S. underwriter had laid part of the blame on the high costs of “red tape” required by the Securities & Exchange Commission’s registration rules. This week, the SEC said: not so. After analyzing the costs of 715 issues (worth $8.5 billion) floated through 1945-47, the SEC found that registration cost only one penny out of every $100 raised.

For all the issues studied, the overall cost was $2.48 for every $100 raised—and $1.88 of that went for underwriters’ commissions and discounts. But these figures failed by far to tell the whole story. For issues of less than $500,000, the costs for common-stock flotations ran as high as $27.90 per $100, compared to $22.60 for preferred stocks and $5.75 for bonds.

The bigger a company, the cheaper were its costs of new financing. For companies with more than $500 million in assets, the cost per $100 amounted to only $1.01; for companies of less than $1,000,000 in assets, $16.94. Even if the cost of raising risk capital was low, most Wall Streeters still thought capital would be short as long as taxes were so high.