Each one of these legal entities must have its own capital assets. Each of the subsidiaries owns its own plant and equipment in its own name-in other words, each has a legal title in a definite accumulation of economic capital assuming of course that they are primary or operating companies. The holding company's assets are the securities of its subsidiaries. To these only does it have the legal title. But as a stockholder in each of the subsidiaries it enjoys all of the rights and powers embodied in that relation, including a claim on the basic capital.

We may, then, restate the results of the process of securities-substitution to be:

1. The continuance of legal title to definite accumulations of basic underlying capital in legally independent ownership entities.

2. The combination, either in whole or in part, of such accumulations of capital into an economic business unit.

3. The legal unification of proportionate claims to income accruing to such capital and

4. The possibility of a centralized, unified, control over it.

Participation as an Application of the Principle of Substitution. That there is more than one use that may be made of the principle of substitution of securities has already been indicated in the preceding paragraph. In the first place, it may be employed to create a more or less permanent relation between the several companies involved, so that the holding company becomes a participant in the enterprises conducted by the companies whose securities it holds. In the second place, the arrangement may be characterized by its temporary nature, being employed merely to facilitate the accumulation of sufficient capital by the companies whose securities are held, the ultimate aim of the holding company being to sell these securities finally to permanent investors. In such cases the holding

company does not aim to become a participant in the enterprises of the other companies, but renders them a service by furnishing the money capital to be converted into business capital, namely, it finances them. These two uses of the securities-substitution principle may thus be said to give rise to two classes of holding companies, namely; (1) participation companies and (2) finance companies.

Kinds of Participation. — Participation through substitution of securities may be either partial or complete; and it may arise merely out of a voluntary desire, or out of economic or legal necessity. Present day practices present three distinct applications of the participation principle, each of which gives rise to specialized companies through which they are brought into use.

A. The first use of participation is to minimize as much as possible the speculative features that characterize most securities and in this way to widen the market for them by making them appeal to small investors. A particular issue of securities may have a high rate of return; another, a low rate; a third, may exhibit irregular fluctuations, while still a fourth gives a regular, stable, income to the holder. By combining the earnings of a large number of various types and kinds of securities the varying rates of return from individual units may be averaged, the high interest and dividend rates counterbalancing the low. A wealthy capitalist is in a position to apply this law of averages for himself to his investments in securities; but a small investor is in no position to do so. He must take a chance unless some other agency applies it for him. This may be accomplished through participation by substitution of securities. For instance, a holding company may issue its own securities to investors and use the funds received from them to purchase a great variety of securities in the market, or to purchase them directly from the issuing organizations. It then derives its income from the large number of

enterprises whose securities it holds and transmits it to the holders of its own securities in averaged form. Such a procedure is an application of the investment principle to securities capital, and the holding companies performing this function may very properly be called investment companies.

B. The second use of the participation principle arises out of a desire to establish a unified control over one or more securities-issuing organizations through the acquisition by the holding company of all or a majority of their voting stocks. In operations of this kind there is naturally a tendency to make the participation as complete as possible, giving it more the character of true ownership. In the United States, this is the chief purpose for which the security-holding power has generally been requested. For this reason the name "holding company has come into general use to designate participation organizations of this type. However, in order to distinguish them clearly from the other types of holding companies, they will here be called control companies. Where the participation of the control company in other companies is only little more than a majority control, the latter are usually designated as controlled companies; and where it is complete or very nearly so, they are known as proprietary companies.

C. The third use arises out of the existence in certain industries of economic or legal conditions that make it impractical to issue the securities of operating companies directly to the public. In order to effect the "securitization" of capital invested in such undertakings, it becomes necessary to interpose between the final investor and the organization directly conducting the enterprise a secondary securities-issuing company that can assume, as its permanent business capital, the securities of the operating concerns. To this type of participation company is given the name, assumption company.

Commenting upon the occurence of these three types of participation companies and their distribution throughout the world, Professor Robert Liefmann, a recognized authority on the subject, says: "It is noteworthy that, today, in each of the great commercial and industrial countries some one of these three types of companies is conspicuously prominent. England is the land of the investment trusts and investment companies. In America, control of other undertakings is almost exclusively the purpose for which the substitution of securities is employed. In Germany the securities-assumption companies have attained a prominence that far surpasses any that organizations for the accomplishment of like ends in other countries exhibit. But any single one of these three types of participation companies is not to be found exclusively in its respective country. There are in England also some control companies; in America also some investment companies, though they emanate chiefly from England, and also a few securities-assumption companies; in Germany also a few control companies. But of the three types described, each one is, respectively, predominant in some one of the three countries, so that each type may be regarded as characteristic of a given country. Of other states where securitization of capital has developed, France has a number of investment companies, and the principle of securities-assumption also has attained some development. Belgium, to the contrary, has followed the German example and has a larger number of assumption companies because it has developed just that particular field for capital investment in which the system of assumption companies plays the chief rôle (electric light and power establishments). Holland, as an interest receiving state, follows the French plan and has a number of investment companies.

1 R. Liefmann, Beteiligungs- und Finanzierungsgesellschaften, Sec. Ed. 1916, pp. 78-79 (Translation by the author).

In Switzerland, chiefly as a result of outside influence, a whole array of investment and assumption companies have been formed. In all other countries, the principle of substitution of securities has at times been used in one or another of its several different forms, but these have not as yet attained a sufficiently advanced industrial development to permit of ascribing to them, with any degree of certainty, any marked tendency of development in one or another direction."

It is quite apparent that a participation company need not confine its activities to any one of these three uses to the exclusion of the others. Indeed, it is very common to find a single company performing two and sometimes even all three of these services. Nevertheless, there are a large number of companies that are distinctly representative of these several types. A brief description of some of these companies will serve to illustrate the practical use made of them.

INVESTMENT COMPANIES

England is the great home of investment companies. They have been in use in that country since 1868. From that time on they increased slowly in number for about two decades. In 1888, however, began a period of very rapid growth that was checked only by the advent of the crisis of 1892. Since 1897, they have again become prominent features of the English business world, and in 1911 there were over 125 of them listed. Their adoption by other countries has been rather limited, with the possible exception of France, where they are fairly common.

English Investment Companies. A study of the extent and kinds of holdings of English investment companies leads one to the conclusion that there are two general classes, namely; (1) those that carry on a general investment business by purchasing securities of enterprises engaged in many industrial and commercial fields;