Legal Definitions - Bubble Act

The Bubble Act was an important English law passed in 1720. Its primary purpose was to prevent widespread financial speculation and curb fraudulent schemes involving joint-stock companies, which were early forms of corporations. At the time, many companies were formed with grand promises but little substance, leading to significant financial losses for investors. The Act aimed to regulate the formation and operation of these companies, making it more difficult to establish businesses without a proper royal charter or parliamentary approval, thereby protecting the public from deceptive investment opportunities and corporate fraud.

Here are some examples illustrating the types of situations the Bubble Act was designed to address:

• Imagine a promoter in 1720 advertising a company called "The Grand Scheme for Extracting Sunshine from Cucumbers." This company sells shares to the public, promising immense profits from a revolutionary, albeit nonsensical, process. There's no actual technology, no real business plan, just a charismatic promoter collecting money from unsuspecting investors.

  How it illustrates the term: The Bubble Act would have made the formation of "The Grand Scheme" illegal. It was a speculative venture designed to defraud investors, lacking proper authorization and a legitimate business purpose, which the Act specifically targeted to prevent such corporate fraud.

• Consider a group of individuals forming a "Company for the Exclusive Trade in Air from the New World." They issue shares, claiming exclusive rights to bottle and sell "pure American air" to wealthy Europeans, despite having no actual means of doing so or any legitimate trade agreement. They simply collect investment money from the public.

  How it illustrates the term: This scenario perfectly illustrates the type of corporate fraud the Bubble Act aimed to prevent. The company is based on a deceptive premise, designed to lure investors into a scheme without any real underlying business or proper legal formation, which the Act required to protect the public from such "bubble" companies.