The Economics of Real Deals vs Selling Smoke & Mirrors
By William Cate
Published September 1999
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
If you want to make real money in the Market, you don't want to
follow the Pump & Dump (P&D) crowd's approach to the OTCBB. Promoting your Smoke & Mirrors (S&M) stock and selling your shares into the Market isn't very profitable.
Let's assume that you spent a million dollars to take public a
Smoke & Mirrors company on the OTCBB. You have four million insider shares. You raised $500,000 by doing an IPO at $0.50/share. Thus, the S&M company has 5 million shares issued. This is about the limit of shares workable for any OTCBB company.
You wait one year, spending your IPO money on your salary etc. Your
4 million shares are now free-trading. Because the SEC rarely enforces the
Insider Trading Rules, you intend to ignore them. You're ready to do your
first small P&D. Your target share price is $3.00/share. You expect to sell
your insider shares on average at $1.50/share.
It'll cost money and stock to do the stock promotion. We'll assume
that you'll have to trade your S&M float (create 5 million shares of
buying) to generate a $3/share price for your S&M company. If we apply the
Florida formula to creating 5 million shares of stock at an average price
of $1.50, the dollar cost to you will be about $750,000. The Florida
formula assumes that your P&D group knows what its doing. You'll have to
give away some of your stock to stock brokers, investor relations firms,
and others. If you know what you are doing, you'll give away less than 1
million shares. Whatever stock you give away will be sold into your P&D.
Let's assume that for this small P&D, it's 500,000 shares.
Public investors on the OTCBB are speculators. It's the only way
they can make money. You must assume that your one million-share float
will be sold into your stock promotion. This means that 1.5 million shares
(remember the 500,000 shares you paid to create buying?) of the S&M selling
won't benefit you.
Your next problem is that there are an array of Market
Professionals that include Market Makers and stock professionals such as
myself that will easily spot your P&D in it's formation stage. We'll buy
your stock cheap and sell it high. We'll be at least two million shares of
your selling. The Rule of Thumb is that small P&D sellers dump about 25% of
the volume. (In a major P&Ds insiders can do up to 40% of the dumping. and
they get the money from the Private Placements they arranged during their
P&D.) In our example, you'll have sold 1,250,000 S&M shares at an average
price of $1.50. You will have grossed $1,875,000. Deduct your $750,000 cost
and you appear to net $1,100,000. Keep in mind that many P&Ds lose money
for the promoters. However, in our example you are a winner.
The SEC may not rigorously enforce the Insider Trading Rules. They
only respond to public complaints in about 10% of the P&D cases. However,
they respond to nearly 100% of the P&D's whose share price collapses. Thus,
you must support your P&D share price as it slowly collapses below one
dollar.
Your problem is those Market Professionals and brokers who took
most of your P&D profit on the way up are now selling short your stock. You
must use your $1,100,000 to buy some of their short sales. You'll do it by
trying to get public shareholders to keep their stock. You'll do it by
promoting your stock into the short selling. In the end, you'll spend about
$900,000 of your profit defending your share price on the way down. The
Rule of Thumb is that in the usual small stock promotion, the P&D insiders
make about $150,000 to $200,000. You can usually do about three P&Ds on
most S&M companies, before you can't find more pigeons for the next P&D in that company.
In the OTCBB Market, P&D promotions are more complex that outlined above. However, the costs and resulting net profit are as I've outlined above. So let's assume that you can make about $600,000 during three small P&Ds over about three years with your S&M deal. To make more money, you'll want to develop "a stable" of S&M companies. Over a seven year period, let's assume you can do three P&Ds on five companies. You'll make $3,000,000.
For years , I've argued that the money is in doing one real OTCBB
company. You start out with a company making money, if not a profit. You
either create the company or buy it. If you are cash-strapped, you buy a
turnaround. You take your cash-producing company public via spinoff. You
forget that you have four million insider shares. You move your share price
to $20/share. You use your strong share price to do a Private Placement
financing. You use your strong share price to buy cash-producing assets.
Over a 5-7 year period, you create a hundred-million-dollar company.
From the beginning, you've made your acquisitions to meet the needs
of a major power in your industry. You've focused on overseas asset
development because it costs less and is often more attractive to industry
giant corporate buyers.
With a strong balance sheet and a $20 share price, you open
discussions to do a friendly merger with that Industry Giant. As a public
company, you let public investors know of your pending friendly merger at
Market Capitalization (share price times issued shares). Your share price
climbs to $40/share in anticipation of your pending merger.
You sell your 4 million shares at $40/share in the friendly merger.
You make $160 million. You get your "Golden Parachute" as an officer or
director of the company. It's worth another $5 million to you. You net $165
million in about 7 years.
What makes more sense? You can make $3 million in 7 years doing
Pumps & Dumps. You risk regulatory problems doing it. You'll lose your
friends and business associates because you'll have defrauded them with
your S&M deals. Some of your P&Ds will fail and cost you money. Or, you can create one real company. You'll make $165 million. You won't have to hide from the SEC. Your friends and business associates will thank you for
putting them into your stock.
It's your choice. If you chose the real company strategy, I want to
help you. If you prefer the P&D strategy, please don't contact me.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] |