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The Economics of Real Deals
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/]
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