The,Economics,Real,Deals,The,E finance, share, loan The Economics of Real Deals

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The Economics of Real Deals vs Selling Smoke & MirrorsBy William CatePublished 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 tofollow 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 aSmoke & 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. Your4 million shares are now free-trading. Because the SEC rarely enforces theInsider Trading Rules, you intend to ignore them. You're ready to do yourfirst small P&D. Your target share price is $3.00/share. You expect to sellyour insider shares on average at $1.50/share.It'll cost money and stock to do the stock promotion. We'll assumethat you'll have to trade your S&M float (create 5 million shares ofbuying) to generate a $3/share price for your S&M company. If we apply theFlorida formula to creating 5 million shares of stock at an average priceof $1.50, the dollar cost to you will be about $750,000. The Floridaformula assumes that your P&D group knows what its doing. You'll have togive 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 1million 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 waythey can make money. You must assume that your one million-share floatwill 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 sellingwon't benefit you.Your next problem is that there are an array of MarketProfessionals that include Market Makers and stock professionals such asmyself that will easily spot your P&D in it's formation stage. We'll buyyour stock cheap and sell it high. We'll be at least two million shares ofyour selling. The Rule of Thumb is that small P&D sellers dump about 25% ofthe volume. (In a major P&Ds insiders can do up to 40% of the dumping. andthey get the money from the Private Placements they arranged during theirP&D.) In our example, you'll have sold 1,250,000 S&M shares at an averageprice of $1.50. You will have grossed $1,875,000. Deduct your $750,000 costand you appear to net $1,100,000. Keep in mind that many P&Ds lose moneyfor the promoters. However, in our example you are a winner.The SEC may not rigorously enforce the Insider Trading Rules. Theyonly 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 onedollar.Your problem is those Market Professionals and brokers who tookmost of your P&D profit on the way up are now selling short your stock. Youmust use your $1,100,000 to buy some of their short sales. You'll do it bytrying to get public shareholders to keep their stock. You'll do it bypromoting 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. TheRule of Thumb is that in the usual small stock promotion, the P&D insidersmake about $150,000 to $200,000. You can usually do about three P&Ds onmost 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 OTCBBcompany. You start out with a company making money, if not a profit. Youeither create the company or buy it. If you are cash-strapped, you buy aturnaround. You take your cash-producing company public via spinoff. Youforget that you have four million insider shares. You move your share priceto $20/share. You use your strong share price to do a Private Placementfinancing. 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 needsof a major power in your industry. You've focused on overseas assetdevelopment because it costs less and is often more attractive to industrygiant corporate buyers.With a strong balance sheet and a $20 share price, you opendiscussions to do a friendly merger with that Industry Giant. As a publiccompany, you let public investors know of your pending friendly merger atMarket Capitalization (share price times issued shares). Your share priceclimbs 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 ordirector of the company. It's worth another $5 million to you. You net $165million in about 7 years.What makes more sense? You can make $3 million in 7 years doingPumps & Dumps. You risk regulatory problems doing it. You'll lose yourfriends and business associates because you'll have defrauded them withyour 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 forputting them into your stock.It's your choice. If you chose the real company strategy, I want tohelp 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/] Article Tags: Real Deals, Insider Shares, Million Shares, Share Price, Stock Promotion, You'll Have