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GO PUBLIC - RAISE CAPITALSpinoffs The LOW COST SECRET to Going PublicByWilliam CateFor American Venture Magazine (1999)[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]IntroductionYour odds of raising $200,000 for a Private Company are aboutone-in-four (Money 1/1/98). Your odds of raising a million dollars as aspunoff public company exceed ninety percent. The odds improve because you are offering investors liquidity. They can sell their stock in yourcompany because it will trade on the Over-the-Counter Bulletin Board(OTCBB) in the United States.Liquidity means that investors are more willing to risk their moneyon your stock than on your company. Your stock has the potential tooutperform, by far, your business plan. These facts explain whyprofessionals take companies public to raise money for the company. Stockpromoters abuse the OTCBB system, but honest entrepreneurs must use it tosucceed.For Centuries, investors have told business owners to sell stocknot steak (your business plan). If you find investors for your steak,they'll want half your steak for their money. If you have buyers for yourstock, you'll keep control of your company. In the financial world, fewinvestors buy steak. There are millions of stock buyers.If you don't hear the investors' mantra to buy stock not steak,you'll repeatedly fail in your efforts to create a successful businessfinancing formula.Market Capitalization vs Balance SheetYou beat the odds. Investors risk a million dollars in your privatecompany. You work hard and succeed in creating a three million dollarcompany in five years. Your company's pretax profit is $750,000 (25%). Yousell your private company. Any business broker will tell you that you'vemade a good deal if you sell your private company for 1.5 times the pretaxprofit. This means you and your partners gross sale will be less than$1,125,000. Your half of the sale will be about $562,500. This is a BalanceSheet sale of your successful company.Market Capitalization (Market Cap) is the share price multiplied bythe issued shares of the company. It's the valuation formula for publiccompany. Let's assume that you own 4.6 million shares of the 5.6 millionissued shares in your company. This is the spinoff formula. I would use itto take your company public. Your stock trades on the OTCBB in the UnitedStates. You raise the million dollars because the odds favor your success.[If you work with me, I have the European investors committed to my spinoffprogram.] You work hard and succeed in creating a three million dollarcompany in five years. Your company's pretax profit is $750,000 (25%). Youmerge your public company with a giant in your industry. Since you areamong the few cash-producing OTCBB companies and your stock moves up on the news of the pending merger, let's make a conservative assumption that the merger occurs at $5/share. Your 4.6 million shares sold at Market Cap gives you $23 million.You can sell your successful private company at its balance sheetvalue of $562,500. You can sell your successful public company at itsMarket Cap value of $23,000,000. You'll make your choice after you readthis report. A private company decision is a base hit. A public companydecision is a home run.It costs money to raise money. You can use your seed money and workwith quality professionals like AVCE to raise private risk capital for yourventure. You can use your seed money to do a spinoff and go public. Thequestion you should ask your prospective investors is do they prefer stockor steak. In my nineteen years of stock market and investment experience,stock is the overwhelming choice of investors.Let's assume that your seed money to raise capital comes from thesale of ten percent of your company. If you sold your seed capital to steakinvestors, in five years, they'll earn $56,250. If they bought stock,they'll earn $2,300,000. If you were the investor, which would you preferstock or steak?Stock Is MoneyIf you decide to print U. S. Dollars, the U. S. Secret Service willbe hunting you within a few months. You can get a permit to print moneyfrom the U. S. Securities and Exchange Commission (SEC). It's called stock.Your job is to convince investors and owners of cash-producing assets thatyour stock is worth more than their dollars. When you do a spinoff, you canuse your stock to buy cash-producing assets, without touching yourcashflow, that builds your business into a three-million dollar grossingoperation within five years.You can use your stock wisely. You'll add cash-producing assets. Infive years, your public company will be grossing ten or twenty milliondollars. It will cost you no more to buy these assets than it costs toprint the stock certificates.I've been in this business for nineteen years. I know that mostOTCBB companies are run by stock promoters. Their goal is to move up theircompany's share price and sell their insider stock to the public. It's atake the money and run strategy. The SEC has waged a sixty year war againstthis strategy. The SEC has failed. There's three times more stock fraudtoday than in 1991.In part, the SEC failed because stock promoters don't accept theMerger at Market Cap Strategy. It takes hard work to create a successfulcompany. It takes perseverance to overcome problems. Why struggle toovercome business problems? You can sell your stock in a year? If you can'tanswer that question, you should join the ranks of the stock promoters.However, hire a good attorney. Eventually, you'll have to justify your Pump& Dump Strategy to the SEC. Also, tell your wife and children to expect tomove every two or three years. It takes about that long for your laststock promotion to go sour. One proof that the Merger at Market CapStrategy is better is that I've lived in San Mateo County, California since1974. Nothing goes sour, if you ensure that everyone wins.The Public vs Private Risk Capital Option1. It's about twenty times easier to raise money for a public company thana private company.2. You'll make about fifty times more selling a Public Company at MarketCap than a Private Company on its balance sheet.3. You can use public company stock to buy cash-producing assets andimprove your bottomline.Strategies and Costs of Taking Your Company PublicThere are three ways to take a Private Company public in the UnitedStates. 1. You can do an Initial Public Offering (IPO). 2. You can buy ashell or do a reverse merger with a shell. 3. You can do a spinoff.1. Initial Public Offerings (IPO)Over eighty-five percent of the companies that go public use theIPO process. The good news is that your company will get a multi-milliondollar cash infusion when the underwriting succeeds. The bad news is thathalf the IPOs fail and private companies with cashflow less than $5 millionrarely qualify to start the IPO process.If you are unaware of the costs of doing an IPO, here's my articlein "Equity Finance Solutions" from Volume 3 Number 10 (10/99):-----* IPO CostsThe following data is taken from "Going Public" by James B.Arkebauer (1994) and the IPO cost website at:http://www.intranet.ca/~tgil/p2.html You should keep in mind that costs vary based upon the complexity,the size of the underwriting and the history of the private company. The following IPO costs would be reasonable for a company with over$2 million in gross revenues and a 3-5 year operating history. A startupcompany would pay less than half this estimate to do an IPO.In some cases one or both sources acknowledge a cost listed below,but fail to offer an estimate. In those cases, I've supplied an estimatebased upon my IPO experience.Pre-IPO Costs$300,000Legal Costs$175,000Accounting$80,000Printing & Mailing$100,000Translation$30,000Market Prep Costs$90,000Investment Bankers$50,000Consultants$50,000Moody's or S&P$6,000Blue Sky Fees$20,000 (California only)Transfer Agent$2,000Mgnt & Admin$200,000SEC Filing Fee$5,000Taxes$15,000Total$1,123, 000Underwriting Costs The underwriting cost is a function of the money raised in the IPO. TheNASD allow up to 18% in costs. If the gross revenue from the IPO is $10million, this is an underwriting cost of $1.8 million. Here's how the costs breakdownNonaccountable Expense 3%Accountable Expense 5%Discount 10%Company supplied IPO buyers usually 50% (10%-90%)Commission 5% - Its paid by the brokerage firm client and doesn't affectthe money received by the company.---- Unless your private company is grossing over $20 million a year,doing an IPO doesn't make sense.ShellsYou can buy an OTCBB Trading Shell for about $150,000. If you areexperienced in shell purchases, you will employ professionals to evaluatethe shell. This will cost you another $100,000. Unless you are verysophisticated, you must file an S-4 with the SEC. This will cost youanother $100,000. Expect to pay about $350,000 for your OTCBB TradingShell. Expect to buy a dirty shell. Look for hidden stock, pending lawsuitsand off-line debt. I'm among the professionals that buyers use to evaluateshell purchases. My advice to a shell buyer is "Buyer Beware!"The alternative to buying an OTCBB shell is to do a reverse merger.This allows the insiders of the shell to keep their stock. This strategywas popularized about a decade ago. It's the worst option ever devised forgoing public. The past insiders sell their stock into the public marketcreated by the new shell owners. It's rare that the new owners createenough buying to overcome this selling. The share price collapses and theprivate company and public small capital investors are the losers.The retail price of a reverse merger deal is often below $100,000.There's no reason to have professionals evaluate the purchase, since you'veagreed to buy the shell sight unseen. The SEC filing costs will be around$100,000. Budget about $200,000 on the front end to do the reverse merger.Budget about two million on the back-end to buy the stock of the shell'sinsiders.A wary buyer can't be protected in a reverse merger. If you do areverse merger, expect to be a loser.SpinoffsThe 1934 U. S. Securities Act states that any private company withmore than five hundred American public shareholders must become a reporting (public) company. Over the years, the SEC has used the Courts to limit effectively this option to Private Companies whose shares are distributed by a Public Company with over five hundred American public shareholders. The process has become known as a spinoff. There are tens of thousands of examples of successful spinoffs. They range from AT&T's spinoff of Lucent Technologies to my dozens of OTCBB companies. Ifyou visit the SEC's website, you'll find the five hundred shareholder rule.Because a spinoff is created by paying your stock to the publiccompany's shareholders, spinoffs are clean. You don't have to worry abouthidden stock. There are no more shares in your spunoff public company thanthose distributed by the public company. The spinoff sponsors publiccompany can be sued. The spinoff sponsors insiders may have hidden millions of warrants. The spinoff sponsor may have off-balance sheet debts. You don't care. You aren't responsible for these problem, if they exist.Spinoffs are clean. It's why I favor using them.It costs money to do a spinoff. You need an audit for your privatecompany. An attorney must file the spinoff documents with the SEC. Yourpublic company must be rated by S&P or Moody's. You need to print sharecertificates and use a Transfer Agent. If you lack the contacts, you need aconsultant to find a Market Maker and arrange a Private Placement financingfor your public company. If you do a spinoff, you should budget $150,000.Funding Shells and SpinoffsSuccessful IPO's come with a built-in infusion of money. It's onereason they are so expensive. If you go public with a shell or spinoff, youmust find a Private Placement funding source. When you offer investorsstock and not steak, your odds of finding investors greatly improve.If you want professional help to raise the money, expect to pay forit. My advice is to find a consultant to arrange a spinoff and find aPrivate Placement. I offer the service. I raise a million dollars fromEuropean Private Placement sources. You can decide to go public with ashell. If you use a shell, ask your market makers and investor relationsfirm to find "accredited investors" for your company. If they can do it,expect to pay a retainer against twenty-five percent of the money raised.Going Public1. It takes money to raise money. If you aren't willing to pay retainers,don't waste attorneys, accountants and consultants' time. They won't helpyou.2. IPO's are costly and beware of buying a shell.(Edited to 1,500 words) Article Tags: Private Company, Million Dollars, Public Company, Raise Money, Five Years, Share Price, Seed Money, Cash-producing Assets, Reverse Merger, Five Hundred, Private Placement