Going Public: A Unique Perspective

In 2002, your private company grosses $1 million. Your Fairy Godmother will give your company $10 million. You won't have to repay the money. You'll keep 100% equity in your company.

Your alternative is to have our Sponsor take your company public. They'll raise $10 million for your company. The process will cost you 43.2% of your company. Your insiders will retain about 4.626 million shares (56.76%) of your company's stock.

In either case, you'll use the money wisely to build your company. In five years or less, you'll want to sell your company. At the time of your company's sale, your company's profit is $3 million/year.

Which offer should you have taken five years earlier to get the best price for your company?

The Fairy Godmother option leaves you with 100% ownership of your private company. Your private company should sell for 1.5 times its annual profit (considered by most business brokers to be a very high estimate). Your golden parachute is worth $4.5 million.

The Sponsor’s program assumes a public company merger in five years. Your stock should trade over $60/share. At that price, your 4.626 million shares will be worth over $277 million.

Which was the better deal?

The moral of this story is: take your operating company public. The money you'll raise from your equity financing isn't as much as the money you'll earn from the sale of your stock.

You will spend $1,500,000 to $2,250,000, perhaps more to do your IPO filing. Add to that an average of $300,000 paid up front to an underwriter for "non-accountable" and non-refundable fees. You’ll also pay all the costs of doing the "Dog & Pony Shows," which will average about $10,000/presentation.

Most modern IPOs leave the insiders with considerably less than 50% ownership of their companies. You’ll lose control and could conceivably be voted out.

Market professionals then often immediately begin to sell your stock short. In a short time, this can add 10-20% more stock into the market that never profits your company a single dime! Your investor relations costs go up accordingly, though you have no benefit from it.

Sound depressing? The hard fact is that of small companies taking this route, less than 50% ever finish the IPO process. The odds of bucking the stock short selling which takes place is even lower. This is just one of the major reasons why over 98% of all IPO companies , trading on the OTCBB, fail within five years of doing an IPO.

2. REVERSE MERGER SHELL – Another avenue is called a "reverse merger." A public company buys your stock for restricted stock. You own over 50% of the issued stock for your company. The past management then sells their free trading stock into your best efforts to improve the share price of your public company. The result, once again, is that stock support costs destroy your company as past management laughs all the way to the bank.

The buyer’s cost of a Reverse Merger Shell are about US$150,000. If you assume that past management owns four million shares of your reverse merger stock and sells it at an average price of $2/share, your reverse merger will cost the public eight million American dollars. It’ll cost you $600,000 in Investor Relations and to keep your share price at $2/share, you should budget about US$2.4 million a year to pay for your Investor Relations Program. These Investor Releations support costs will eventually destroy your company.

As of December, 2001, the cost of an OTCBB trading clean shell with 90% control is between $750,000 and $950,000. To this you must add the costs of proper Due Diligence ($100,000) and the filing of the S-4 ($150,000). Thus, the cost of a clean shell will exceed $1,000,000.

It will take you 6 months or more to buy a clean shell. However, there are some major pitfalls even here. You must often reduce the issued stock of your shell to try to gain control over your share price. The stock reduction process is called a reverse split or rollback of the stock. This will anger your present shareholders and their brokers. Those brokers were your company’s market makers. You must now find new market makers for your public company. The former unhappy market makers may well destroy your company by selling it short. Your shareholders may simply dump their stock.

Let’s assume that the stock held by the public, after your rollback of stock, is one million shares. The disgruntled market makers sell short one million shares. You’ve gotten your share price to $2/share at a cost of about $300,000 and your annual costs of keeping your share price at $2/share will be about US$1,200,000. To use your stock to buy cash-producing assets, it should trade at $6/share or more. To manage your two million share float at $6/share will cost you about US$2,400,000/year. The Investor relations costs will continue to grow as your share price strengthens.

Our recommendation? Avoid shells!

4. SPINOFFS – Fourth, we come to "spinoffs," private companies which are spun off from companies which are already public. This shortens the process considerably, down to 8-12 months. It reduces cost. You also have the advantage of it being a new company. No hidden secrets, no previous bad history, no hidden shares of stock.

However, depending on who is doing the process for you, you may still find yourself dealing with excessive shares, short selling and other difficulties.

Nevertheless, in a world of difficult choices, a spinoff remains the best method of those available to you. It is simpler, safer and less expensive than an IPO. Costs are usually equal to those of a shell. You must find the right ethical team to do this for you. There are many spinoff sponsors now in existence. It’s a rapidly growing market segment of the stock industry. In each case, you will still need a spinoff sponsor – a company established to spin you off into the market – an underwriter, a securities attorney and market makers.

You will still be relying totally on the acceptance of your stock in the general market. If your market makers won't support your stock, all your costs to acquire a spinoff will have been for nothing. If they are less than ethical, you will find yourself being sold short no matter how hard you are working to raise the value of your stock. And each of these various entities will have its own separate fees for services, unconnected to any other. Your chances for success are, at best, 50-50... and the price will be high, both financially and in terms of failure.

The underwriter requires that you list your shares on a European Stock Exchange. And, that you’ll fund a European Investor Relations Program to support your share price. However, they will buy up to US$10 million worth of shares of your Treasury Stock, to ensure that you have the funds to buy cash-producing assets to grow your company. There is no other spinoff opportunity which offers all this, at any price, much less the reasonable cost of this one. Further, we know of no other group which can provide, out of its own offshore investor pool sources, up to $10MM in offshore private placements for your company.

Notwithstanding a complete breakdown of the market, your chances for success, if you can qualify for this program, have now grown from 50/50 to over 90%.

If you are an entrepreneur seeking powerful growth, with an exit strategy in two to five years, the Supported Spinoff™ program can make you very wealthy. If your goal instead is to build a successful company and leave it to your heirs, your best opportunity still lies here. But if you feel it is too soon for an offshore private placement for your company, now is the time to begin (1) educating yourself and (2) building a fee account against such a time.

For any company to become a publicly traded and reporting company, many things have to occur. In the case of a Supported Spinoff™, there will be a review of US Dollar issues, tax considerations, stock issued and transferred, audits done, legal filings with the SEC, corporate ratings completed, Market Maker secured, mailings done, phone calls and faxes initiated and often some travel undertaken.

Some clients assume that these folks will take on the full risk of such financial outlays and that the new company need only sit back and make payments for such services after all has been accomplished and investor funds have been delivered. (Occasionally, such companies have been known to simply end the process after major outlays have already been made because "we've changed our minds," leaving the professionals with egg on their faces and depleted bank accounts.)

While up front or retainer fees have gotten bad press due to some unscrupulous people in financial fields, they are nevertheless a necessary, realistic and ethical fact of existence for many legitimate areas of business.

Spinoffs are neither new nor unique. Many thousands of companies have chosen this route over the past sixty or seventy years. (Lucent Technologies, spun off from AT&T is, perhaps, the best known.) But a Supported Spinoff™ is a whole new ball game.

What’s being offered is something quite different – a complete package, including a Spinoff Sponsor, an Underwriter and a Market Maker – which can assure our clients that they will receive the funds they expect. We reduce the risk of entering the marketplace minus a method of raising funds. We do it via both the market itself and offshore private investors already in hand. Additionally, this group will support your stock for a period of up to five years to help ensure its value remains high. No other group markets such a unique package. And I stress again, this is NOT an IPO (Initial Public Offering) with all the higher costs, higher risks, uncertainties, "dog and pony shows" and management attention taken away from running the business.

Though I have mentioned it before, I will repeat that it is critical that you DO YOUR HOMEWORK. If you do not fully understand the process of becoming a publicly traded and reporting company, I cannot stress strongly enough that you MUST educate yourself on the process. Remember this statistic: Approximately 98% of all companies which go public on the OTCBB fail within five years. In virtually every case, the major reason is that the principals did not understand the responsibilities nor how to protect themselves from potential pitfalls. Please get educated!

Proper budgeting, a clear understanding of costs, risks and rewards and a solid grounding in the responsibilities of being an American reporting company, as well as firmly supporting your stock, are critical to the process. Neither the Supported Spinoff™ Sponsor nor the Underwriter/Investment Group will approve or accept any firm which does not demonstrate a clear understanding of these processes. (The Supported Spinoff™ Sponsor is legally accountable for the actions of its spinoffs for two years. Thus we are seeking only real players looking to expand in a manner that benefits all, including and especially the public holders of their stock.)

Some of the questions you need to be asking of yourself are:

1. Do we understand fully the responsibilities and burdens of becoming an American publicly reporting company? Do we understand the positive values of such a move?

2. Have we budgeted properly for the Supported Spinoff™ process? Do we fully understand that the payment of various fees is a part of such a process?

3. Are we prepared to present an Audited Financial Statement (an SEC requirement)? Have we budgeted for that process? Even at the outset, can we present a letter from our accountant attesting that our financial records have and are being kept to Generally Accepted Auditing Practices (GAAP) standards? [For foreign companies, an audit is essential, but it can be done in accordance with local audit principles.However, a GAAP audit is often easier to have quickly reviewed by the U.S. Securities and Exchange Commission (SEC).]

4. Do we have an international expansion plan? Can we show how an infusion of up to $10MM by the Investment Group will be used to accelerate those plans? (Paying down your debt should not be a principal part of your use of funds. That should be accomplished with expanding income. Salary increases for principals will also not be acceptable.)

5. Do we have a plan in place for an internal stock support program and stockholder communications? (We will help you develop your stock support program.) Are we willing to train or hire an executive to be responsible for our investor relations program? Have we budgeted fully for its implementation? Do we know of one or more well regarded stock support firms with which we can work to ensure excellent stockholder relationships?

6. Do we fully understand the program being presented by CFG in comparison to other programs? Have we fully investigated its value to our company?

7. Are we prepared to pool and vault ALL insider stock for the required period of time (5 years) or until such time as we receive an acceptable buyout offer? Are all our current principal shareholders/owners aware of our proposed direction? Are they also willing to agree to the stock pooling agreement? Do we understand the purpose and value of such an agreement and pooling program?

These are some of the more critical questions you should be asking... and answering. If you're not financially and organizationally prepared to go forward at this time, be honest with yourself. Begin a budgeting/savings and education process to prepare yourself for a future program with us. If you can't qualify this year, we will work with you to prepare for next year if we feel your company is in the ballpark of the type of firms we're seeking.

The following is part of an article written by our program underwriter, a highly published author. He stresses a number of points which I may not yet have covered with you. If you have further questions, contact me.

In presenting the financial opportunity represented by the spinoff funding group, a phrase which has come up a number of times is: "It sounds almost too good to be true." This indicates to me that either I'm not explaining this well enough, or a really well planned and sound "win-win" financial opportunity is completely unique in the business world.

Let me be very clear when I say that this funding is not a "giveaway" by any stretch of the imagination.

In talking with one of the Supported Spinoff™ Sponsors recently, he mentioned that in his many dealings with entrepreneurs at many levels, he found that the vast majority of them had been trained to "think small." The reason for this was that they were constantly being reminded of the difficulty of raising capital, of high interest rates charged by lenders to small companies and the insistence by many venture capitalists that they surrender control of their companies. If, instead, they continued to "think small," they could still retain control of their company, even if they were unable to expand due to lack of capital and a funding strategy.

I've found similar attitudes. When I discuss a $10 million funding, I've often heard, "But we don't need that much" or "We only need $2 million." These are often examples of being stuck in a mental rut, locked into what is thought to be "possible."

In such cases, my response is, "I understand. That's what you've been thinking about and planning...and that's fine. However, can you set that plan aside for a few moments and imagine what you might be able to do if you had $10 million?" I generally hear a long silence at that point. Then the ideas begin to pop, the possibilities expand. If, however, you really do need a lesser amount, it merely means that you will retain a larger percentage of your public company since less will have to be sold to raise the funds in the Offshore Private Placement.

What is the main thing the Supported Spinoff™ Sponsors and Underwriter suggest? Acquisition. You can grow the value of your company rapidly by finding cash producing companies in your field, supportive of your main product/service, that you might be able to acquire for stock and cash.

It builds company equity far faster than by simply ramping up production or marketing. The intriguing thing is that should that new "division" you just acquired happen to meet the requirements of the Supported Spinoff™ Sponsor which got you the original funding, they will be happy to look at the possibility of another spinoff and subsequent funding. What they're investing in is the potential of your company and its acquisitions.

Probably the single biggest factor which made me decide to work with this group was their willingness to pool their small stock percentage along with yours. In other words, they will only be taking a profit at the same time you do, when you sell out to a larger company. They're taking the risk of success/failure right along with you. Combined with their external stock support program, you have a funding group which will work with you for up to five years ensuring everything possible to maintain your share price. You won’t find any other group in the financial community making such an offer.

My suggestion? Think BIG! What was your original dream? Might you be able to achieve it faster than you've thought? How big are you willing to grow? As an entrepreneur, what are you willing to tackle? If you can qualify for the program, we'll support you in your rapid expansion toward your goals.

In discussing the private placement spinoff program I represent, I have mentioned both internal and external stock support programs. A number of you have questioned why this would be necessary. Just what is the purpose of spending all this money for stock support programs? The Underwriter for the program has written extensively on this subject. It is the foundation for the success of your stock values using this program, how you will ensure that your share price is at least $40-60 at the time you decided to sell your company or merge with another. That $40-60 share price results in over $184-276 million to the company insiders.

The Underwriter's story is clear. You must support your stock price whether you use our program or you do an IPO or any other public offering. In our case, we provide a powerful five-year FREE external stock support program to bolster and extend the value of your insider program. Combined, the two programs create a strong marketing effort for your stock in the US, the UK, Europe, South America and Asia.

Remember that selling the concept of owning your stock is just as critical as selling the concept of your product or service. The customer list may be different, but both represent profit potential for you and your company.

More good news. The benefits of our expansion capital program are increasing. I've recently learned of several programs being put into place for the clients.

1. Most Supported Spinoff™ Clients are non-American public companies trading on the OTCBB. Assuming the Supported Spinoff™ Client’s products or services have a potential market in the United States, the Supported Spinoff™ Sponsor will act as an import management service and assist them in developing an American market.

2. Another benefit we foresee is that many of the funded companies will become clients for the services and products of other companies. Additionally, they will be able to recommend your firm to friends and customers, as well as reporting on business opportunities which may crop up in their geographic areas. It will be a powerful networking program.

3. Supported Spinoff™ Clients qualify to trade on Regional American Stock Exchanges and the Supported Spinoff™ Sponsor is willing to assist them secure such listings or to list on Nasdaq or AMEX, if that is the desire of management.

Some companies pay cash dividends for such purposes. The Underwriter advises against this with smaller companies, for two reasons. (1) The first year you don't pay a dividend, your share price will crash on the "bad" news and (2) all your profits should be plowed back into the company to increase share value.

Those clients seriously interested in becoming part of the next funding cycle should schedule a formal meeting with the Supported Spinoff™ Sponsors at the earliest date possible. Capital Funds Group will arrange that.

At that time, you will do a personal presentation of your package, what you intend to do with the funding and satisfy the Supported Spinoff™ Sponsors that your company meets the criteria for the program. You will also have the opportunity to ask as many questions as you need in order to become comfortable with both the program and the Supported Spinoff™ Sponsors. (This is critical. If you are taken into the program, you will be involved with these businessmen for up to five years. Unless your company is successful, their stock, pooled with yours, will have no value. They want your success to happen. They will also have a seat on your Board of Directors for that period of time.)

It is suggested and urged that you bring your attorney, CPA and any other advisors you deem necessary to this meeting.

This meeting requires a non-refundable fee of $950, if the consultation is held in the San Francisco Bay Area. (If the meeting is held elsewhere, the consultation fee is $1,500) The purpose of this, according to the Underwriter, is to separate the real players from the shoppers. (This fee, too, is subject to increase. Check with CFG to confirm the current meeting fee.)

Another item to be considered is that of an "exit strategy." Most entrepreneurs - and their investors - want some exit strategy planned, a way of getting out of the business or investment with the best possible payoff. Some textbooks suggest that the Initial Public Offering (IPO) should be the insiders’ exit strategy. This is an expensive, time and energy consuming and high risk shot at the stock market.

Instead, this Private Placement $10 million funding program IS your exit strategy. You should know going into the program who will purchase your stock in a few years. You’ll control your issued shares by maintaining a strong share price and thus limiting dilution with your acquisitions. Your underwriter will work with you to keep the float small and thus responsive to your Investor Relations efforts.

You and your investors know that sometime within the next 5-7 years, you'll likely be targeted as a buyout or merger company by an industry giant. As your stock is already trading on at least three major stock exchanges - without having to go through the high costs, agonies and uncertainties of an IPO - you've been building its value for some time. The Underwriter and Spinoff Sponsors have conservatively estimated a $60 stock value at the time of purchase of your company in five years or less. At that price, your insider stock would be worth over $276 million.

You will recall the segment on the the subject of "Too Good To Be True." We continue to get that kind of response when we first speak of this funding opportunity. For reasons unknown, some people can only contemplate the reality of receiving a lousy deal. If it's a good one, there must be something wrong with it! (The logic of this totally escapes me.)

In a recent email to his own client list, the Underwriter spoke of some of these issues. I'm repeating parts of it below.

If you're serious about expanding your company, begin your move now.

This Bull Market has lasted too long. We should have seen the Bears as early as October 1987. We may have another Decade before the end arrives. Eventually, this Bull Market must end. It will end because of a collapse in the Derivatives Market.

When it ends, everyone should be in hard assets or cash and that cash should be American Dollars.

Currently, doing a Supported Spinoff™ is less than one-third of the average cost of doing an IPO. With the Supported Spinoff™ you can GROSS up to US$10.4 million in a Private Placement Financing. (Most IPOs never raise this much. The only ones you hear about are the raving successes, a small percentage.) The Supported Spinoff™ savings over traditional equity finance costs create a credibility problem for them. Their offer seems to be "too good to be true." However, there are thousands of successful spinoff public companies.

If you can't afford paying well over a million dollars to do an IPO, this opportunity is worth considering."

If your company, or any of your clients, needs to benefit from being a public company, and can qualify for this program, this is your financial answer.

Since we've been talking about the various fields in which these firms function, we might mention here that the Supported Spinoff™ Sponsors and the Underwriter will not take on or fund any company which competes for the same customers as one of their earlier funded clients. If you are considering this program and are in a field with a lot of competition, you might want to give that some consideration. It's going to be strictly first come, first served.

I am currently arranging meetings for any of you who wish to proceed further into this program. Let me know if you're serious about taking this major expansion step. If you've been considering rapid and powerful growth, you will do yourself a service by looking into this funding program.

The Supported Spinoff™ Sponsor has already announced plans to acquire Management Consulting firms in North America, Europe and Asia whose clients are SMEs which qualify for the Supported Spinoff™ program. As they succeed in their acquisition program, their interest in finding independent clients, such as your company, will wane. Now is the time to get into this program.

Contact me now with an executive summary of your business plan, a paragraph or two on how you would apply a funding and your most recent financials.

I look forward to working with you and helping you achieve your greatest goals.

(It is suggested that you contact me for the full version of this article.)