Professional Help Funding Your Company
By William Cate
Published April 2001
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
It costs money to raise money. Here are the primary costs in doing an
Initial Public Offering (IPO).
Your securities attorney will charge you anywhere from $75,000 to over one
million dollars. Quotations for legal services below $75,000 are usually
offers to review and edit your filing. Costs rise when your attorney must
sign your SEC filing. The usual attorney retainer is $25,000.
Your Certified Public Accountant will charge anywhere from $15,000 to over
$250,000 for their audit. They will want at least a $5,000 retainer.
Your underwriter will charge a 3% nonaccountable expense, a 5% accountable expense and expect up to a 10% discount on the IPO share price. The NASD limits IPO commissions to 18%. The "apparent" commission is around 15%-16%. Unless the IPO can easily be oversubscribed, the brokers double their commission by requiring the principals to supply 50% or more of the IPO buyers. They receive the discount, accountable and nonaccountable expense on the IPO buyers supplied by the company. This effectively doubles their commission on an IPO.
The underwriter's retainer is half the nonaccountable expense. On a
ten-million dollar IPO, this is a retainer of $150,000.
Your Investor Relations firm will want anywhere from $25,000 to $800,000.
Until recently, they demanded a large bloc of stock along with their cash
fee. The SEC is moving aggressively against the payment of stock for
services, especially stock promotion services.
Studies show that the average cost of doing an IPO is about $750,000. The
odds of raising money with an IPO are about even. Going public is a high
risk game. If you win, you can create a multinational powerhouse. If you
lose, it can destroy your company.
Here are two secrets to containing IPO costs.
1. Seek flat fee agreements with professionals. If you agree to an hourly
rate, you are giving the professional a blank check. I've seen failed IPO
efforts that have cost the company as much as $15 million. The reason for
the obscene cost was the professionals billing at $1,000 per hour.
2. Don't pay the entire bill as the initial retainer. I try for a formula
of one-third retainer against costs. One-third payment when the
professional supplies the company the service expected by the agreement.
The last third when you get the positive result that you expect from the
professional's service.
Alternatives
It's the cost and risks of doing an IPO that makes alternative methods of
going public attractive. You have three choices:
1. You can use the Capital Funds Group Stock Exchange strategy
[http://www.capitalfundsgroup.com/raiscap/SCORregD.htm] The cost is $20,000 plus audit. You should be trading within a month. You can use your
liquidity to attract investors. You can present your investment opportunity
to IVCC members, if you meet the IVCC requirements.
2. You can buy an OTCBB shell. The retail shell cost is $150,000 plus the
costs of an audit, due diligence investigation and SEC filing. The total
cost will be around $350,000. You'll get around 60% of the issued shares.
Only buy a currently trading shell. Make certain that it's clean. This
means there aren't pending lawsuits. Your group gets all the insiders'
shares. You cancel past insiders' rights to buy stock. Over the years, I've
helped over 30 clients buy shells. I've never been offered a clean shell. It
takes time, knowledge and money to clean any shell you buy.
3. You can do a spinoff. You can sell 10% of your private company's stock
to an existing public company with over 500 American resident public
shareholders. The public company can pay your stock as a stock dividend to
their shareholders. This gives you over 500 public shareholders. Under the
1934 U. S. Securities Act, when you have over 500 public shareholders, you
must start reporting to the SEC and thus become a public company. The cost
of doing a spinoff can be as little at $25,000 plus audit and legal costs.
Total costs are about $115,000.
The primary advantage of a spinoff isn't the cost savings. It's the
guarantee that your public company is clean. You won't face an unexpected
lawsuit. Your share price won't be buried by million of shares of selling
by past insiders.
The disadvantage to any alternative to doing an IPO is the need to find a
source of funding. The CFG program gives you access to public investors,
but not an underwriter. The Shell or Spinoff strategies require that you or
the service arrange a Private Placement.
Unless you find a way to offer investors liquidity, your odds of finding
money are less than 1%. The low cost starting point in this liquidity game
is to use the CFG service. If you have the assets and income, consider
going public with a spinoff. See article at:
[http://WWW.capitalfundsgroup.com/raiscap/expansionexit.htm] If you are a major power in your industry, do an IPO.
The opportunity to raise risk capital is excellent as long as this Bull
Market lasts. I think it will last for several more years. However, every
day you waste is one less day you have to build your company into a
multinational powerhouse.
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/]