Why Stock Support?
By William Cate
Published April 1999
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
If investors won't buy your stock, you'll never find an IPO
underwriter. Without an underwriter, your Public Company can't raise
money. The underwriter's clients buy your stock with the expectation that
it will appreciate. If investors don't buy your stock, the underwriter's
clients will lose their money. The underwriter will lose their clients.
Underwriters refer to losing their clients as "Turning their Book." If they
can't replace their lost clients, the underwriters are out of the brokerage
business. It's for this reason that underwriters expect you to support the
share price of your public company.
When buying exceeds selling, your share price goes up. When selling
exceeds buying, your share price goes down. Your Stock Support Plan should
guarantee that buying exceeds selling.
If your private company is well known to the investment community,
you will have a "Hot Stock." Buying will exceed selling and the
underwriter's clients will see share price appreciation. Companies like
Microsoft, Netscape, or Solomon Brothers are examples of "Hot Stock"
issues. The stock support problem for these companies is sustaining
investor interest after their share price settles.
Your private company can be profitable. It should be in an industry
currently popular with investors. Your stock support plan must attract
investors based upon your company's fundamentals. Your investors must be
prepared to buy the stock from the day your company starts to trade. You
must sustain buying at a share price above the underwriter's Initial Public
Offering (IPO) price.
Your private company may be a startup or unprofitable. If so, it
must be in an industry currently popular with investors. Usually, you must
supply part of the underwriter's clients buying your IPO or Private
Placement. Usually, this means that your family, friends and business
associates will be required to buy 50% to 90% of the IPO or Private
Placement stock. You will be expected to ensure buyers at share prices above
the IPO or Private Placement share price.
Unless your company is a "Hot Stock." the underwriter will ask you
about your stock support plan. They may want you to supply some of the
buyers for your IPO or Private Placement. They will definitely want you
to ensure a secondary market for your shares. If you can't support your
share price, don't expect a financing. The need to supply secondary market
stock buyers is the reason that promoters take more companies public than
entrepreneurs.
It doesn't matter if the underwriter signs a "Best Efforts" or
"Firm Commitment" underwriting agreement. The day that your underwriter questions your stock support plan is the day you'll lose your financing. You need more than a stock support plan, you need to prove constantly that you can execute it. This is the reason that you must have someone on your staff familiar with stock support issues.
Firm Commitments aren't firm. The underwriter will have several
clauses in the Agreement that allows them to withdraw for vague or
unspecified reasons such as "market conditions." I've worked with scores of
underwriters over the years. The real reason that these underwriters
withdrew from over 90% of their "Firm Commitment" underwriting agreements was lack of faith in the ability of the company to make a market in their stock. Keep in mind that the company paid the underwriter a non-refundable 1.5% fee for the "Firm Commitment" underwriting agreement. This means $15,000 for every million in proposed gross proceeds from the underwriting. Underwriters won't refund this fee.
My advice is, put your money into your stock support program and
not a non-refundable "Firm Commitment" underwriting fee. Your company
should hire someone to develop and implement your stock support program.
The other side of this coin is that the structure of your
underwriting has a lot to do with the success of your stock support plan.
Doing a million-dollar Private Placement at ten cents will permanently
destroy your share price. Seek your company's financing in the multi-dollar
range. A "Hot Stock" can do an IPO over $20.00. A startup company is lucky
to place their stock at two or three dollars while raising a million
dollars.
Have a stock support plan before you arrange your first meeting
with a potential underwriter. If you can't answer stock support questions,
you are wasting your time arranging the meeting. Furthermore, you won't get a second chance to sell that underwriter on your company. Once your company is rejected by several underwriters, no one will want to meet with you. A credible stock support plan is the key to finding an underwriter for your company.
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/]