The Cost of Money

By: William Cate

If you're spending money to raise money for a private business,
you're betting on a long shot. The odds are against you. There are two reasons that investors prefer public company speculation.

  • 1. If they see your business plan in trouble, they can sell their stock and recover their risk capital.
  • 2. The odds that your share price will outperform your balance sheet are overwhelming. Consider the Amazon.com share price against its audit. As a public company, Amazon.com has been a winner for many investors. As a private business, would you have invested in it?

What is Cost of Money?
When you are serious about raising risk capital, you are talking about taking your company public. It's the cost of going public that financial professionals consider as the Cost of Money.

In April 1999, it cost about $1.23 million to do an IPO (Initial Public Offering). I did a cost and alternatives study for 'American Venture' Magazine. 

In April 1999, you had two lower cost alternatives to going public,
without doing an IPO. You could buy a trading shell or you could arrange to do a spinoff. The costs ranged between $125,000 and $200,000 for shells or spinoffs.

In January 1999, the National Association of Securities Dealers (NASD) announced that they would end the trading of private companies (non-reporting companies) on the OTCBB (Over-the-Counter Bulletin Board). The process would start in June 1999. The last company would be delisted in July 2000. There were about 3,400 companies that would no loger trade.

It took until the Fall of 1999, for the NASD to create an increase in demand for trading shells. As I reported in an early issue, OTCBB shells doubled in price in about three months.

The SEC is ending the sale of Trading Shells. How will this affect the price of spinoffs and IPOs, by this Summer? It depends upon the Bull or Bear winning in the Market in the next few weeks.

The end of trading shell sales makes spinoffs the only low cost alternative to doing an IPO. If a Bull Market survives the current Market correction, demand for spinoffs will increase and the cost of doing a spinoff must go up. If the Bear wins the Market battle in the next few weeks, demand for going public will collapse. You can't raise risk capital in a Recession or Depression. Spinoff costs should remain at the current US$250,000 level. This is payments over eight months of US$100,000 and the balance paid from the proceeds of the Offshore Private Placement.

Financial Professionals are caught between a rock and a hard place.
If the Bear wins, they can't raise risk capital. If the Bull wins, the Cost of Money will go up in the next few months. If the Bull looks like the winner, my advice is start the spinoff process before your Costs of Money double.

Money Management
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Money Management
 



Share this article :
Click to see more related articles