Why Stock Support?
If investors won't buy your stock, you'll never find an IPOunderwriter. Without an underwriter, your Public Company can't raisemoney. The underwriter's clients buy your stock with the expectation thatit will appreciate. If investors don't buy your stock, the underwriter'sclients will lose their money. The underwriter will lose their clients.Underwriters refer to losing their clients as "Turning their Book." If theycan't replace their lost clients, the underwriters are out of the brokeragebusiness. It's for this reason that underwriters expect you to support theshare price of your public company.
When buying exceeds selling, your share price goes up. When sellingexceeds buying, your share price goes down. Your Stock Support Plan shouldguarantee 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 theunderwriter's clients will see share price appreciation. Companies likeMicrosoft, Netscape, or Solomon Brothers are examples of "Hot Stock"issues. The stock support problem for these companies is sustaininginvestor interest after their share price settles.
Your private company can be profitable. It should be in an industrycurrently popular with investors. Your stock support plan must attractinvestors based upon your company's fundamentals. Your investors must beprepared to buy the stock from the day your company starts to trade. Youmust sustain buying at a share price above the underwriter's Initial PublicOffering (IPO) price.
Your private company may be a startup or unprofitable. If so, itmust be in an industry currently popular with investors. Usually, you mustsupply part of the underwriter's clients buying your IPO or PrivatePlacement. Usually, this means that your family, friends and businessassociates will be required to buy 50% to 90% of the IPO or PrivatePlacement stock. You will be expected to ensure buyers at share prices abovethe IPO or Private Placement share price.
Unless your company is a "Hot Stock." the underwriter will ask youabout your stock support plan. They may want you to supply some of thebuyers for your IPO or Private Placement. They will definitely want youto ensure a secondary market for your shares. If you can't support yourshare price, don't expect a financing. The need to supply secondary marketstock buyers is the reason that promoters take more companies public thanentrepreneurs.
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 severalclauses in the Agreement that allows them to withdraw for vague orunspecified reasons such as "market conditions." I've worked with scores ofunderwriters over the years. The real reason that these underwriterswithdrew 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 andnot a non-refundable "Firm Commitment" underwriting fee. Your companyshould hire someone to develop and implement your stock support program.
The other side of this coin is that the structure of yourunderwriting has a lot to do with the success of your stock support plan.Doing a million-dollar Private Placement at ten cents will permanentlydestroy your share price. Seek your company's financing in the multi-dollarrange. A "Hot Stock" can do an IPO over $20.00. A startup company is luckyto place their stock at two or three dollars while raising a milliondollars.
Have a stock support plan before you arrange your first meetingwith 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.
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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/