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The Correct Use of Shares

Textbooks on Going Public in America advise that being published is an exit strategy for a company’s insiders.

The textooks are wrong!

If you follow their advice, in time you will destroy your public company. (98% of all companies going public in the United States fail within ten years.) In doing so, you will destroy our public shareholder base. Let me show you why this happens.

The Float

The shares held by the public are called “the float.” When your public company insiders sell their shares to the public, they add that many shares to the company’s float. Remember that sentence. I’m going to repeat it further into this explanation.

Who Sells Your Company to the Public?

Every public company is totally responsible for finding buyers for their float. No one else will do it for your company. This responsibility begins even before the company actually goes public and remains throughout the life of the company.

If your company fails to do this, the company will quickly go out of business. In order to find those buyers, the company must spend money. (And important rule to be remembered here is that “Stocks are NOT bought. Stocks are SOLD!” With thousands of companies offering their stocks to the public, your Investor Relations efforts must be aimed at getting buyers with limited investment funds to choose YOUR company’s stock instead of another company’s stock.)

The money spent finding and convincing those buyers doesn’t create any additional revenue for the company. It’s simply part of the cost of doing business as a public company. Tens of thousands of public companies have not paid their Investor Relations bill and, instead, have paid the ultimate price of doing business. They have failed and disappeared.

Stick with me now, as I’m going to explain how these costs re figured. They remain pretty much the same for and all public companies and have been learned through long experience.

Figuring Your Costs

The actual cost to our public company to find buyers for the float is a simple multiple of two things: (1) the number of shares in the float and (2) your company’s share price. So the greater the number of shares in the float, or the higher your company’s share price, the more money your company must spend to find buyers for the company’s shares.

Simply to maintain the share price in most public companies requires the company to find buyers for the float every quarter of the year. (Investor “A” may have an illness in his family, which requires the shareholder to sell some stock, let’s say 1000 shares. The public company’s Investor Relations program must find potential investors and promote the company to those potential buyers for that shareholder’s 1000 shares of stock. If they fail to do so, the share price will drop. The falling share price will encourage other shareholders to sell their stock. If the buyers can’t be found, the share price will continue to fall. Eventually, the shares will trade for less than once cent and the company will be delisted from the stock exchange.

The Company Isn’t the Only One Issuing Shares

Most shareholders leave their shares with the Depository Trust Company (DTC) in “Street Name.” Their stockbrokers strongly encourage this practice since the DTC pays them for doing so. However, the shares held in “Street Name” are used by “short sellers,” professionals who are betting that your company’s share price will go down. These shares, “borrowed” from the DTC, are sold into the company’s float. As long as that short position exists, the company is required to find buyers every quarter for the short shares. A multimillion-share short position will destroy the strongest public company in time.

Thus the primary concern for any Investor Relations program is to encourage the company’s shareholders to take possession of their stock certificates and remove those shares from the DTC. If there is no stock in “Street Name,” there can be no short selling. Our program is focused on reducing the stock held by the DTC in “Street Name” to less than 20,000 shares. This policy limits potential short selling and thus ensures that investor relations costs are manageable.

The Formula

Here is the simple formula for figuring Investor Relations costs to sell your company’s shares: Float X FR X 4, where FR (known as the Florida Rule)*** is a constant based on the company’s share price.

This constant starts at ten cents per share per quarter for shares trading under US$1.00 and is adjusted upward by five cents for every dollar increase in average share price to US$5.00/share. There is no increase in cost to US$7.00/share. Then the increase again climbs five cents for every dollar of share price up to US$20.00/share.

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