Investor Relations For CFOs

BY William Cate

Investor Relations For CFOs
By
William Cate

"Stocks aren't purchased. They're sold." Every public company CFO should write this axiom down often enough to ensure that they understand it.

Investor relations costs are the primary financial reason an operating private company should not go public. It's the reason that many public companies fail. Stock promoters usually take most of the money they raise and put it into their public company's investor relations program so that they can dump their shares on the public. An operating company takes the money it raises and puts it into growing their business. Most operating companies will find that spending your money on your company doesn't leave enough money to create buying for your stock. The result is the operating company's share price falls. The public company shareholders are angry. The stock market failure usually means the operating company will come upon hard times and in due course fail.

CFOs, whose companies are involved with the public market, should be collectors of investment taut sheets. Get on investor relations' mailing lists. When you get the hot tip, ignore it and read the disclaimer at the bottom of the email or newsletter. The SEC regulations now require anyone recommending a stock to clearly state how much they were paid for doing so and by whom. Get that payment amount and after a few days, get a chart of the company's share price. You should see an upward spike in the trading volume of the hyped company for the three or four days following a mailing. Determine the added trading volume and divide it by two. Trading volume reports the buying and selling of a block of shares. For instance, if an investor buys 1,000 shares, a shareholder has sold 1,000. The trading volume reflects this fact by showing the trade as 2,000 shares. Divide the shares purchased by the cost of the mailing and you have the cost of having that taut sheet hype that stock on whatever day that you received the hot tip mailing.

Here's an example to make my point clearer. The taut sheet states they charged the company $30,000 to write and mail their newsletter. The average trading volume the week before the newsletter was sent was 10,000 shares/day. The taut sheet generated 190,000 shares traded the first day, 130,000 shares traded the second day and 90,000 shares traded on the third and fourth days after the newsletter arrived. Average trading volume for 4 days was 40,000 shares traded. The total trading volume for the four days following the mailing was 210,000 shares. Deduct the 40,000 shares from the 400,000 shares and you have an added trading volume of 360,000 shares. Divided the 360,000 shares of added trading volume by two and you get 180,000 shares of buying for the $30,000. This means it cost the company $0.18/share sold to create each share of buying.

The shares being traded are part of the company's float. Simply defined, the float is all the shares held by the public shareholders. For most public companies, the float trades every quarter. You can find the float of any public company at the SEC EDGAR website. Determine the issued shares of the company. Subtract the insiders' shares and you have the float. Let's say our hyped company has a million share float. This means every quarter to get the same results, they must spend $222,222. Our example will be spending $888,888/year to keep their shares trading at whatever price.

Almost all public companies have an undeclared short position in their stock. This adds to the float and thus the costs of the company's investor relations' costs.

There are two morals from this tale of excessive costs.

1. Your insiders should sell their shares into the Market. If they do so, they add to the float and thus the costs of the public company's investor relations program.

2. You need to work with an Equity Finance Consultant that can help you control your investor relations costs and keep those costs within reason while ensuring a strong and sustainable share price. In fact, a good Equity Finance Consultant would estimate the share price of our example above, trading on the Over-the-Counter Bulletin Board (OTCBB) at between $3.75 and $4.00. They would tell the Example Company to keep that share price and do nothing to tackle the cost problem will mean a budget of at least $900,000/year

If your investor relations program doesn't work, your public company will fail. Usually, when the public company fails, the business goes bankrupt. Your stock support plan is essential to your public company's survival.

He is the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/]. He's the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] He's a Venture Capital %26 Equity Finance Consultant
[http://home.earthlink.net/~beowulfinvestments/williamcateventurecapitalampequityfinanceconsultant/]

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