The Cost of Going Public

The average cost for a traditional U.S. Securities and Exchange registration and listing on Over-the-Counter Bulletin Board (OTCBB) has risen to about $1,500,000 in 2003. If your company wants to list on Nasdaq, cost will be an additional $500,000. Registration and listing costs have risen by about 30% in past two years thanks to stock scandals that have significantly increased GAAP audit costs and increased regulatory compliance requirements that resulted from Sarbanes-Oxley Act.

The Reasons that Costs of Being Public Have Increased

Section 404 of Sarbanes-Oxley Act addresses accounting control issues for U.S. Domestic public companies. Section 404 requires increased corporate responsibility and accountability. This means increased financial disclosure that results in increased audit and liability-insurance costs.

Being Public in 2003

The legal, accounting and other costs of being public rose to an estimated average of $2.86 million for OTCBB firms in 2003. Major public companies paid, on average, $7.41 million to trade on Nasdaq, AMEX and NYSE, according to a survey by Foley & Lardner LLP.

The Foley & Lardner 2003 survey breaks down 2003 costs as follows:

OTCBB Firms, which they call small public companies

Director and Officer Insurance$850,000 Accounting$824,000 Legal$468,000 Board Compensation$313,000 Lost Productivity$160,000 Other Sabanes-Oxley costs$100,000 Governance Setup Costs$147,000 TOTAL$2,862,000

Nasdaq, NYSE, AMEX firms which they call large public companies

Director and Officer Insurance$2,200,000 Accounting$1,200,000 Legal$ 841,000 Board Compensation$ 247,000 Lost Productivity$2,500,000 Other Sabanes-Oxley costs$ 246,000 Governance Setup Costs$174,000 TOTAL$7,404,000

Investment reward should be a function of speculation risk. The investor's goal should be to have a reward that is a multiple of his risk.

Breakeven ROI For Startup Companies

If an angel investor is considering financing a local startup company, he needs a sevenfold Return on Investment (ROI) to breakeven. The simple reason is U.S. Small Business Administration will tell anyone that only 15% of startup local companies succeed.

Thus, 7 X 15 = 105%, just over breakeven point for his original investment. In my way of looking at investment, those are dreadful odds.

If a venture capitalist is considering financing a high tech startup company, he needs one hundredfold Return on Investment to breakeven. Only one High Tech startup company in one hundred makes money. Those odds are far worse.

Yet in past five years, hundreds of billions of investment dollars have been washed away investing in such companies. And it's not only been funds of Venture Capitalists, but additional billions of small capital investors who then bought into media and stock hype of these useless, non-productive companies when they went public.

Breakeven ROI for Investors Playing OTCBB Market

Over 98% of OTCBB companies fail within five years. If you are a small capital investor and invest in one of these public companies, you need to eventually sell your shares for forty nine times what you paid for them to breakeven.

If you are a conservative investor and realize that inflation must eventually destroy U.S. Dollar and thus you invest in Junior Resource Companies (mining, natural gas, minerals) trading in US or Canada, you need to eventually sell your shares for two thousand times what you paid for them to breakeven. Here's why.

A Winning/Losing Investment

The success rate of mining exploration companies is about one in every two thousand. Among best performing mining exploration stocks of 1990s was Bre-X. Adjusted for splits, it climbed to US$240/share. Had you paid less than ten cents a share for this stock, it would have been a breakeven or potentially profitable investment.

However, no matter what you paid, an investment in Bre-X proved to be a losing investment, because company was a clever stock swindle. The conclusion is that anyone who invested in Bre-X shares for more than ten cents was making a losing bet.

Do As They Do

As a wise old British Investment Advisor, Harry Hone, observed to me in 1980: If US Dollar and British Pound are about to become worthless, why are all hard currency gurus so anxious to take paper currency for their invaluable gold? His point was simple. Do what people do, not what they say. And, I've learned over years that fads and promotions are never good investments. They can be good speculations IF you enjoy speculating and can afford losses. There will be many of them.

Inflation and Taxes Are Factors