Why Stock Support? By William Cate Published April 1999 [http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]If investors won't buy your stock, you'll never find an IPO underwriter. Without an underwriter, your Public Company can't raise money. The underwriter's clients buy your stock with expectation that it will appreciate. If investors don't buy your stock, underwriter's clients will lose their money. The underwriter will lose their clients. Underwriters refer to losing their clients as "Turning their Book." If they can't replace their lost clients, underwriters are out of brokerage business. It's for this reason that underwriters expect you to support share price of your public company.
When buying exceeds selling, your share price goes up. When selling exceeds buying, your share price goes down. Your Stock Support Plan should guarantee that buying exceeds selling.
If your private company is well known to investment community, you will have a "Hot Stock." Buying will exceed selling and underwriter's clients will see share price appreciation. Companies like Microsoft, Netscape, or Solomon Brothers are examples of "Hot Stock" issues. The stock support problem for these companies is sustaining investor interest after their share price settles.
Your private company can be profitable. It should be in an industry currently popular with investors. Your stock support plan must attract investors based upon your company's fundamentals. Your investors must be prepared to buy stock from day your company starts to trade. You must sustain buying at a share price above underwriter's Initial Public Offering (IPO) price.
Your private company may be a startup or unprofitable. If so, it must be in an industry currently popular with investors. Usually, you must supply part of underwriter's clients buying your IPO or Private Placement. Usually, this means that your family, friends and business associates will be required to buy 50% to 90% of IPO or Private Placement stock. You will be expected to ensure buyers at share prices above IPO or Private Placement share price.
Unless your company is a "Hot Stock." underwriter will ask you about your stock support plan. They may want you to supply some of buyers for your IPO or Private Placement. They will definitely want you to ensure a secondary market for your shares. If you can't support your share price, don't expect a financing. The need to supply secondary market stock buyers is reason that promoters take more companies public than entrepreneurs.