A direct investment cannot always be priced based on a discount to market, particularly not in the case of a private startup that is raising seed capital or an early-stage thinly-traded OTC-quoted company like ADIA that is raising capital for immediate growth.
gamood wrote:
"Buying shares directly from the company require a substantial investment, usually and the shares have a one year restriction. That is why restricted shares are sold at a discount to the market."
Under the revised Rule 144 that went into effect on February 15, 2008, a registered, fully-reporting, 1934 Exchange Act-regulated company (as ADIA was when it was known as PivX Solutions, Inc. from 2004-2006) the holding period for restricted shares is only six months.
Consider, in the case of ADIA, the price you would pay to acquire millions of free-trading shares through a broker. If you offer to buy at current market price, who will sell to you in such large quantity? How much do you think you would need to offer above the current market price to attract new sellers and fill your order?
If the company won't even sell to you at current market price, then you have a choice to make: pay a higher price or you don't get shares. Are you willing to pay brokerage fees every day to buy a few thousand shares on the bid? After 12 months, how many shares would you have by doing this in the case of ADIA? With an average daily volume under 40,000 shares it would take a very long time to accumulate shares in that way, which leaves the same choice to make: pay a higher price or you don't get many shares.
If this remains your only choice to make, then it makes no sense to wait for free-trading shares. Investing directly in a private placement offering is what Accredited investors would do in a situation like this one, if they want shares. The private placement gives the company capital, immediately and directly adds value to the shares being purchased. Plus, the price paid by the investor will still be lower than the price they would have had to pay to acquire shares through a broker in secondary market transactions.
The direct investment approach can also form a strategic partnership for the investor. How much are existing distributor relationships such as Whole Foods worth to an investor who would like to expand their own product sales channels with the help of the Adia management team? When the investor is able to benefit from working with the company, and when the strategic partnership adds value for everyone, why does it make sense to price that investment at a discount to market? Discounts make no sense for strategic investors unless the market price is too high, which is why most M&A transactions price at a premium to market not at a discount.
Quality capital, smart capital, from well-positioned long-term strategic investors, can (and does) price shares with a different calculus when the free-trading market is pricing backwards-looking or worst-case market conditions. Buying free-trading shares at a discount to the value that the company actually represents in the next 12 months gives you a position from which to benefit from the future investments that Accredited and strategic investors will be making, and the only reason such investors would not make those new investments is if the company isn't doing business development and isn't engaged in conversations with private investors.
I have confidence that Wen and her team are doing their job competently, and despite the slow movement on all fronts there is no doubt that there is movement. What is the right price for everything that will likely happen in the coming 12 months? That is the question we all ask every day, is it not? That question is the one we all ask about everything we own and everything everyone else owns, and everyone knows that we don't always estimate value at a discount to what the last person paid.
Sincerely,
Jason Coombs
JCoombs@homelandforensics.com
