This section of the OMDI (Offer Memo, Pitch Deck, Investor-relation website) says it all. The issuer can describe how fabulous the products can solve the unresolved pain points and their unique selling propositions. What the investors really want to know is how much money is there to be made and of course what are the attendant risks to bear. The next section will address the execution risk of the investment – that is who are the people that will transform all these plans and projections into reality.

Theodore Levitt said the purpose of all business is to “find and keep customers”. We say the goal of an issuer is to “find and keep investors”. If customers are unsatisfied with the firm’s products, they go elsewhere. If investors cannot increase their net worth in this firm, they put their money into companies that can grow their personal wealth. Thus capital gain is the core essential in any investment. The OMDI must be presented in a clear and concise manner showing what is the possible capital gain.

In the ABC example below, if the investor had subscribe for ABC shares at $1 each, at the end of financial year 1, with the forecasted figures actually delivered, there is  a possibility for the share price to grow to $6.60 (theoretically based on 20 times price earning multiple and the earnings per share is 33 cents). Wow a 5.6x capital gain!

The investor checked comparable peer share pricing and confirmed that ABC’s 20x PER is lower than many players who are trading at 30x. Next the investor needs to ascertain whether the pricing for ABC products are reasonable and that the firm has the capacity and capability to produce and deliver 100,000 tons a year. Checked ok.

The investor scans comparable variable costs and operating expenses and is satisfied that the figures match with most of the players. Now the investor needs to verify the withholding tax for ASEAN trades and realised that ABC is structured uniquely to enjoy such taxation advantage. So far so good.

After looking through the section on the production cycle, the investor discovered that ABC had leased additional equipment that helped to deliver more by-products and thus resulting in additional “costless” revenues – adding all to the bottom line. The issuer did not “buy” the PPE and instead leased them for $10 million a year. This conserves ABC capex of $100 million. Using $10m to pursue $33m profits.

Alas what is the going share price of ABC. The investor has been monitoring ABC’s e-fundraising activities and observed that ABC did not place out 10m shares to raise the $10m for the business. What ABC did was to raise the $10m over 4 phases with 3 months apart. At each phase,  ABC placed out 1 million shares during each phase and priced them at $1, $2, $3, $4 for phase 1, 2,3,4 respectively. In total ABC put out 4m shares and raised the $10m ($1m+$2m+$3m+$4m), diluting only 4% of the total shareholding (4m/100m shares). It is harder to place out 10m shares and raise $10m in one go and dilute 10% of the shareholding. The Cheese Nibbling tactic requires the issuer to announce significant milestone accomplishment to justify the new price. As investors, they are delighted to see the share price is getting higher than theirs.