Are You The Next Billionaire

The meeting with Peter did not go so well at first. I asked Peter if I could apprentice with him and be an inside investor with him. I told him that I would work for free if he would teach me what he knew about the process of taking a company public. I explained to him that I was financially free and that I did not need money to work with him. Peter was skeptical for about an hour. He and I went back and forth discussing the value of his time and questioning my ability to learn quickly and willingness to stick with the process. He was afraid that I would quit once I found out how hard it was, since my background was weak when it came to finance and the capital markets such as Wall Street. He also said, “I've never had anyone offer to work for free just so they could learn from me. The only times people have ever asked me for anything is when they wanted to borrow money or they wanted a job. ” I reassured him that all I wanted was the opportunity to work with him and to learn. I told him about my rich dad guiding me for years and my working for free much of the time. Finally, he asked, “How badly do you want to learn this business?” I looked him squarely in the eye and said, “I want to learn it very badly. ”

“Good, ” he said. “I am currently looking at a bankrupt gold mine located in the Andes Mountains of Peru. If you really want to learn from me, then fly to Lima this Thursday, inspect the mine with my team, meet with the bank, find out what it wants for it, return, and give me a report on your findings. And by the way, this entire trip is at your own expense.”

I sat there with a stunned look on my face. “Fly to Peru this Thursday?” I restated.

Peter smiled, “Still want to join my team and learn the business of taking a company public?” My stomach turned into a knot and I broke out in a mild cold sweat. I knew my sincerity was being tested. This was a Tuesday and I had appointments already scheduled for Thursday. Peter sat patiently as I thought over my options. Finally, he asked quietly with a very pleasant tone and smile, “Well,still want to learn my business?”

I knew I was at a defining moment. I knew it was time to put up or shut up. I was now testing myself. My choice had nothing to do with Peter. It had everything to do with the next evolution of my personal development. At times like this, I recall the wisdom of the great philosopher Johann Wolfgang Von Goethe:

a chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, There is one elementary truth, the ignorance of which

It is the line “then Providence moves too” that has kept me from taking a step forward when the rest of me wanted to step backwards over the years. Webster defines “providence” as “Divine guidance or care. God conceived as the power sustaining and guiding human destiny.” Now I am not intending to preach or say that God is on my side. All I am saying is that whenever I come to the edge of my world, or when I am about to take a step into the unknown, all I have at that moment is my trust in a power much larger than myself. It is at such moments—moments when I know I must step over the edge—that I take a deep breath and take the step. It can be called a leap of faith. I call it a test of my trust in a power much bigger than I am. In my opinion, it is those first steps that have made all the difference in my life. The initial results have not always been as I would have liked them to be, but my life has always changed for the better in the long run.

“I have learned a deep respect for one of Goethe's couplets: Whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it.”

As the words of the poem faded, I looked up and said, “I'll be in Peru this weekend.”

Peter smiled a wide quiet smile. “Here is a list of people you are to meet and where to meet them. Call me when you get back.”

This is definitely not the path I would recommend for anyone wanting to learn to take a company public. There are smarter and easier paths. Yet this was the path that was laid forth for me. Therefore, I faithfully describe to you the process via which I came to achieve my goal. In my opinion, everyone must be true to his or her own mental and emotional strengths and weaknesses. I am simply relating the process I went through once I knew the next direction in my life. It was not mentally hard but emotionally challenging, as most significant changes in life tend to be.

Rich dad often said, “An individual's reality is the boundary between faith and self-confidence. ” He would draw a diagram that looked like this:

He would then say, “The boundaries of a person's reality often do not change until that person forsakes what he or she feels confident in and then goes blindly with faith. So many people do not become rich because they are limited by their self-confidence rather than the limitlessness of faith.”

On that Thursday, in the summer of 1996, I was on my way to the Andes Mountains to inspect a gold mine that was once mined by the Incas and then the Spaniards. I was taking a bold step of faith into a world I knew nothing about. Yet, because of that step, a whole new world of investing opened to me. My life has not been the same since I decided to take that step. My reality on what is possible financially has not been the same. My reality on how rich a person can become has expanded. The more I continue working with Peter and his team, the further those limits to wealth expand.

Today, I continue to expand my limits, and I can hear my rich dad say, “A person is limited only to his or her reality of what is possible financially. Nothing changes until that person's reality changes. And a person's financial reality will not change until he or she is willing to go beyond the fears and doubts of his or her own self-imposed limits.”

Upon returning from the trip, I reported back to Peter. The mine was a great mine with strong and proven veins of gold, but it had financial problems as well as many operational challenges. I recommended against acquiring it because the mine had severe social problems and had severe environmental problems that would have cost millions to clean up. In order to make the mine operate efficiently, any new owners would have to downsize the workforce by at least 40%. It would destroy the town's economy. I said to Peter , “For centuries, these people have lived there at 16, 000 feet above sea level. Generations of their families are buried here. I do not think it is wise for us to be the ones to force them to leave the home of their ancestors to seek work in the cities at the base of the mountain. I think we would have more problems than we want to deal with. ”

Peter agreed with my findings and—more importantly—agreed to teach me. We were soon looking at mines and oil fields in other parts of the world, and a new chapter in my educational process began.

From the summer of 1996 to the fall of 1997, I worked as an apprentice to Peter. He was busy working on developing his company, EZ Energy Corporation (not the real name) , which was just about to go public on the Alberta Stock Exchange when I joined him. Since I was late joining his team, I was not able to acquire any of the pre-IPO shares at the insider 's price. It would not have been appropriate for me to invest with the founders since I was still new and untested. Yet, I was able to acquire a sizeable block of stock at the IPO price of $. 50 (Canadian) a share.

After striking oil in Colombia, and possibly finding what appears to be a large oil and gas field in Portugal, EZ Energy's stock is trading at around $2.00 to $2. 35 (Canadian) a share. If the find in Portugal is proven to be as big as the tests indicate, the price per share of the stock may be as high as $5.00 (Canadian) a share sometime in 2000. If, and that is a qualified if, the field in Portugal proves to be as big as we hope it is, the price per share of EZ Energy could climb from $15.00 (Canadian) to $25.00 (Canadian) in the next two to three years. That is the upside. There is also a downside with these micro-cap stocks. The shares could also go to $. 00 a share in the next two to three years. A lot of things are possible when companies are at this stage of development.

Although EZ Energy is a very small company, the increase in value for what Peter calls the “front money investors” is pretty good to date. If things go as hoped, these investors will make a lot of money. The front money investors (pre-IPO accredited investors) put up $25,000 (U.S. ) for 100,000 shares of stock, or 25 cents per share. They invested this money on the reputation of Peter, the strength of the board of directors, and the business expertise of the oil-exploration team. At the time of the private offering, and even the public offering, there were no guarantees or certain value to invest in. In other words, in the beginning, this investment was all “P” (price) and no “E” (earnings). It was initially offered only to Peter 's friends and his circle of investors.

At this stage of the investment cycle, investors invest in the people on the team. The people—much more than the product, be it oil, gold, an Internet product, or widgets—are far more important than any other part of the equation. The golden rule of “Money follows management” is extremely important at this stage of a company's development.

The management of EZ Energy has done extremely well. But rather than go into the hype, hopes, and dreams of this company, I think it best to quote you just the facts of this publicly traded company.

The founders of the company put up their time and expertise in exchange for shares in the company. In other words, most of the founders work for free, investing their time and expertise in return for blocks of shares of stock. The value of their stock when issued is very small, so they have very little, if any, earned income. They work without pay, intending to increase the value of their stock, which will generate portfolio income rather than earned income. A few of the founders are paid a small salary for their services. They work for the bigger payoff, which comes if they do a good job of growing the company and making it more valuable.

Since most of the directors are not drawing a salary, it is in their best interest to increase and keep increasing the company's value. Their personal interest is the same as the shareholders' , which is an ever-increasing price per share. The same is true for many of the company's officers. They may draw a small salary but are really more interested in the price per share going up.

The founders are very, very important to the success of a startup because their reputation and expertise give credibility, confidence, momentum, and legitimacy to a project that often exists only on paper. Once the company is public and successful, some of the founders may resign, taking their stock with them. A new management team replaces them, and the founders move on to another startup, repeating the process.

The following is a sequence of events that occurred after the company was founded:

1. Front money investors put up $25,000 (U .S.) for 100,000 shares, or 25 cents per share. At this stage, the company had a tentative plan but owned no exploration leases. There were no assets. Front money investors invested in management.

3. Therefore, the front money investors' block of 100, 000 shares is currently worth $200,000 to $235,000 (Canadian)—$160,000 to

$170,000 (U.S. ). The directors' job now is to keep increasing the value of the company and its share price by bringing to market the oil it has found, drilling more wells, and finding more oil reserves. On paper, the front money investors have made about $140,000 on their $25,000 investment. They have been in the deal for five years, so their annual rate of return would be 45% if they could sell their shares.

4. The problem for the investors is that the company is small and the shares are very thinly traded. An investor with 100,000 shares would be hard pressed to sell 100, 000 shares all at once without seriously depressing the price of the stock. So, the valuation of the entire block of stock is in many ways a paper valuation at this time.

If things go as planned, the company will grow and more people will begin to follow the company and the stock. Buying and selling larger blocks of these shares should then become easier. It is safe to say that due to the good news of the discoveries, most large-block investors are holding on to their shares rather than selling.

When I first began working with Peter, I asked him why he used the Canadian exchanges rather than the more well-known NASDAQ or Wall Street. In America, the Canadian exchanges are often treated as the Rodney Dangerfields of the North American Securities industry. Yet, Peter uses the Canadian exchanges because:

1. The Canadian exchanges are the world leaders for financing small natural-resource companies. Peter uses them because he primarily develops these types of companies. Peter is like Warren Buffet, who tends to stay with businesses he understands. “I understand oil and gas, silver and gold,” Peter says. “I understand natural resources and precious metals. ” If Peter were to develop a technology company, he would probably list it on an American exchange.

business in the 1950s, a small company could gain some attention from the brokers on the major exchanges. Today, Internet companies, many without any earnings, are commanding more money than many larger well-known Industrial Age companies. Hence, most larger brokerage houses are not very interested in small companies that need to raise only a few million dollars. Brokerage houses in America are interested primarily in offerings of $100 million or more.

3. The Canadian exchanges let the small entrepreneurs stay in the business. I think Peter uses Canadian exchanges mainly because he is retired. He often says, “I don't need the money, so I don't need to build a big company to make a big score. I just enjoy the game; it keeps me active, and where else can my friends get into an IPO play for only $25, 000 for 100, 000 shares of stock? I do this because it's still fun, I love the challenges , and the money can be rewarding. I love starting companies, taking them public, and watching them grow . I also love having my friends and their families become rich. ”

4. Peter offers a word of caution. “Just because the Canadian exchanges are small does not mean that anyone can play their game. Some of the Canadian exchanges have gained a shaky reputation due to past transactions. To work with these exchanges, a person should be very familiar with the ins and outs of taking a company public.”

The good news is that the Canadian system of stock exchanges appears to be tightening up on regulations, which are being enforced more closely. In a few years , I think the Canadian exchanges will grow as more and more small companies from all over the world look to the smaller exchanges to raise the capital they need.

Beware of the stock promoter: In the few years I have been actively involved in this business, I have come across three individuals who had the right credentials as well as the right alphabets after their name, told a great story, raised tens of millions of dollars, and had absolutely no idea how to start a business and build one from scratch. For several years, such people fly around in first class or on private jets, stay at the best hotels, put on lavish dinner parties, drink the best wines, and live high on the hog on their investors' money. The company soon dies because there is no actual development. The cash flow has all been going out. These people then go on to start another company and do it all over again. How do you spot a sincere entrepreneur from a big-spending dreamer? That I do not know . Two of the three sure had me fooled until their companies folded. The best advice I can give is to ask for a past track record, check references , and let your sixth sense or intuition be your guide.

5. If a small company grows and prospers, it can later move from a small exchange to a bigger exchange such as NASDAQ or NYSE due to its success. Companies that make the move from a Canadian exchange to an American exchange average a substantial increase in the valuation of the company (sometimes over 200%).

Most of today's big name companies started out as small companies that were unknown. In 1989, Microsoft was a small company whose stock sold for $6 a share. That same stock has since split eight times. In 1991, Cisco stock was just $3 a share, which was eight splits ago. These companies used their investors' money wisely and grew into major powerhouses in the world economy.

The entry requirements of the major stock markets in the United States have made the IPO a difficult process for most businesses. As described in the Ernst & Young Guide to Taking Your Company Public, The New York Stock Exchange requires a company to have net tangible assets of $18 million and pre-tax income of $2,500,000. The American Stock Exchange requires a

stockholders' equity of $4 million and a market value of the IPO to be a minimum of $3 million. And the NASDAQ National Market requires net tangible assets of at least $4 million and a market value of the IPO to be a minimum of $3 million.

In addition, it has been estimated that the IPO process can cost $400,000 to $500,000 for one of these major exchanges. These costs include the registration fees as well as the fees paid to legal counsel, accountants and underwriters.

Many small to medium companies that cannot meet these qualifications look for “reverse merger” opportunities, which allow them to merge with an existing public company. Through that process, the company can become a publicly traded company by taking control of the newly combined public company.

Companies may also look to other foreign exchanges, like the Canadian exchange, where the entry requirements are not as severe.

During one of my talks on investing in Australia two years ago, a member of the audience questioned my sanity at investing in precious metals and oil. He asked, “If everyone else is in high-tech and Internet stocks, why are you working on the dogs of the economy?”

I explained that it is always less expensive to be a contrarian investor, which is an investor who seeks out-of -favor or out-of-cycle stocks. “A few years ago,” I said, “when everyone was into gold, silver, and oil, the prices of the exploration leases that make up these startups were very high. It was very difficult to find a deal at a good price. Now that the prices of oil, gold, and silver are down, finding good properties is easy and people are more willing to negotiate because these commodities are out of favor .”

The price of oil has begun to rise, making the shares in our oil company much more valuable. Also, during this period, Buffet announced that he was taking a sizeable position in silver. In February 1998, the billionaire investor disclosed that he had acquired 130 million ounces of silver and stored it in a warehouse in London. On September 30, 1999, Canadian Business ran an article indicating that the world's richest man, Gates, had made a buy in silver, acquiring a 10. 3% stake for $12 million (U.S.) of a Canadian silver company listed on the Vancouver Stock Exchange. Gates had been quietly acquiring shares in the company since February 1999. When this announcement went out to our investors , the news was welcome relief for their years of trust and confidence.

Not all startup companies do as well as EZ Energy. Some never get off the ground even after going public, and the investors lose most if not all of their front money. Investors therefore need to be accredited, and they are warned about the “all or nothing” type of investments we bring to market.

As one of Peter's partners, I now speak to potential investors about becoming front money investors in new companies. I explain the risks to potential investors before I discuss the business, the people involved, or the rewards. I often start my presentation by saying, “The investment I am about to talk about is a very

high-risk speculative investment, offered primarily to individuals who meet the requirements of an accredited investor .” If a person does not know the requirements for being an accredited investor , I explain the guidelines as laid out by the SEC. I also stress the possibility that they can lose all of their invested money, repeating that statement several times. If they are still interested, I go on to explain that any money placed with us should never be more than 10% of their total investment capital. Then and only then, if they are still interested, do I go on to explain the investment, the risks, the team, and the possible rewards.

At the end of my presentation, I ask for questions. After all the questions have been answered, I again reiterate the risks. I end by saying, “If your money is lost, all I can offer you is the first opportunity to invest in our next business.” By this time, most people are fully aware of the risks, and I would say that 90% decide not to invest with us. We give the 10% that are still interested more information as well as more time to think things over and to back out if they desire.

I suspect that many of today's high-flying Internet IPOs will come crashing down in the next few years and investors will lose millions, if not billions, of dollars. Although the Internet does provide a tremendous new frontier , the forces of economics allow only a few of the pioneering companies to be winners. So regardless of if the company going public is a gold-mining company, a plumbing-supply company, or an Internet company, the forces of the public market still have much of the control.

Deciding to fly to Peru has turned out to be a great decision for me. I have learned as much from being Peter's student and partner as I did from my rich dad. After I put in about a year and a half as an apprentice to Peter and his team, he offered me a partnership in his private venture-capital company.

Since 1996, I have gained the experience of a lifetime watching EZ Energy Company go public and develop into a viable company that someday may become a major oil company. I have not only become a wiser businessperson because of my association, but I have also learned much about how stock markets work. One of my policies is to invest five years in the learning process—and so far I have spent four in this phase. At this time, I have still not made any real money—at least not money I can put in my pocket. My gains have been all paper gains, yet the business and investment education has been priceless. Maybe someday in the future I will build a company to take public on an American exchange.

Currently, Peter and his private venture-capital team in which I am a partner are developing three other companies to bring to the public market: a precious-metals company that secures leases in China, an oil company that secures oil and gas leases in Argentina, and a silver company that acquires leases in Argentina.

The company that has taken the longest to develop is the Chinese precious-metals company. We were doing fine with our negotiations with the Chinese government, and then suddenly, in 1999, a U.S. warplane bombed the Chinese Embassy in Kosovo. They say the maps were not updated. Whatever the reason for the bombing, the incident set our relations back two years. Yet we continue to make steady but slow progress.

When people ask why we take such great risks working in China, we reply, “It will soon be the largest economy in the world. Although the risks are huge, the potential payoff could be staggering. ”

Investing in China today is like the English investing in America in the 1800s. We are investing in contacts and goodwill. We are well aware of the political differences and the human-rights issues. As a company, we do our best to develop strong relationships and open communications with our contacts in China in the hope that we can be part of the transformation of the American/Chinese relationship. The educational experience has been priceless for me. It is like being a part of history. Sometimes, it almost feels like being on the same boat with Columbus as he set sail for the New World.

It usually takes three to five years to bring a company to the public market. If things go well, we may bring two of the three companies to the public market within the next year. When that happens, I will have achieved my goal of becoming an ultimate investor. It will be my first public company but Peter's number ninety something. So although I have not yet qualified as an ultimate investor, I am closing in on that goal, a goal I set for myself in 1995.

Given the risk involved, every one of these projects I am currently working on could fail and never go public. And if that happens, the pieces will be picked up and new projects will be started. Our investors know the risks involved and also know that their investment plan is to put a little money in several of these smaller ventures. They also know that they will be called and asked to invest in any new start up we have. All it takes is one project to hit a home run. In investments such as these it is definitely not wise to put all your eggs in one basket. It is because of such risks that the SEC has the minimum requirements for investors in such speculative investments.

The next chapter briefly outlines the basic steps of starting with an idea, building a company, and perhaps eventually taking that company public. Although it has not been an easy process for me, it has been a very exciting one.

Taking a company public is the rite of passage for any entrepreneur . It would be like a college sports star being selected to play for a professional team. According to the September 27, 1999 issue of Fortune, “If you're acquired, a company validates you. If you go public, the market—the world—validates you. ” That is why rich dad called a person who could build a company from scratch, and take it public, an ultimate investor . That title eluded him. Although he invested in several businesses that ultimately did go public, none of the companies he actually started ever did go public. His son Mike took over his business and continued to grow it, but he has never built a company to take public. So to become an ultimate investor will mean that I will have completed rich dad's training process.