Stability of the Market

Replicating the initial public offering is a difficult process. There are not enough investors to cover all the shares, and there are no "institutions" to purchase a large number of shares. My initial idea was to just skip the IPO process and issue shares as demand warranted.

When I was trading virtual currency (see Wired article) it was a known issue that all the currencies were suffering pretty massive devaluation. As more people enter a virtual world and are assigned a set amount of currency, the overall supply of currency rises and the value of that currency shrinks.

With shares of K5M my goal was to avoid the problem of devaluation by only having a set amount of total shares. With no additional shares entering the market, then the problem of devaluation should be avoided, right?

Well, it turns out no. While I set a cap of 100,000 shares, those shares were being held by me and issued to investors as demand warranted, but I didn't take into account the shrinking voting power of selling my shares. Let's say there are 4 people who have each purchased 100 shares:

Alex: 100 shares
Bill: 100 shares
Curt: 100 shares
Dave: 100 shares

At this point each person owns 1/4 of the total shares on the market. If there is a shareholder resolution then at least three of them will need to agree to reach the majority.

Resolution: Should K5M File More Paperwork?

Alex: Yes
Bill: Yes
Curt: No
Dave: No

So there are 200 Yes votes and 200 No votes. But then Alex says he will buy 1 share for $3.00. Curt and Dave know that if they sell 1 share then the Yes votes will have the majority, so they hold strong. So Alex increases his offer... $4.00, $6.00, $10.00, $25.00 and finally $50.00. If Curt takes the money and then the Yes votes win and the stock price is $50.00 a share.

But what about Eric? During this voting time, when Alex and Bill are locked in a shareholder battle with Curt and Dave, Eric signs up for an account. I (K5M, "the system") sell him 100 shares for $100. Suddenly the battle has changed. Alex, Bill, Curt, and Dave no longer own 25% of the actively traded stock. When I sold 100 shares to Eric I diluted their percentage by 5% each, and now Eric is the decider. However he votes swings the resolution.

Do Alex, Bill, Curt, and Dave have a right to assume that the shares they own correspond to an unchanging percentage of influence? For integrity to be maintained that what they are buying (shares) means something concrete then the argument can be made that the percentage ownership should be constant. New shareholders should be required to buy in at the going market rate and not able to dilute the influence of the other shareholders by bringing more shares into "active" market.

That problem of the large reserve of shares being held by me (K5M, "the system") is basically the same thing as the virtual worlds just creating more and more virtual currency. Essentially I am creating massive inflation and the value of the individual share will shrink or stagnate as people wait to buy from my deep reserves instead of trading amongst themselves.

The solution that I came to after discussing the problem with several shareholders was to issue a set amount of shares at scheduled times. This creates an element of certainty in the market, but also allows me to continue to raise funds for future projects. These shares will be released in an auction that happens once a year (perhaps on May 17th?) and will be for 3000 shares.

Of course there is still the matter of the shares that have already been sold...

(please post any comments, feedback, or ideas in the forum)