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Go Public Today By Reverse Merger

What Is Reverse Merger?

Why Use Reverse Merger to Raise Money

What Are The Benefits In Being Public?

Does My Company Qualify To Become Public?

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What is Rule 15c2-11?

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Most people equate "going public" with the celebrated "IPO" that transforms struggling entrepreneurs into multi-millionaires — overnight! But in reality, IPO is only one of five possible routes to Wall Street, and may not be the best route for you. Consider carefully each of the alternatives.

IPO

Certainly the most well known approach. But it’s also the most costly, the most risky and most disruptive to the business, and can take a year or more to complete. Hundreds of thousands of dollars must be invested in the process without any certainty that the IPO will be successful. Indeed, it is common for changing market conditions to cause underwriters to pull the plug at the eleventh hour, which can be disastrous for a young company’s cash flow and morale. The IPO is best for well-seasoned start-ups with, among other things, ample fiscal resources and substantial brand recognition. The main advantage, of course, is that you raise new money if the process is successful.

DPO

The "Direct Public Offering" is sort of a scaled-down version of the IPO, more suited to many companies that are not as far along in their business development as the typical IPO candidate. Some think of the DPO as a "do-it-yourself" IPO, where the registration of the securities with the regulators is done using simplified forms and procedures, and the issuing company manages the underwriting itself. The cost of a DPO is typically much less than the cost of an IPO; however, the process is still labor-intensive for the company’s management.

Exchange Act Registration

If you already have a shareholder base of folks who’ve acquired your stock privately, registering under the Securities Exchange Act of 1934 can make your company eligible for listing on NASDAQ’s OTC Bulletin Board. The OTC-BB is an electronic quotation system, not a stock exchange, but it makes your stock quote available to brokers around the world and to any investor who has access to the Internet. Many companies have used this strategy as a low-cost route to transition into the public securities markets. Advantages are many, including providing liquidity for early investors, getting your stock noticed by professional securities analysts, and facilitating capital formation.

Reverse Merger

The term reverse merger refers to an alternative strategy by which a private company seeks and acquires public listing and becomes a publicly traded company. In a reverse merger, a private company merges with a public company and continues as the dominant successor entity. Optimally, the public entity has no assets, liabilities or operations prior to, or concurrent with the merger. Public companies actively seeking such mergers are sometimes referred to as blank check companies or public shells, given the fact that ideally only their corporate structures and status as publicly listed entities and fully reporting issuers are the dominant features of interest in such a merger. By merging into a shell, a private company becomes public in an expeditious and cost-effective manner.

The private company merges into a public company and obtains the majority of its stock (generally ranging from 80-95%) Once the merger is consummated, the post-merger, combined entity changes its name to that of the private company, appointing and electing key officers and directors and the discretion of the private company.

The advantages of public trading status notably include the possibility of a greater likelihood of capital formation. Relative to a private enterprise, a public company is potentially more successful in attracting potential investors and investment banking firms for the purposes of raising additional funds. Going public through a reverse merger allows a private company to go public rather relatively quickly, at a substantially lesser cost and with less resultant dilution than traditional initial public offering (IPO) or direct public offering (DPO) strategies. While the process of going public securing fully reporting status and raising capital is combined in an IPO, in a reverse merger these two functions are unbundled; secures public listing first then seeks additional capital formation Via this unbundling operation, the process of going public is significantly simplified. The advantages of public listing or going public include:

• Increased liquidity of the ownership shares of the company
• Higher share price and thus higher company valuation
• Greater access to the capital markets through the possibility of a future stock offering
• The ability of the company to make acquisitions of other companies using the company's stock
• The ability to use stock incentive plans to attract and retain key employees
• Going public can be part of a retirement strategy for business owners. 

The benefits of going public through a reverse merger, as opposed to the traditional IPO process, include the following:

• The costs are significantly less than the costs required for an initial public offering
• The time frame requisite to securing public listing is considerably less than that for an IPO
• Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the up-front-costs have been expended
• Traditional IPOs generally require greater attention from senior management
• While an IPO requires a relatively long and stable earnings history, the lack of an earnings history does not normally keep a privately-held company from completing a reverse merger
• There is less dilution of ownership control
• No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering)
• Typically publicly traded companies enjoy substantially higher valuations 
  

Registered Spinoff

The registered spinoff, or registered stock dividend distribution offers yet another method of going public. In a spinoff, a privately company goes public by issuing shares of its common stock to an existing publicly traded company. That stock issuance is subsequently registered with the SEC and the shares are distributed to the shareholders of the public company.

The private company’s stock, distributed to the public shareholder base of the public company results in a divestiture by the public company of its direct ownership or affiliation of the private company via a distribution of the private company’s stock to the public company’s shareholders. The net result is two companies each with a public shareholder base. The spinoff company then secures a market maker and lists independently.

The registered spinoff offers many advantages:

• The private company may structure the new public company to meet its particular needs, such as amount and classes of stock, warrants, etc. A merger requires that the private company accept the structure of the existing company or change it by shareholder vote, including outside shareholders
• Typically only a small percentage of the private company's shares are distributed as a spinoff. This serves to preserve the corporate ownership of the existing shareholders for future financial transactions
• The spinoff prepares the stock market for a secondary public offering later on, which typically occurs at a cost more desirable than an IPO
• Principals and shareholders of the private company can include their securities in the registration statement for the stock dividend distribution. This can allow them to then sell their securities in the public market, subject to the volume limitations of Rule 144
• If the private company is an overseas company, it may not want to become an American company as it would in a merger into a shell. A stock dividend distribution (registered spinoff) is a solution to that problem. The overseas company can have their securities traded in the United States on a U.S. Stock Exchange without requiring them to become a U.S. company or a U.S. subsidiary.
• A domestic company may also prefer a stock dividend distribution to a merger with a shell if it wants "custom features" which it does not find in a shell, e.g., two classes of stock owned by shareholders of the private company and/or warrants.

Requirements prior to entering into a reverse merger or a registered spinoff are the following:

• A private company will require approval of the majority of its shareholders for a merger with a public corporation.
• Once a company is taken public through a reverse merger or a registered spinoff the financial markets hold the following future prospects in the capital markets for the newly public corporation:
• The market value of a public company is often substantially higher than a private company with the same structure in the same industry
• Capital is easier to raise for public companies because the stock has market value and can be traded
• The public corporation may be used for special purposes.
• The public trading price of the public company's securities serves as a benchmark for the offer price of a subsequent public or private securities offering
• Acquisitions can be made with stock since publicly traded stock is viewed as currency for mergers and acquisitions
• Form S-8 stock can be issued.
• It is essential that public companies, especially newly formed public companies, actively maintain and manage a financial communications program.
• A newly formed public company would be well-advised to invest in consulting services, to plan and execute a strategy for building and maintaining an interest in your company within the financial community
• Consultants are available to assist the public corporation in providing corporate relations services intended to increase awareness of your company on Wall Street.