Going Public: Go Public Direct without a Reverse Merger or Public Shell
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You don't need a reverse merger with a public shell to go public and get a ticker symbol.
Going Public Directly Through an SB-2 Registration Statement VS. Reverse Merger with a Public Shell
You now know our little secret: You don't need a reverse merger with a public shell to go public and get a ticker symbol.
A trading in a shell is not only irrelevant, but potentially a negative. What, you don't believe me. I'm not the only person with expertise in this area that thinks so. The guy that wrote the book on Reverse Mergers agrees with me, for the following reasons:
* The percentage of the company that represents the public float following the merger is tiny, at most 5-10%. Of that, probably 2/3 is held by one person who does not wish to sell, so you are looking at maybe 3% of the company tradeable, which is pretty meaningless until the investor and private company shareholders are registered. This 3-5 months of trading by appointment of 3% of the stock is worth $1 million to buy a trading shell.
* The holders who have the tradeable stock invested in some other company, lost their investment, have now probably been reverse split 1 for 20 or worse, and wish only one thing once a merger happens. They wish to sell. That puts downward pressure on the stock following the merger to the extent it trades at all.
* There is insider trading leading up to the announcement of the deal in way too many of the merges with trading shells that I've been involved with.
* The identity and intentions of the shareholders is completely unknown to the private company merging in.
Here's a detailed analysis of why Mr. Williams believes that in most cases a reverse merger with an OTCBB trading shell is a waste of hundreds of thousands of dollars.
One of our prospective clients recently asked to prepare a comparative analysis of going public directly versus going public through a reverse merger.
We thought we share our response with you.
General
Going Public Directly involves a company obtaining a ticker symbol by preparing, filing and clearing with the SEC a registration statement, generally on Form SB-2, for its own securities - called a Direct Public Offering; for securities already owed by its stockholders - called a Selling Stockholder Offering; or a combination of both. Simultaneously, an NASD broker called a Market Maker files a Form 211 with the NASD to obtain a ticker symbol. When these filings clear at about the same time, the company has satisfied both requirements for obtaining a ticker symbol, free-trading stock and SEC reporting status, and the company commences trading in its securities.
Unless a company has at least 50 non-affiliated shareholders that have held for more than two years approximately 400,000 shares of stock initially purchased at a reasonable price, a Form 10-SB registration statement won't work for obtaining a symbol because it doesn't provide the free trading stock required to secure a ticker symbol that a Form SB-2 registration statement provides.
Going Public through a Reverse Merger involves locating a Pubic Shell - generally a company with no operations or assets that has a ticker symbol, and merging with that company. When the merger closes, the company continues trading in its securities.
Going Public Directly is significantly less expensive and provides several other key advantages over a Reverse Merger. However, a Reverse Merger generally can be accomplished in a shorter period of time. Ultimately, the decision as to which method to utilize comes down to issues of price and time sensitivity and financing requirements.
Price
Clean OTCBB trading shells today generally cost $500,000 to $1,000,000 in cash, with the average being approximately $750,000. However, that is not the true total cost of an OTCBB shell. In addition to cash, OTCBB shell promoters and other shell shareholders generally retain 5 - 10% of the equity in the shell company after the merger. Assume that the company post-merger has a market capitalization of $40 million. 5% X $40 million = $2 million. So the true cost of this shell would be more than $2.5 million.
Going Public Directly will cost you much, much less than even the $750,000 cash price of a shell, with the key variable of the total cost of Going Public Directly being the expenses of the required audited and interim financial statements.
Price Advantage: Going Public Directly
Timing
Going Public Directly generally takes approximately five or six months, but can be accomplished in a much shorter period of time 1f the company is lucky enough to get a "no review" by the SEC, as recently happened with one of our Going Public Directly clients.
Reverse Mergers generally take approximately two months. Although Reverse Mergers used to be able to be done in a shorter period of time, the SEC adopted Release 33-8587, "Use of Form S-8, Form 8-K, and Form 20-F by Shell Companies" in 2005, which now requires the filing no later than four days after merger closing of the same disclosure information and audited financial statements about the private company that are required in the SB-2 filing in a Going Public Directly transaction. Because in practice this information takes a month or more to compile, the time required for the closing of Reverse Merger transactions has increased.
Timing advantage: Reverse Merger
Intangibles
Going Public Directly has many intangible advantages compared to a Reverse Merger.
We described these in the first few paragraphs of our website above.
Intangibles advantage: Going Public Directly
Why do a Reverse Merger?
We believe there is only one reason that a Reverse Merger makes any sense at all: If a company's financing source insists that the private company obtain a trading ticker symbol at the time the financing source makes an investment, this method is the only viable alternative.
Why do a Direct Filing?
If the company can wait an extra four months to obtain a ticker symbol, it clearly should go public with a direct filing.
* The direct filing provides investor liquidity by registering the shares of investors acquired in private placements in the SB-2 registration statement.
* The risks inherent in a reverse merger transaction, many of which can lead to a lower trading price for a long period of time, do not exist.
* The cost is significantly less, leaving the company with increased capital to develop its business and thus potentially increase its trading price.
IPO Alternative Williams Law Group, P.A. Copyright 2007
About the Author
MICHAEL T. WILLIAMS, ESQ., Williams Law Group, P.A., Tampa FL. Mr. Williams currently represents or has represented over 25 clients and their representatives in the process of going public. He was previously an Enforcement Attorney with the SEC.
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