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Companies
seeking to access public capital markets and establish
themselves by "going public" quickly find that
the process can be costly and time consuming. The
traditional way of going public - filing SEC documents,
finding an underwriter, generating broker interest,
getting on analysts' radar screens, etc. takes most of a
year and frequently diverts top management of the
company from business operations. Many companies are
considering the use of a reverse merger to save time,
costs and equity.
Another
disadvantage to traditional IPOs is the valuation for
the company - most often set by outside interests. The
pricing of the shares depends on perceived interest in
the company and the ability for brokers to sell the
public on the company and its future. Price the shares
too low, and the company loses capital in the
aftermarket, as the price is driven up by demand. Price
the shares too high, and low demand causes a drop-off
from the offering price - calamity for a new issue.
There
are many reasons for a privately held company to become
public. Initial investors may be looking for liquidity
or an exit strategy. The company may be looking to raise
capital in the public markets. A business looking to
expand may want to use publicly traded stock to acquire
more market share. Stock purchase plans and option
packages can help a company attract top talent. Public
companies tend to gain more exposure in the media, and
the fact that a company is publicly traded and reporting
adds credibility.
The
problem is that the hurdles involved in a traditional
public offering can be daunting - or even prohibitive.
The company must undertake significant tasks that will
pull resources from day to day operations. First the
accounting of the company must be reviewed and restated
to conform to GAAP guidelines. A prospectus must be
drafted by IPO attorneys. Due diligence must be
performed - the company must be investigated. A
financial printer must use prescribed guidelines to
print the preliminary prospectus. A syndicate of
investment bankers must be formed to sell the offering.
A road show consisting of many long trips must be
undertaken by top executives to meet with analysts and
investors. Finally, a revised prospectus must be
printed, the pricing set and then hope that the issue
sells out. After all of this work, the offering is still
subject to market conditions and investor sentiment!
Many
small and medium sized companies would like the benefits
of being public but do not want to endure the expense,
time and diverted resources of a traditional initial
public offering.
A
strong alternative to an IPO is a reverse merger. In a
reverse merger, the private company buys control of a
public company (the "shell" company) and
merges its assets and liabilities into it. Usually the
public shell has little or no assets or liabilities and
in many cases has been formed specifically for this
purpose. At the end of the merger, the private company
owns a substantial majority of the stock and control of
the board of directors. At that point the name of the
shell may be changed to that of the former private
company.
The
time it takes to transact this type of merger can be as
quickly as a few weeks. First the companies exchange
information on each other. They perform their due
diligence (extremely important, as a private company
does not want to assume huge liabilities) and if they
approve of each other, they negotiate a share exchange
agreement. The shell company then issues a majority of
its shares (and board control) to the shareholders of
the private company. In return, the private company pays
for the shell and contributes its shares to the public
company that it now controls.
If
the public shell is a reporting SEC company, the private
company is now a public company. If the shares are listed
on an exchange, the company is a publicly trading
company. Since the public shell has gone through the SEC
investigations and reviews, there are no such burdens
for the private company. Naturally, the company will now
become a reporting company and be required to file all
SEC reports in a timely manner.
The
bottom line? For the right company, a reverse shell
merger may be the best way to become a public company.
The company can shave months of time from the process,
save hundreds of thousands of dollars, retain control of
the company and its valuations, and will not subject
itself to the scrutiny of underwriters and analysts.
If
you are considering becoming a public company, feel free
to give us a call. We have experience in this area and a
number of public shell candidates available.
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