Are Reverse Mergers Obsolete?

Are Reverse Mergers Obsolete?

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It is important to note a little on the history of going public techniques. First, we had the initial public offering or IPO. A company, lets call it a venture company, seeking to raise money finds an underwriter for an IPO stock offering.

Then came the reverse merger or merger with an OTC shell. The company seeking money, the venture company, found a (hopefully) clean shell trading over the counter. The shell usually had no assets but had trading public stock. The venture company merged with the OTC shell, giving up 5-20% of its value to the public shell shareholders and paying $50,000-$750,000 to the principals of the public shell. The result was a publicly trading company fast.

Several problems developed in this reverse merger approach. First, the stock of the new company was trading usually without full disclosure. Second, the people who controlled the shell often dumped their stock on the market without mercy, leading to a disastrous decline in the stock price of the new company and unjustified shareholder anger at the new management for letting the stock price slip when the new management was simply being victimized as well.

In fact, there were so many abuses in the reverse merger game, that the SEC in 2005 and passed a rule saying that the new, combined company had to file a Form 8-K within four days after the merger. This Form 8-K had to contain essentially all the information you would need to file in a public offering. Now there would be full disclosure to investors essentially the same disclosure you would need to file if you were registering the stock for sale. So we now call this Form 8-K a Super 8-K.

You may find yourself thinking, "If I have to file the same information as in a public offering, why do I have to buy the shell and give up all that stock and money?"? The answer is that there are usually no good reasons to buy the shell. You might as well do what is sometimes called a self-filing or direct registration.

Moreover, when you do a reverse merger, there are many drawbacks to buying the shell over registering the stock in a self-registration. It costs you a lot to give up all that money and a significant percentage of your company to do a shell deal. Shells can have undisclosed problems and liabilities. Instead of having to prepare a filing on one company, in effect you must prepare the documents for two companies that are now in the new company: your company and the shell. Shell companies have had a negative reputation in the past. Having the shareholders in the public shell dumping stock in the market is not a good thing for your stock price. You want loyal shareholders. As a former market maker as well as an attorney and investment banker, I can tell you that a strong operating company can attract more and better market makers than those that usually trade OTC shells. As a market maker, I used to trade public shell companies and buy large blocks of stock for pennies. After a merger, I would sell it fast for several dollars. The volume of trading in a shell company is usually thin. While some may think they are paying for a trading market by buying a shell, they are really buying a market that has nothing of much value.

Thus, the more you look at the alternatives, the more you can start to see the advantages of a self-registration. Now you want to contact a good advisor on these transactions. Looking at all this data can cause you to reach the same conclusion others have, self-filings are usually a better deal.

About the Author:
For more information, contact the author, John Lux at http://www.reverse-merger.info John has been an OTC market maker in new issues, shells and other companies, a security analyst, an investment banker, and attorney. He is a principal in several venture companies and private equity funds.



Article Originally Published On: http://www.articlesnatch.com


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