Going Public

Reverse Mergers

Reverse mergers continue to flourish in popularity because, when coupled with a well-executed capital raise, they are still the fastest way for private Companies to access investment capital investment from the public markets.
 
In a standard reverse merger the shareholders of the private Company going public gain control the majority of the shares (a controlling interest) in a clean public shell.

The private Company is then backed into the public shell and the shareholders now have control of a public Company. Upon going public there is a change in the control of the board of directors as well. The transaction is referred to as a reverse merger because although the private company merges with the public shell, the private company becomes the surviving entity.
 
After completion of the reverse merger, the previous public shell company undergoes a name change to that of the private Company that is now public. Lastly, FINRA is contacted so that a new trading symbol can be issued. 
 
Under the correct conditions, and with certain criteria being met, the reverse merger can be completed in a matter of a few weeks.
 
SEC Reporting Requirements
 
Within four days of the private Company going public an 8-K containing all the same information that could be found in a Form 10 is filed with the Securities and Exchange Commission (SEC). The 8-K contains all relevant information pertaining to the reverse merger and contains profiles of the Company’s new officers and directors, a thorough summary of the public Company’s business operations, and GAAP qualified audited financial statements.  This 8-K is commonly referred to as a “Super 8-K”.  Since the document is extensive it should be drafted by securities counsel prior to the closing of the reverse merger. 
 
The Five Benefits of Going Public by Reverse Merger with a Public Shell 

1. A Limited Operating History Does Not Prevent a Company From Going Public by Reverse Merger – Whereas it is essential for Companies to possess a substantial operational history in order to launch an effective IPO, reverse mergers are designed to accommodate start-ups and high-growth Companies  with minimal previous operations and earnings.  
   
2. Reverse Mergers are Fast – A private Company can go public by reverse merger with a public shell in a matter of weeks as long as they are organized, properly advised, and have access to a clean public shell.
   
3. Potentially Less Expensive – Depending on the cost of the public shell required for the reverse merger, the out-of-pocket expense for the private Company going public can be less than initiating an IPO.   
   
4. Dilution is Reduced – In an IPO there is a greater possibility that the Company’s shares will experience dilution. This detriment is greatly reduced in a reverse merger.    
   
5. Underwriter Requirements are Reduced – The participation of an underwriter is not essential to the reverse merger process. In an IPO it is generally necessary to have the backing of an investment bank to act as lead underwriter. This factor is eliminated when conducting a reverse merger with a public shell Company.  

Going Public by Registration Statement
 
An S-1 Registration Statement includes audited financial statements, in-depth financial information and a comprehensive narrative of the private company going public. The company going public is required to disclose a description of the company's business; any assets or properties it may own or control; identification of the company’s officers and directors and their backgrounds; a plan of operations; a management discussion of previous and future operations; imminent material transactions between the company and its officers and directors; prior and pending equity transactions; specific ongoing legal proceedings; the plan for distributing the securities; and the intended use of the proceeds.
 
An S-1 Registration Statement is filed with the Securities and Exchange Commission (SEC) to register the sale of stock, either directly by the company going public and/or by certain selling shareholders. The S-1 Registration Statement includes detailed discussions of the business, its operations, the market in which it operates and its management and also includes audited financial statements. 
 
In addition to the information expressly required by the form, the company going public must also provide any other information necessary to make the statements complete and not misleading.
 
The main benefit to a private company going public through the filing of an S-1 Registration Statement as opposed to a reverse merger is that the Company does not have to be concerned about undisclosed, potential or contingent liabilities.  Moreover, the SEC rules relating to shell companies (such as Rule 144 and Rule 145) prevent the operating company’s shareholders from selling stock using the Rule 144 exemption for twelve months following the completion of the merger. 
 
Eight Components of the S- 1 Registration Statement
 
1.    Business Summary
 
The S-1 includes a detailed summation of the business the Company transacts or intends to transact. This description includes its product, technology or service, its distribution and manufacturing methods, and the overall nature of their operations.
 
2.    Financial Statements
 
Financial statements audited by an independent certified public accountant are included in the Registration Statement. Income statements from the last three years and balance sheets from the last two fiscal years are included. All financials must be in compliance with SEC accounting requirements and generally accepted accounting principles (GAAP).
 
3.    Financial Summary
 
The Company’s financial statement is comprised of a balance sheet and income statement.
 
4.    Management and Compensation
 
The compensation received or to be received by the Company’s officers and directors is spelled out clearly whether said compensation is in the form of securities or cash. Any material transactions between the Company and its directors and officers are also disclosed.   
 
5.    Analysis of Financial Condition and Results of Operations
 
This financial analysis covers at least the three most recent fiscal years. If the Company going public has been in operation for a period of less than three years, the analysis then focuses on any material changes or nonrecurring items that may make the skew the comparison of results. This section analyzes and compares the company's financial statements on an interim period and annual basis.
 
6.    Risk Factors
 
The risks and uncertainties of investing in the company are clearly described in this section of the S-1 Registration Statement.
 
7.    Stock Offerings
 
Any plan to distribute securities must be broken down to describe the size of the offering and whether or not the distribution plan will include options or warrants. Weighted average exercise price is a good example of the details that are disclosed in this section of the S-1 Registration Statement. 
 
8.    Use of Proceeds
 
The private Company seeking to go public must disclose exactly how they intend to use the proceeds from their stock offering. Even if the intended use is general in nature, as many details as possible must be included.