Going Public Directly VS. Reverse Merger with a Public Shell

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.

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

As we discussed, when you consider the time it takes to source one or more public shells, vet the shells, negotiate and close the acquisition of the public shell, a Go Public Direct transaction may not take any more time ? and may actually take less time ? than a reverse merger.
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 MergerDraw

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.