A Market Maker Explains: When a Go Public Direct Works Best & How It Works

Go Public

Go Public

One of my potential new clients asked a Market Maker I use for most of my Go Public Direct transactions to explain more about how a Go Public Direct transaction [also called a self-underwriting] works.

He also answered some other very good technical issues about the process from a FINRA point of view and indicated the situations in which a Go Public Direct transaction could be preferable to a reverse merger.

The answer was so good I’m sharing it in its entirety with you [with my comments], as follows:

It is not uncommon for the first round of investors [i.e. the investors I put into my Go Public Direct Selling Stockholder S-1 filing with the SEC] to be made up mostly of friends and family.  FINRA will use the definition of affiliate from Rule 144 below.

Are they an affiliate if they are relatives but live in different addresses?  That is the harder question and can really only be answered based upon the shareholders relationship with the company.  Michael summed it up pretty well in his response to this part of the question: If you have 35-40 shareholders as long as around 20 are non-relatives (but friends are OK) with at least 30-35 total parties with different addresses I think you would be good. 

Assuming that you will be selling [to investors located outside the US], US regulations on offshore sales are much easier (see Reg S and confirm with Michael), so it makes sense to obtain as many offshore shareholders as you can.  Check with local laws on securities solicitation to make sure you are not breaking any rules there. 

[We] have filed at least 10 deals as primary offering S-1’s that sell exclusively to residents of [one offshore country].  It makes sense to file a primary offering [i.e. the Go Public Direct Selling Stockholder S-1 filing with the SEC structure I use] since each shareholder that buys off of this offering obtains shares that are free trading right away. 

[THIS IS VERY IMPORTANT.  EVERY COMPANY CONSIDERING GOING PUBLIC IN THE US SHOULD READ THIS CAREFULLY.  I’m paraphrasing a bit here but the message is exactly the same.]  Ultimately this is what the SEC wants you to do, sell stock to shareholders, file a registration statement for the business you are in, then sell even more shares to raise money – either through an S-1 or private placement, and then enjoy the US capital markets.  Going this route is the cleanest way to obtain access to US markets. 

If you do a reverse merger, while technically legal, the SEC has a tendency to frown upon these types of transactions.  Michael is right about the disclosure for reverse mergers, it is the same as an S-1. 

The only advantage is that the 8-K is effective right away, whereas the S-1 could take months.  8-K’s could receive comments from the SEC though, very similar to the S-1 comments.  Keep in mind that either way you go, the timeline starts from when the audit on your company is done and the disclosure statement is done.  These both could take a few months as well. 

If you are not being told that you could obtain financing shorty if you were a public company, I would choose the route of self-filing.  If you have a finance source that will fund you right away, you should consider a merger.  [I have more comments on these sometimes untrue funding promises, but that’s for another day.]

THANK YOU TO MY MARKET MAKER friend.  if you wish to contact him directly, let me know and I’ll put you in touch.

Here’s the definition of “Affiliate” referred to in the discussion above:

a. Definitions. The following definitions shall apply for the purposes of this rule.

  1. An affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer.
  2. The term person when used with reference to a person for whose account securities are to be sold in reliance upon this rule includes, in addition to such person, all of the following person
    • Any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person;
    • Any trust or estate in which such person or any of the persons specified in paragraph (a)(2)(i) of this section collectively own ten percent or more of the total beneficial interest or of which any of such persons serve as trustee, executor or in any similar capacity; and
    • Any corporation or other organization (other than the issuer) in which such person or any of the persons specified in paragraph (a)(2)(i) of this section are the beneficial owners collectively of ten percent or more of any class of equity securities or ten percent or more of the equity interest.

As usual, if you have any additional questions, feel free to contact us.

But this post really sums it all up!