Methods of Going Public
There are three basic methods of going public:
1. Initial Public Offering called and IPO
2. Reverse Merger with a Public Shell
3. Go Public Direct called a Self Underwriting
Unless your company has hundreds of millions of dollars of revenues and profits, even in good economic times, you won't be able to go public with an IPO.
This leaves you with the other two alternative methods of going public. We believe that Go Public Direct is more advantageous to you and your company than a Reverse Merger with a Public Shell unless the Reverse Merger involves:
- A public shell you absolutely know is clean, preferably brought to the table by or through a Financial Institution Regulatory Authority, or FINRA, registered broker/dealer
- Significant funding at the closing of the Reverse Merger, not a promise of funding after the deal closes
Only this type of Public Shell Reverse Merger overcomes the potential Reverse Merger disadvantages of:
- The risk of having the promoters and other shareholders of the Public Shell dumping their shares onto the market following the closing thereby depressing your stock price, potentially for a substantial period of time
- Recent changes to SEC Rule 144 which make raising funds in subsequent a PIPE financing transaction more difficult and more expensive Unknown Shareholders and Liabilities, although a minimal risk if the Public Shell is SEC Reporting
In contrast, there is no Public Shell or Reverse Merger in a Go Public Direct Self-Underwriting transaction. Instead, your company files directly with the Securities and Exchange Commission a registration statement for shares you have already sold, called a Selling Stockholder Registration Statement, or shares you want to sell publicly, called a Direct Public Offering or DPO. In addition, a FINRA broker/dealer called a Market Maker files a separate Form 211 with the Financial Institution Regulatory Authority to secure your Ticker Symbol.
In choosing to go public through a Reverse Merger with a Public Shell or a Go Public Direct transaction, you need to consider various factors:
Cost: A Reverse Merger with a Public Shell is significantly more expensive that a Go Public Direct transaction because you must add in the cost of the Public Shell both in the cash you must pay and, in what many people forget but actually is the more expensive part of the price of a Public Shell, the value of the equity you must leave with promoters and owners of the Public Shell.
Certainty of Getting a Ticker Symbol: Because many people do not understand or fear the SEC review process involved in a Go Public Direct transaction, they think that a Reverse Merger with a Public Shell is a more certain method of going public. You know you have a ticker symbol when you close a reverse merger. But what if the SEC doesn't clear a Go Public Direct filing? As every experienced securities professional will tell you, you are certain to clear a filing in a Go Public Direct transaction if you have a knowledgeable team of professionals representing you. Why? The SEC is not a merit review agency such as the FTC. Give the SEC the required disclosure and financial statements and they will clear your filing in a Go Public Direct transaction.
Timing:Most people will tell you that a Reverse Merger with a Public Shell is always faster than a Go Public Direct transaction. It can be, but not always. Why? Because of recent SEC rule changes regarding Reverse Mergers, you must file a disclosure document with the SEC for all practical purposes when you close the Reverse Merger. What you may not know is that that disclosure document requires to be filed with the SEC in a Reverse Merger transaction contains virtually identical information to that required in a filing in an SEC filing in a Go Public Direct transaction, both in terms of substantive disclosure and in audited financial statements of your business. The time it takes to prepare this required filing is the same for both methods of going public. So the real comparison in timing between the two methods of going public is the time it takes you to find, vet, negotiate and close on the purchase of a Public Shell in a Reverse Merger transaction versus the time it takes the SEC and FINRA to review your filings in a Go Public Direct Transaction. A Go Public Direct transaction generally requires at least 3 – 4 months to clear these filings. But every experienced securities professional will tell you it can take that much time, or longer to find, vet, negotiate and close on the purchase of a Public Shell. Not always, but sometimes.
You may not want to fool with an SEC filing to go public. In that case, you are looking to trade on the Pink Sheets. You can in fact do a Go Public Direct transaction on the Pink Sheets. However, you cannot get a Pink Sheet Ticker Symbol directly unless you have approximately 30 or more non-insider shareholders who have owned their stock for at least a year. Further, most securities professionals will tell you that the FINRA review process, which is still required, tends to be much more demanding. But not impossible, again if you have the right team of professionals advising you.
So you may hear, "Avoid all that FINRA and SEC review and buy a Pink Sheet Shell." However, as many experienced securities professionals will tell you, Pink Sheet Shells can be very problematic. In addition to the potential problems with SEC Reporting Shells described above, Pink Sheet Shells have no disclosure filings or audited financials statements on file with the SEC, which makes due diligence difficult if not virtually impossible.
Worse, and what people in the Pink Sheet Shell business may not tell you, is that due to recent SEC rules changes, unless and until you become an SEC reporting company, you and all your shareholders will have totally illiquid, totally not sellable stock. And so too will any investor you try to get to give you money after you close a Reverse Merger with a Pink Sheet Shell. The one year holding period to get free trading stock does not apply to a Pink Sheet Shell. The only people who can sell your stock are the promoters who sold you the shell and the shareholders of the shell.
So if you are considering just a Pink Sheet "Listing," think through the issue very carefully and make sure you seek competent professional advice.