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What Is Reverse Merger, And Is It For Everyone?

A reverse merger is a method used by many small and mid-cap companies to initially go public, its the purchase of, and reverse merger into, an existing public shell company. This is inexpensive compared with conventional Initial public offerings (IPO). This is also a simplified fast track method by which a private company can become a public company.

In a reverse merger, an operating Private company merges with a public company that has little or no assets, nor known liabilities (the "shell"). A shell is what remains of a once public company that has ceased to operate, by going bankrupt or liquidation of assets. In some rare instances, the shell may have some amount of cash remaining for investment into the new enterprise. The public corporation is called a "shell" since all that exists of the original company is its corporate shell structure and shareholders. The private company owners obtain the majority of the shell corporation's stock (usually 90-95%) through a new issue of stock for the private enterprise or asset.

The public corporation will normally change its name to the private company's name and elect a new Board of Directors which will appoint the officers. The public corporation will usually have a base of shareholders sufficient to meet the 300 shareholders requirement for eventual admission to quotation on the NASDAQ Small Cap Market or American Stock Exchange (if the private company's financial condition substantiates other NASDAQ or AMEX requirements). The company must file a form S-4, this form is use to register securities in connection with Business combinations and exchange offers. although some shells have as few as 35-50 shareholders, and are currently listed (or can apply for listing) on the OTC Bulletin Board or the NQB Pink Sheets.

A Reverse Merger may be the quickest way to go public but is it the best?Lets look at a few drawbacks of using a Reverse merger to take your company public.

(1). The cost of the shell: the price of corporate shells has skyrocketed over the last couple of years, due to increased SEC scrutiny and demand for shells by Chinese companies looking to go public and trade in the U.S.

The price of public shells today start at $500,000.00 and people are paying it. With all the other expenses the final cost of doing a Reverse Merger could be close to one million dollars.

(2). Greedy shell owners: The shell owner not being satisfied with the $500,000.00 Plus he gets for the shell and usually keeps 5-15% of the shares for himself.

The shell owner�s shares will come out and cause problems for your share price when you least expect it, even if he sign an agreement not to sell for a year, he can not be trusted, it�s the nature of the beast, greedy and slimy like all snakes.

Don�t let the shell owner dictate to you and insert a stipulation in the contract forbidding you to do a reverse split, after all he needs you more than you need him, you can go public without him but he can�t get his money without you.

(3). The smooth talking consultant that can sell ice to an Eskimo in the middle of winter. He will paint a rosy picture and not warn you of possible bumps in the road to the public square.

Often the consultant may be the shell owner at the same time or at least own a piece of the pie, and is disguising his ownership with the help of a Lawyer.

The consultant should have financial industry experience, if he doesn�t have a website, most likely he does not want the visibility that the website provides and is operating in a stealth manner, under the regulators radar screen.

A website provides a open forum for consultants to do business but many shy from it because they do not want the regulators to see what they are doing, many have been barred by the SEC from having any involvement with securities transactions.

I keep a website and write articles because I want the visibility they provide. In many cases if you type the name of the consultant into google you will be able to see if they have been convicted by the SEC of securities fraud in the past.

(4). Due diligence: proper due diligence can save a lot of headaches later on, examine the shell closely, why are they out of business? Or if they have any hidden problems Such as angry employees, upset investors, product litigation. Or inconsistencies in prior financial reporting which can cause serious SEC problems down the road.

(5). Short Sellers: When I was a market maker I tried not make a market on the stocks of companies that used certain consultants because between the shareholders, the stock held by the shell owner and various other group the potential for a big sell off existed., short sellers know that when that stock comes out the share price will go down so they try to get there first.

Joseph D. Quinones, President of Genesis Corporate Advisors has spent over 25 years in the securities industry. In 1992 he founded JDQ Financial Group, Inc. and proceeded to build it up from a one man operation to the point where it employed many traders, advised numerous client and generated millions in revenues.

Many Reverse Mergers have been successful when done properly that is why I never consent to doing one without providing the company with the possible problems that can arise and how to deal with them.

I also provide the client with the alternatives to Reverse Merger, such as Regulation D Offering, Direct Public Offering and private placement.

One way to make sure that the Reverse merger is going to work is to buy one hundred per cent of the shares owned by the shell owner, but this is not a guarantee because there could be shares unaccounted for.

Proper due diligence is a must, and you must be immune to smooth talking salesmen.An alternative to a Reverse Merger is a Direct Public Offering, DPO.

Direct Public Offerings are increasing in popularity since the shell prices are skyrocketing and companies are becoming aware of the problems associated with Reverse mergers.

And if a company is trying to obtain financing Direct Public Offerings are preferable to a venture capital investment, venture capital firms demand a large portion of the company and will not be passive investors.

Venture capital investors will be very involved with the company and will make demands that can be detrimental to the company�s success, they may not give you enough time to put your business plan in place.

An IPO is probably out of the question because you must convince an underwriter that your company is the next Microsoft, or you will have a difficult time getting someone to do the IPO for you.

An IPO is more expensive and time consuming and will take the decision making out of your hands place it in the underwriters hands.

A DPO is targeted to affinity groups such as employees, suppliers, distributors and customers. These groups usually are familiar with the company and are loyal to it.

DPO�s are registered securities offerings that allow you to market the securities directly to the public. The Internet can be use to market the securities but if your website doesn�t have a lot of traffic nobody will know about your stock offering.

So that leaves affinity groups as your best source of funding, unless you are a google and the investors are looking for you.

As the large corporations continue to reduce their work force and are leaving a lot of talented people with the option of an unemployment check or starting their on business, we find that a lot of the job creation is being left to small businesses.

These small businesses must find capital in order to expand or to fill order, small business have created over 20 million jobs over the last 15 years while big business has been cutting them. If this creative force had the capital they could propel the economy to unheard of levels.

DPO�s fall under �SCOR� small corporate registration and are for companies doing under $25 million in revenues and have a capitalization (share market value) of less than $25 million dollars.

By doing a Direct Public Offering you are raising capital that will not be costing you monthly interest payment, and is a permanent source of funding.

You will not have to give a large portion of the company to investors, a venture capitalist will demand a disproportionate Amount. Private funding is always more expensive in terms of equity and control.

As a public company you can better negotiate future financing requirements, and use the company stock for acquisitions. In a DPO filing you only need 2 years of audited financial as compare to 3 years for other filings.

All this sounds easy but in reality it isn�t you need somebody with experience to hold your hand and guide you through the process.

You must make sure that you are ready for the commitment and are prepare to devote the required time to this endeavor. Talk to your affinity groups about the possibility of investing in your company, this will give you an idea as to who is a potential investor.

Keep updated records of your customers and friends in the community who may be contacted later on. It may become necessary to purchase a mailing list, if you are medical product company or laboratory you would know some of the Doctors in your community but not all of them.

Stay in the planning mode and take necessary step while you are preparing for your DPO, such as having one year of financials audited and having a business plan prepared and printed, so that you don�t have to incur all the expenses at once.

Give us a call so that we can start planning together, the more prepare you are the less you will have to rush later, everyone everything done yesterday but the process takes time.

Regulation D Offerings: This rule provides an exemption from the registration requirements of section 5 of the Securities Act of 1933. Such transactions are not exempt from the antifraud civil liability, or other provisions of the federal securities laws. (See my article on Regulation D (504) offering.

Nothing in these rules obviates the need to comply with any applicable state law relating to the offer and sale of securities.

Rule 506: Provides an exemption for limited offers and sales without regard to the dollar amount of the offering. This offer does not limit the number of accredited investors, but the nonaccredited investors is limited to 35. for a description of accredited and nonaccredited investors see my article on Regulation D (504) offering.

Rule 505: Offerings may not exceed $5,000.000.00 less the total dollar amount of securities sold during the preceding 12 months period under rule 504 or 505. This exemption limits the number of nonaccredited investors to 35 but has no investor sophistication standards.

Rule 504: Offerings allows business to raise a maximum of $1,000,000.00 in a twelve month period, under Rule 504, Rule 505 or section 3 of the act a business can raise only $500,000.00 by the sale of securities to persons residing in the states of Montana and Alaska, which have no disclosure law. In states that have disclosure laws companies can raise up to $1,000,000,.00.

Rule 504 has no prescribed disclosure requirements, no limit on the number of purchasers. Offering under Rule 504 are relatively simple to prepare, which reduces the cost and delay and does not require an underwriter.

Joseph Quinones, President of Genesis Corporate Advisors has spent over 25 years in the securities industry. In 1992 he founded JDQ Financial Group, Inc. and proceeded to build it up from a one man operation to the point where it employed many traders, advised numerous client and generated millions in revenues.

For additional Information Please visit: www.genesiscorporateadvisors.com

For questions email: [email protected]

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