1. Traditional Underwriting
Time: 6 to 12 months
Cost: $350,000 to $1,000,000. (The company will be out of pocket at least 50% of this amount prior to completion.
Capital: Typically raises more capital than other types of transactions.
Problems: Underwriting may be delayed or canceled. Issue Price may be changed by market conditions or underwriter.
Time: 2 weeks to 60 days
Cost: $300,000 to $800,000
Capital: Does not raise money but stock is now valued and tradable
Problems: Potential “skeletons” in acquired shell.
Control shareholders of operating company may receive restricted shares.
Advantages: Typically, reverse merger or public shell merger is the quickest way to get public. Non-control investors may receive registered or trading shares.
3. Merge with a “Custom Designed” Public Company
Time: 4 to 8 months
Cost: $150,000 to $300,000
Capital: May raise money, and stock is now valued and tradable
Advantages: Public company can be “Custom Designed” to the operating companies specifications. Shareholders of operating company receive registered shares. New corporation, so no “SKELETONS” in the company. Financial expertise during the transaction and market support after the transaction. Automatic shareholder base friendly to the “Small Cap” market.
Preparation for a Reverse Merger or Public Shell Merger
• Locate a Suitable Public Shell – Public shells can often be found by consulting with securities law firms or CPA – Audit firms that deal with public companies. Vista Investment Management, Inc. also has access to an inventory of public shells available for merger.
• It is important to start with a clean shell – Due diligence on the public shell cannot be over emphasized, advice from your securities counsel, auditors, and a financial consultant should be utilized. As was mentioned, many shells are created for the express purpose of merging with a private company. These shells have no predecessor entities, and, as a result, little baggage in the way of a business failure or other skeletons in the closets.
• Comprehensive Business Plan – Potential investors, public shareholders, auditors, securities counsel, brokers and market makers will want to see a well documented business plan.
• Strong Management Team – Public investors demand strong management teams.
• Convincing Marketing Plan – Public companies need the ability to show good sales and earning growth.
• Product or Service – Public companies should be able to develop strong or dominant position in their business segment.
• Financial Audits – SEC qualified audited financial statements for your last two fiscal years.
• Experienced Securities Counsel – Your attorney must be qualified to deal with regulatory compliance, and the ongoing reporting requirements of all public companies.
• Have Public Company Experience – Your Company should have at least one person in senior management that has significant public company experience. Financing consultants such as Vista Investment Management, Inc. can assist management in the complex issues of being a public company and maintaining a good relationship with the financial community. In fact, we may actually have a couple of shell corporations in-house, or upon request, can manufacture a clean public shell. A made-to-order shell without the baggage of a business failure in its background can sometimes be the way to go, but there’s often a cost involved. You will most likely end up with the financing consultants as minority shareholders in the new company, holding a negotiated percentage of the equity. However, in almost any reverse merger transaction, the principals of the shell company keep a small equity position in the company going forward. Therefore, this surrender of equity is simply a cost of doing business.
• Devise your financing strategy – A reverse merger is an indirect route to raising capital. Entrepreneurs must first consider how additional capital will be raised after the deal is done. An experienced financial consultant, like Vista Investment Management, Inc., can be very beneficial in this area.
Requirements Necessary to Close a Reverse Merger or Public Shell Merger
• Management information, including completion of the “Officer and Director Questionnaire,” for all Officers and Directors designated by the private company merger partner.
• Agreement on structure and terms of merger.
• Letter of intent with escrow payment made to public company or its principal shareholders. (This must happen for the public company to cease negotiations with other merger prospects.)
• Audited Financial Statement, conformed to US-GAAP for the private merger partner. The audit statements of the private company have to be consolidated with the public company’s financial statements.
• Agreed merger fee in escrow with the securities attorney representing the merger partner.
• Consent from the majority, usually over 51%, preferably 100%, of existing shareholders of the private company to merge or exchange their shares for shares of the public company.
• Agreement for the Officers and Directors of the public shell to be replaced with the Officers and directors designated by the private company merger partner.
• List of all shareholders in the private company that will make the share exchange.
• Post Merger Structure. Number of shares to be outstanding “post merger”, and a complete breakdown of share ownership post merger. Note: It is often necessary for the public shell to do a reverse split and/or cancel shares owned by the affiliates of the public share prior to completing the merger.
• Domicile Agreement. Agreement on state the company will be domiciled in post merger.
• Satisfaction of warranties and representations between public shell and merger partner.
• SEC counsel and auditors. Designation of securities attorneys and SEC qualified auditors that will represent the private merger partner.
• Agreement Preparations of the share exchange agreement, stock purchase agreement, definitive merger agreement, and all other documents necessary to complete the merger.
• Final preparation of the 8K that is required to be filed with the SEC within 4 days of closing the merger. However, this is required by Vista prior to completing the merger. Please note: The 8-K must disclose the same type of information that it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934.
Filing a Form 211 to receive a Trading Symbol:
Rule 15c211 was designed to allow non-reporting public company’s securities to be quoted on the National Association of Securities Dealers’ (“NASD”) Over-the-Counter Bulletin Board (“OTCBB”) by filing some simple disclosures.
Now, companies seeking to obtain a quote on the NASD OTC/BB are required to file reports with the Securities and Exchange Commission (“SEC”), under Section 15D of the Securities Exchange Act of 1933 (the “Act”), as amended, or section 12G of the 1934 SEC Act. A company, who has filed a registration statement with the SEC using an SB-1, SB-2, or Form 10, will become a reporting company when the SEC declares the registration statement effective. Once the company is reporting, it is eligible to have a market maker file a Form 211 with the NASD. The 211 must be approved by the NASD, which normally takes 3 to 6 months, before the company can trade its stock on the OTC/BB. The NASD will require 40 to 50 shareholders and sufficient public float to approve the 211 application.
If you need assistance in having a Form 211 filed with the NASD so that your company can trade on the OTC/BB, we can help prepare that paperwork and introduce you to a market maker.
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