Why Go Public

 

  • Access to Capital – It is easier to raise money as a public company than a private company.  Investors are more comfortable because there is sufficient information available in public filings, the exit is faster, and the valuation is likely higher.

  • Owners and early investors have a way to cash out over time.

  • Growth through acquisitions or strategic partnerships – A public company can use its stock as currency for acquisitions, preserving needed cash for other uses.

  • Stock Options to incentivize – Through vesting of options, a longer-term commitment is encouraged from senior management and others.

 

Disadvantage of IPO

 

  • IPOs cost are very high.

  • An IPO from start to finish can easily take a year or more.

  • The IPO “window” is generally considered to be either open or closed, and is generally only available to companies with market value in excess of roughly $300 million.

  • In an IPO, an underwriter can cancel a deal or dramatically lower an offering price at the last minute because of market conditions.

  • An underwriter may often suggest or even insist that the company raise more money in the offering than the company reasonably needs, creating greater dilution to owners.

The accepted alternative to an IPO is Going Public via a Reverse Take Over (RTO)

                The following well known Companies have gone public through RTO:

                Texas Instruments Inc.

                Jamba Juice, Inc.

                Berkshire Hathaway Inc.

                Tandy Corporation (Radio Shack Corporation)

                Occidental Petroleum Corporation

                Muriel Siebert & Co., Inc.

                Blockbuster Entertainment

                The New York Stock Exchange

                Monster Beverage

Advantages of Reverse Mergers

  • Lower cost than IPO. A reverse merger usually costs significantly less than an IPO. Most reverse mergers can be completed for under $500,000; some have been done for around $200,000.

  • Speedier process than IPO. Reverse mergers can close in 30 days or sooner whereas an IPO can take a year or longer.

  • Not dependent on IPO market for success.

  • Not susceptible to changes from underwriters regarding initial stock price.

  • Less time-consuming for Company Executives.

  • Less Dilution.

  • Underwriter unnecessary.

What is a Reverse Merger

In a merger, reverse or otherwise, two corporations join together. One becomes the “surviving corporation” while the other becomes the “non-surviving corporation”.

The surviving corporation swallows up the assets and liabilities of the non-surviving corporation and the latter simply ceases to exist, or may survive as a wholly owned subsidiary of the new parent company.

Some reverse mergers are structured as an exchange of shares or simple asset acquisitions. The transaction generally ends up as a tax-free reorganization under IRS regulations. Whether the deal is a merger, share exchange, or asset acquisition, the net result tax wise is typically the same. In general, the tax treatment of reverse mergers is very straightforward and in almost all cases, the parties avoid the payment of a tax as a result of the transaction.

After the reverse merger closes, the company is now a fully reporting public company with the company’s shares traded on the OTCQB (providing the company is current on its financial filings). If the company meets the listing requirements of NASDAQ or another recognized exchange, it can apply to have its shares capital traded on that market platform. The company will file quarterly and annual financial reports to keep the public aware of its business activities.

Going public via a self Registration with the SEC

 

Self-registration is an alternative scenario, which saves a private company the estimated $350,000 cost of purchasing a public shell company. A private company accomplishes self-registration when it (I) completes a private placement financing transaction; (II) undertakes to become a publicly-held company by means of filing a registration statement covering shares to be sold by certain selling shareholders of the company, which will make it a publicly reporting company under the Securities Exchange Act of 1934; and (III) applies for listing on a US-based exchange. The process can be lengthy, but it is as effective as a reverse-merger in the long run and more cost-effective in the short run.

 

In a self-registration scenario, the registration statement is the instrument by which the company goes public.  As with a reverse-merger, the private company proposes a private placement financing transaction, but it then prepares a registration statement with a re-sale prospectus, which registration statement contains all disclosures necessary for the SEC to make a determination as to the company’s eligibility to go public. Once the registration statement is effective, FINRA must determine, upon review of a Form 15(c)211, whether the company qualifies to have its securities traded on a national exchange, such as the OTCQB. The registration statement will have created a public market for the trading of the company’s securities, which is one FINRA requirement.

 

The lengthy part of self-registration consists in the preparation and review of the registration statement on Form S-1. Form S-1 is a form for registration of securities that is filed with the SEC for the purpose of registering the sale (and/or resale) of securities of a company pursuant to the Securities Act of 1933.  The information required by Form S-1 is similar in scope to that of a Form 10-K annual report filed by a public company. In accordance with SEC Rules and regulations, Form S-1 contains certain disclosure about the business of the company, its management and shareholders, as well as audited and unaudited financial information about the company.

 

The preparation and filing the Form S-1 with SEC takes approximately four weeks, assuming that the company has audited financial statements that can readily be presented for inclusion in the filing. Once filed, the Form S-1 will be subject to review and comment by the SEC. This process involves receiving and responding to written comment letters from the SEC regarding certain disclosure and financial matters. This review process is known to be lengthy. The number and complexity of the comments received, and the time it takes for the company to prepare an amended filing and refile with the SEC, determines how quickly the rest of the review process will take. It typically takes about 120 days from start to finish.

 

In any case, the self-registered or reverse-merged Company will not be eligible to have its securities traded on the OTCQB until all of the comments are cleared by the SEC, and the SEC has communicated its clearance to the FINRA examiner that is reviewing the Form 15(c)211 application for trading of the company’s securities on the OTCQB.  The FINRA review will largely be due diligence and will rely on the SEC review and approval for it to get comfortable with the company.  The other key issue that they will look at is the ownership of the Company and they will generally require the Company to have at least 35 shareholders owning at least 1,000 shares of the Company’s common stock.  There are a few other issues in the process that are worth looking at.

 

Going public via Reg A+

 

Regulation A+ allows the public to invest in private companies. Startups can use a Mini-IPO under Reg A+ to turn their customers into investors.

 

Reg A Background

 

On April 5, 2012, President Obama signed a landmark piece of bi-partisan legislation, called the JOBS Act, into law. The JOBS Act greatly expanded entrepreneurs’ access to capital, allowing them to go to the crowd and publicly advertise their capital raises.

 

Initially, private companies could only crowdfund from accredited investors, the wealthiest 2% of Americans. On June 19, 2015, three years after the JOBS Act was initially signed into law, Title IV (Regulation A+) of the JOBS Act went into effect. For the first time, Title IV allows private growth-stage companies to raise money from all Americans.

 

 

What is Regulation A+?

 

Reg A+ of Title IV of the JOBS Act is a type of offering which allows private companies to raise up to $50 Million from the public.

 

Like an IPO, Reg A+ allows companies to offer shares to the general public and not just accredited investors. Companies looking to raise capital via Reg A+ will first need to file with the SEC and get approval before launching a mini-IPO. However, the fees associated with a Reg A+ offering are much lower than a traditional IPO and the ongoing disclosure requirements are much less burdensome, effectively making a Reg A+ offering a mini-IPO.

 

Tier I vs. Tier II Offerings

 

Companies pursuing a mini-IPO can choose between two types of Reg A+ offerings, Tier 1 and Tier 2.

 

 

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