Guidance through unchartered Waters

INITIAL PUBLIC OFFERINGS

Geneva’s unique focus makes it an ideal partner for any emerging growth company seeking to access the public equity markets through an initial public offering. With a strong track record of guiding high-growth companies through the IPO process, Geneva has continually provided superior returns to both clients and investors. Because of the firms’ distinctive approach to the IPO transaction and strong after-market support, Geneva has been able to successfully execute IPOs for earlier stage companies that traditionally would not have been able to access the public equity markets.

REVERSE TAKE OVERS

Reverse Mergers

When a publicly traded company meets its demise the “shell” or publicly traded framework still remains. This creates an opportunity for privately held companies seeking public status. They can simply purchase this public shell and “reverse” their company into it. This process is commonly known as a Reverse Merger. Reverse Mergers can take less time and can be less expensive than an Initial Public Offering (the legal work is considerably simpler) and the results can be more advantageous.

Depending on the shell, an existing shareholder base may be included, providing an immediate public float and liquidity. With existing shareholders the need to pay commissions to a managing underwriter and brokers for an initial public offering is eliminated.

A Reverse Merger may not be the best option for companies needing the capital infusion of an IPO. In a Reverse Merger the functions of issuing stock and raising capital are unbundled, so the resulting time line is much shorter. A private capital raise can be incorporated into the process or a secondary offering can be initiated after the Reverse Merger is completed.

The Reverse Merger’s greatest attraction is that IPO’s typically require a somewhat recognized business entity with an established history of earnings in order to attract an underwriter and investors. Reverse Mergers are ideal for companies that are “up and coming” but may lack solid earnings or an attractive story.

Buying a Public Shell

Shells vary greatly in quality and price and can range from $50,000 to $1,000,000 or even more. When negotiating for the purchase of a shell, the age of the corporation, the state of incorporation as well as the number of shareholders and amount of liabilities should be taken into consideration. Although not as significant, trading history also plays a factor in the decision-making process.

Most critically, it must be ascertained on which exchange the shell qualifies to be listed or on which aspect of the over the counter market. For instance, although both over the counter markets, Bulletin Board shells fetch a greater price than those that trade on the Pink Sheet. A shell that comes equipped with more than 300 shareholders is highly coveted due to the fact that it qualifies for trading on the NASDAQ Small Cap market or American Stock Exchange.

The Reverse Merger Process

After the privately held company selects a shell they obtain a majority of the stock at a minimum and over 90% at a maximum. A private company never obtains 100% of the stock of the shell as at least some of the stock is necessarily held by the public in the float. Name change documents are filed to update the name of the shell so it matches the name of the acquiring company. A board of directors is then formed.

Reverse Mergers are generally structured so that corporate officers and insiders of the privately held company retain more than 80% of the outstanding stock. Once again, exchange requirements vary in order for the shell to be listed and anywhere from 5% to 20% of the outstanding stock needs to be publicly traded stock; meaning not in the hands of insiders and affiliates.

Coupling a Capital Raise with a Reverse Merger

There are several avenues that can be taken if the private company initiating the Reverse Merger needs investment equity.

Shareholder rights offerings, secondary offerings that consist of private individuals and institutions (otherwise known as PIPE’s; Private Equity into Public Entity), conversion of debt to equity and issuing warrants are all viable means for raising investment equity.

In each of the above scenarios the SEC has numerous regulations that must be complied with in addition to various Blue Sky issues that vary from state to state. In the event that insiders of the company decide to sell restricted stock that is not registered or even sell fully registered stock, they are bound by restrictions regarding how much stock they can sell and at what price. The term “insider” refers to company officers and directors and those that own in excess of 5% of all the issued and outstanding stock.

Legal Counsel Goes to Work

If a public shell is available for purchase it is usually behind in its required SEC filings and corporate counsel must go to work in order to “clean up” the shell, bringing these filings current. Also, shareholders must be informed as to who has purchased the shell and for what purpose.

Once the Reverse Merger has been completed relationships must be established with investor relations experts and market makers in order to attract interest to the stock and spark liquidity.

This site is intended as a public resource for those gathering information and conducting due diligence for reverse mergers and public shells. It is not a solicitation to buy or sell securities and should not be construed as legal advice or considered to be a replacement for retaining securities legal counsel

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