SEC Attorneys :: Reverse Merge/Spin-Off

REVERSE MERGERS - OVERVIEW

A "reverse merger" is a method by which a private company goes public. In a reverse merger, a private company merges with a public listed company with no assets or liabilities. (The public company is also called a "shell" corporation). The publicly traded corporation is called a "shell" since all that exists of the original company is its corporate shell structure. By merging into such an entity, a private company becomes public.

The private company merges into a public company and obtains the majority of its stock (usually 90%). The private company normally will change the name of the public corporation (often to its own name) and will appoint and elect its management and Board of Directors. The new public corporation has a base of shareholders sufficient to meet the 300 shareholder requirement for admission to quotation on the NASDAQ Small Cap Market.

The advantages of public trading status, which are outlined in greater detail below, notably include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse merger allows a private company to go public typically at a lesser cost and with less stock dilution than through an initial public offering (IPO). While the process of going public and raising capital is combined in an IPO, in a reverse merger (also know as a "blind pool" merger) these two functions are unbundled; a company can go public without raising additional capital. Through this unbundling operation, the process of going public is simplified greatly.

The private company which has gone public obtains the benefits of public trading of its securities, namely:

	Increased liquidity of the ownership shares of the company
	Higher share price and thus higher company valuation
	Greater access to the capital markets through the possibilities of a future stock offering
	The ability of the company to make acquisitions of other companies using the company's stock
	The ability to use stock incentive plans to attract and retain key employees
	Going public can be part of a retirement strategy for business owners

The benefits of going public through a reverse merger, as opposed to an IPO, are the following:

	The costs are significantly less than the costs required for an initial public offering
	The time required is considerably less than for an IPO
	Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the up-front costs have been expended
	IPO’s generally require greater attention from top management
	While an IPO requires a relatively long and stable earning history, the lack of an earning history does not normally keep a privately-held company from completing a reverse merger
	The company does not require an underwriter
	There is less dilution of ownership control
	You will receive a higher valuation for your company

Requirements prior to entering into a reverse merger are the following:

A private company will require approval of the majority of its stockholders for a merger with a public corporation

Once a company is taken public through a reverse merger the financial markets hold the following future prospects in the capital markets for the newly public corporation:

	The market value of a public company is often substantially higher than a private company with the same structure in the same industry
	Capital is easier to raise for public companies because the stock has market value and can be traded
	The public trading price of the public company's securities serves as a benchmark for the offer price of a subsequent public or private securities offering
	Acquisitions can be made with stock since publicly traded stock is viewed as currency for mergers and acquisitions
	Form S-8 stock can be issued for officers, directors and consultants
	If the stock dividend distribution included warrants, the new company can receive proceeds from the exercise of those warrants if the trading price of its common stock exceeds the exercise (strike) price of warrants.

Spin-Off Option

Our firm can assist your Company in becoming a public company via a spin-off. An alternative to conducting a limited public offering “LPO” in order to achieve a public shareholder base is to become a “spin-off” from an existing public company. Becoming a "spin off" from an existing public company allows your Company to inherit a new shareholder base. All the shareholders of the parent company receive a pro-rata distribution of your Company’s securities out of the 10-20% that is registered with the SEC. This creates the opportunity to have those shareholders buy more stock on the open market (remember, they received their stock for free in the spin off). If done correctly, it should be easier to raise capital in subsequent private placements. These shareholders also tell friends and family which causes buying in the secondary market thus increasing market awareness and hopefully moving the stock price higher.

Our firm will file all the appropriate filings with the SEC, NASD, OTCBB and NASDAQ, where applicable, to finish your registration statement and make your Company publicly traded. Our firm will also negotiate and find the market makers to list and trade your Company’s stock.

In order to make this a "tax free exchange", the public company actually buys 10% of your Company in a stock exchange. Although the amount is rather insignificant at the beginning, as the public company, which serves as the host to spin off, does more transactions; your Company as well will receive distributions from other companies that are spun off.