COMPANIES SEEKING CAPITAL Shells-Reverse and Exchange Mergers Should you incorporate in your own state or Nevada or Delaware? Explanation of Underwriting and SEC Rules Private Placements - Public Offerings - Venture Capital Going Public Advantages of being public Disadvantages of being public Methods of going public Decisions involved in going public

     There are several different options available to companies desiring to go public.  Each has its own advantages, disadvantages, state and federal requirements, time constraints, and costs.  Careful consideration should be given as to the method used to achieve a public company, and the advise of professionals should be sought.

Table Of Contents:

     An I.P.O. (Initial Public Offering) Through a Broker-Dealer
     A Self-Underwriting (I.P.O.)
     An Internet Offering (I.P.O.)
     Reverse Mergers (Shell)
     How It Works
     Advantages
     Disadvantages

     There are very distinct advantages with doing an I.P.O. through a broker/dealer.  An I.P.O. done through a reputable brokage firm usually allows for larger offerings and more assurance that an underwriting can get completed.  A major factor in using a brokage firm with a substantial client base for the underwriting is that the firm may get other brokerage firms involved in the underwriting (a syndicate) and they all continue to take a position in the stock long after the offering is completed, thus maintaining a market for the stock.  While the sale of the securities through a broker will cost a percentage of the offering, it is usually well worth the additional costs to insure the completion of the offering and the aftermarket.

Back to Top

     Company management may feel confident that they can locate investors directly and therefore do a self-underwriting, not using a broker.  It is possible for a company to sell its stock directly to the public, without the use of an underwriter or professional intermediary.  While this may be possible, especially if the underwriting is for a small amount, there are still inherent negatives to a self- underwriting.  Especially in assurances that the deal can get completed and in the aftermarket of the stock.  However, the Internet and the World Wide Web has made technology and opportunities available to companies that did not exist a few years ago.  It allows for the publishing and distribution of its prospectus to solicit funds from a wide audience, without the use of a professional underwriter. A company may also use the Internet to establish their own "bulletin board" to assist potential buyers and sellers.  It is very important that all state and federal laws and rules be met in any offering of a company's stock, and that professional advice be sought.

Back to Top

     An Internet I.P.O. is simply making an offering of the company stock through the Internet.  There have been few successful Internet underwritings to date, however the trend is growing and it is expected that many more offerings will be made in the future.  Again, like any other offering of company stock, either public or private, all state and federal laws and rules must be met and full disclosure made.  Professional legal counsel is a must in any underwriting.

Back to Top

     A merger into a shell or blind pool as a means of taking a company public is totally different than a underwriting.  It involves merging the private company into a public "shell", or a "blind pool", a company that is presently public but has no sales, and usually no assets or liabilities, but does have shareholders.  The "shell" or "blind pool" company may or may not be a reporting company.  It may have as few 20 shareholders and as many as several thousand.

     A "shell" company may be one that went public years ago and then later went of the business that they were in, however remained a public company and keeping their reporting status.

     When a merger takes place between the shell company or blind pool and a private company, the principal shareholders of the private company will control the reorganized public company.  This type of merger can be a very effective and fast means for some companies to achieve a "public" status.  This is especially effective for a company that may not quite be big enough or have the track record of sales and earnings or simply not have the "glamour" for a full public offering.  It is also a method of becoming public usually much faster and with far less front-end cost.  However, there are drawbacks to this type of merger and all of pros and cons must be carefully explored and some will be discussed herein.

Back to Top

1. A shell has a certain number of shareholders, however usually no assets or liabilities. The shell acquires 100 percent of the outstanding stock of the private company in consideration for issuance to the private shareholders of a negotiated number of restricted shares in the public company.  The private company generally continues to operate as a wholly owned subsidiary of the public company for a short period of time.
2. Following the merger as described above, the total shares held by the private company's shareholders will equal a majority percentage of the total outstanding stock in the public company.  In effect, the private company usually acquires up to 95% of the total outstanding stock of the public company, leaving the public shareholders holding 5% of the outstanding stock.
3. One advantage of the merger into a shell is the short amount of time that it takes to effect the merger and become a public company.  The time required for the entire process can usually be from three to eight weeks.
4. A shell is usually purchased for a negotiated amount of money, from $85,000 to $400,000 depending on the type of shell.

   Going public through a merger with a shell or blind pool has both advantages and disadvantages.  Many of the advantages and disadvantages of going public were described above.  However, going public through a shell or blind pool has certain different pros and cons, some of which are discussed below and all of which must be carefully considered.

Back to Top

1. Saving time - Acquiring a "shell" can save an enormous amount of time over the company doing an initial public offering (IPO) of it's stock.  A shell can be completed in 1 to 2 month versus 6 to 12 months of doing a public offering.
2. Saving money - Depending on the type of a "shell' that is acquired and the assets that might be in it, the cost can be considerably less than a full public offering.  There are usually no underwriter fees or commissions to be paid.
3. Saves on legal work required - The acquisition of a shell can require far less legal work and expense than an IPO.
4. Do not have to be an exciting company - A company attempting to do an initial public offering of their stock would usually have to be a very exciting company in an interesting market, or have substantial revenues and profits in order to attract the interest of an underwriter.  Any company of any size can become a public company if the company has the dollars to acquire a "shell".
5. Raising additional dollars - After acquiring a "shell" a secondary offering of company stock to raise additional operating capital can be started immediately.  This can usually result in the company receiving more money at a higher valuation of the company than would otherwise be possible through a private placement. The ability to complete future financing is enhanced through such tools as warrants.
6. No concern for underwriters performance - Going public through a merger with a shell eliminates concern for the stock market in general, the Dow, world events or an underwriter's ability to perform.
7. The entire stock-for-stock exchange can be (and usually is) handled as a tax-free transaction.
8. The reverse merger works well for foreign companies desiring entry to the U.S. capital markets.

Back to Top

1. No money raised - While making the company a public corporation, merging through a shell does not allow for raising needed capital for the company as would an I.P.O.
2. Cost involved.  Although usually far less than an IPO, there is still substantial costs involved in acquiring a shell, and all cost are paid upon completion of the deal.
3. The percentage of the company that is relinquished up front in order to become a public company. (Usually a minimum of 10% which is owned by the public shareholders).
4. The lack of a shareholder base in the new public entity.
5. The shares are normally not immediately tradeable on the NASDAQ system.
6. Due to the quick nature of the transaction, management of the company is sometimes not fully prepared for the more open disclosure of financial information, reporting requirements, and investor relations that is needed to successfully operate a public company.