To become a public company quickly, one of the most expeditious routes is to acquire an existing public company, and merge a private company into it. In such a "reverse merger" a private company merges with a public listed company with no assets or liabilities. This public company is also called a "shell corporation" since all that exists of the original company is its corporate shell structure. Merging the two companies enables the private company to become public - at a fraction of the cost of the conventional IPO!

Taking a company public through reverse merger is not new at all. In fact, nearly one out of three public companies became publicly traded through this process. Several nationally known, very successful and now large profitable companies got to be public companies by way of a reverse merger. These include some very famous names on the American business landscape. Media mogul Ted Turner gained control of a little-known public company in the broadcasting business named Rice Broadcasting in 1970 and accessed the investment community to build his now sprawling empire. The process has also been successfully used by those in the public securities profession. For example, early in 1996 Muriel Siebert, who made history on Wall Street by becoming the first woman to buy a seat on the New York Stock Exchange (NYSE), took her brokerage firm public through a reverse merger with a liquidated publicly traded New York furniture business. These and other top business people realized that to become a public company quickly, acquiring an existing public company was the easiest and most cost-effective way to accomplish their goals.

Merging a private company with a public company must be completed in such a way that potential difficulties can be minimized or avoided. When a private company merges with a public company that had been active, there becomes a real and dangerous potential of finding "skeletons in the closet". These may be in the form of unsettled or pending lawsuits, dissatisfied shareholders, late or negligent filing of reports with the various regulatory bodies, environmental or other problems.

In the reverse merger transaction, a private company's shareholders may acquire a substantial portion of the public company shares, and elect its own officers and directors. Through this process, the private company shareholders own shares in a publicly traded entity.

Subject to current securities rules and regulations, the company can then access the capital markets through private placements and secondary stock offerings. The company can also begin to maximize the awareness of the company's new publicly traded status to the investment community, thus establishing a public market for its shares. Taking a company public through this route may be accomplished in a matter or weeks.

Reverse Merger Benefits

• Higher Valuation:Historically publicly traded companies enjoy significantly higher valuations than private companies.
• Capital Formation: Raising capital is typically easier because of the added liquidity for the investors.
• Acquisitions: Acquisitions can be made with stock which is often used as currency and can be structured so it is less dilutive to the insiders.
• Incentives: Stock options or stock incentives can be useful in attracting management and retaining valuable employees.
• Financial Planning: Public stock can provide a long term exit strategy for the founders or during acquisitions when a seller would like an ear-out versus a straight purchase.
• Reduced Costs: The costs are significantly less than the costs required for an initial public offering.
• Reduced Time:The time frame necessary to achieve a public listing is considerably less than that for an IPO.
• Reduced Risk: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.
• Reduced Management Time:Traditional IPOs generally require significant time from senior management as under writers will expect them to participate in road shows to shore up interest in the aftermarket of the company.
• Business Requirements:An under writer will not consider an IPO unless the company has proven financial results from operations. A reverse merger or spinoff is a way for relatively young companies to enter the public arena without long term track records.

• Business plan with a balance sheet and current financial information along with a 3 year detailed projection.
• Management information, including completion of the "Officer and Director Questionnaire," for all Officers and Directors designated by the company to be listed as the new Officer and Directors of the public company.
• Corporate Information, A copy of the Articles of Incorporation, Certificate of Good Standing, By-Laws, all Board Resolutions and Minutes, Shareholders list and completion of corporate questionnaire and all supporting information.
• Audited Financial Statement, conforming to GAAP are required from the company. The audit statements of the company have to be consolidated with the public company's financial statements and filed in an 8K on the day of closing.
• Consent from the Board and a majority of Shareholders, with private companies that usually have a minimal shareholder base 100% approval is granted, but in some case private placement or financing have occurred and a majority consent of the existing shareholders of the private company is required.
• Satisfaction of warranties and representations between the shell and merger partner. The transaction will be subject to all reps and warranties being made in the agreement have been satisfied.
• SEC counsel and auditors. Designation of securities attorneys and SEC qualified auditors that will represent company after the merger. If a change in auditors is to take place this will trigger ano0ther 8K filing at closing.
• Agreement Preparations of the share exchange agreement, stock purchase agreement, definitive merger agreement, and all other documents necessary to complete the merger.

Going Public via a Spinoff

A spinoff, or stock dividend distribution is yet another process of going public. In a spinoff, a privately company goes public by becoming a wholly owned subsidiary of an existing public company then shares are issued to the shareholders of the existing public company thereby creating a shareholder base. That stock issuance is then registered with the SEC and the shares are disseminated to the shareholders record of the public establishing a public float or shares that can be to create a public market.

The subsidiary company’s stock, distributed to the shareholders of record of the public company results in a divestiture by the public company of its ownership or relationship with the private company via a distribution of the company’s stock to the public company’s shareholders. The net result is two public companies each with a shareholder base and a marketable security. The newly created public company through a market maker lists its stock on the market and trades independently.

Going Public via a Spinoff offers many Benefits:

• The private company can configure the company to meet its particular needs, such as amount and classes of stock, warrants, etc. Thus avoiding the costs and time to structure the proposed reverse merger company with a shareholder vote, including outside shareholders
• A smaller percentage of the private company's shares are distributed as a spinoff as compared to a existing she ll company. This helps to safeguard the corporate ownership of the existing shareholders without worrying about continuing dilution for future financial transactions
• Companies may also desire a stock dividend distribution to a traditional reverse merger with a shell if it wants a certain structure it does not find in a shell, such as, callable warrants to raise money, a larger shareholder base to make it easier to mover from one exchange to another, establishing the public market without worry about carry-over options, warrants.

Information to Complete a Spinoff

• Business plan with a balance sheet and current financial information along with a 3 year detailed projection.
• Management information, including completion of the "Officer and Director Questionnaire," for all Officers and Directors designated by the company to be listed as the new Officer and Directors of the public company.
• Corporate Information, A copy of the Articles of Incorporation, Certificate of Good Standing, By-Laws, all Board Resolutions and Minutes, Shareholders list and completion of corporate questionnaire and all supporting information.
• Audited Financial Statement, conforming to GAAP are required from the company. The audit statements of the company have to be consolidated with the public company's financial statements and filed in an 8K on the day of closing.
• Consent from the Board and a majority of Shareholders, with private companies that usually have a minimal shareholder base 100% approval is granted, but in some case private placement or financing have occurred and a majority consent of the existing shareholders of the company is required.
• Satisfaction of warranties and representations, The transaction will be subject to all reps and warranties being made in the agreement have been satisfied.

As a Public Company...

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.