What Is A Reverse Merger, And Is It Suitable For Everyone?

Numerous reverse mergers have been successful when done properly, which is why I never consent to one without first informing the company of the potential issues and how to resolve them.

Additionally, I advise the client on alternates to the reverse merger, including a Regulation D offering, a direct public offering, and a private placement.

One way to ensure that the reverse merger succeeds is to purchase 100% of the shares owned by the shell owner, but this is not a guarantee, as there may be unaccounted for shares.

Due diligence is critical, and you must be resistant to smooth-talking salespeople.

A Direct Public Offering, DPO, is an alternative to a Reverse Merger.

Direct Public Offerings are gaining popularity as shell prices continue to soar and businesses become more aware of the risks associated with reverse mergers.

And if a business is seeking financing, direct public offerings are preferable to venture capital investments, as venture capital firms typically require a significant stake in the business and are not passive investors.

Venture capital investors will become intimately involved with the business and will make demands that may be detrimental to its success; they may not allow you enough time to develop your business plan.

An initial public offering is probably out of the question, as you will need to convince an underwriter that your company is the next Microsoft, or you will have difficulty finding someone to handle the IPO for you.

An IPO is more expensive and time consuming, and it transfers decision-making authority from you to the underwriters.

A direct marketing campaign is directed at specific affinity groups such as employees, suppliers, distributors, and customers. These groups are typically familiar with and loyal to the company.

DPOs are registered securities offerings that enable you to sell securities to the public directly. Although the Internet can be used to market securities, if your website does not receive a high volume of traffic, no one will be aware of your stock offering.

Thus, affinity groups are your best bet for funding, unless you are a Google and investors are actively seeking you out.

As large corporations continue to reduce their workforce and leave many talented individuals with the option of taking a job or starting their own business, we see that a significant portion of job creation is being left to small businesses.

These small businesses require capital to expand or fill orders; over the last 15 years, small businesses have created over 20 million jobs while large businesses have been cutting jobs. If this creative force were endowed with capital, they could catapult the economy to previously unimaginable heights.

DPOs are classified as “SCOR” small corporate registrations and are available to businesses with less than $25 million in revenue and a capitalization (share market value) of less than $25 million.

By conducting a direct public offering, you can raise capital that does not require monthly interest payments and provides a stable source of funding.

You will not be required to give away a sizable portion of the company; a venture capitalist will demand a disproportionate amount. Private equity and control are always more expensive than public funding.

As a public company, you can negotiate more favorable terms for future financing requirements and use company stock to fund acquisitions. A DPO filing requires only two years of audited financial statements, as opposed to three years for other filings.

All of this may sound simple, but it is not; you will need an experienced professional to hold your hand and guide you through the process.

You must ensure that you are prepared to make the commitment and devote the necessary time to this endeavor. Discuss the possibility of investing in your company with your affinity groups; this will give you an idea of who might be a potential investor.

Maintain current records of your customers and community contacts who may be contacted in the future. It may become necessary to purchase a mailing list if you are a medical product manufacturer or laboratory and are familiar with some but not all of the doctors in your community.

Maintain a planning mindset and take necessary steps while preparing for your DPO, such as having one year’s financials audited and preparing and printing a business plan, to avoid incurring all expenses at once.

Give us a call so we can begin planning together; the more prepared you are, the less rushed you will be later; everyone thought they had everything done yesterday, but the process takes time.

Regulation D Offerings: This rule exempts securities from section 5 of the Securities Act of 1933. These transactions are not immune from civil liability for fraud or from other provisions of the federal securities laws. (For more information on Regulation D (504) offerings, see my article.

Nothing in these rules eliminates the requirement to comply with any applicable state securities law.

Rule 506 exempts limited offers and sales regardless of the dollar amount of the offering. The number of accredited investors is not limited, but the number of non-accredited investors is limited to 35. To learn more about accredited and non-accredited investors, please refer to my article on Regulation D (504) offerings.

Rule 505: Offerings may not exceed $5,000.000.00, less the aggregate dollar value of securities sold during the preceding 12-month period pursuant to rule 504 or 505. This exemption caps the number of unaccredited investors at 35 but does not require investors to be sophisticated.

While Rule 504: Offerings permits businesses to raise up to $1,000,000.00 in a twelve-month period, under Rule 504, Rule 505 or Section 3 of the act, a business may raise no more than $500,000.00 through the sale of securities to residents of Montana or Alaska, which do not have a disclosure law. Companies may raise up to $1,000,000.00 in states that have disclosure laws.

No disclosure requirements are specified in Rule 504, and there is no limit on the number of purchasers. Offerings made pursuant to Rule 504 are relatively straightforward to prepare, which reduces costs and delays and eliminates the need for an underwriter.

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