Going Public: Self-Registration as An Alternative to the Reverse Merger

A reverse merger is a common method by which private companies go public.
Companies appreciate this method because it is generally quick, though the process is comparatively expensive to other ways of going public. In a reverse merger scenario, a privately-held company acquires a majority of the shares of a public shell company whose shares are traded on a US-based exchange, and the shell company is then merged with the private company. Simultaneous with this process, the company completes a private placement financing transaction. After the reverse-merger, the company may either file a registration statement for the purpose of registering the securities sold in the financing transaction, or allow re-sales of the securities subject to Rule 144.

Self-registration is an alternative scenario, which saves a private company the estimated $350,000 cost of purchasing a public shell company. A private company accomplishes self-registration when it (i) completes a private placement financing transaction; (ii) undertakes to become a publicly-held company by means of filing a registration statement covering shares to be sold by certain selling shareholders of the company, which will make it a publicly reporting company under the Securities Exchange Act of 1934; and (iii) applies for listing on a US-based exchange. The process can be lengthy, but it is as effective a reverse-merger in the long-run and more cost-effective in the short run.

Reverse Merger

In the reverse merger scenario, a privately-held company proposes a transaction whereby the shareholders of the private receive shares of a publicly-held shell company. The result is that the shareholders of the private company become the majority and controlling shareholders of the public company. Some or all the shareholders may become directors of the public company. The controlling shareholders consummate a reverse-merger by causing the public company to merge into the private company, with the public company remaining as the surviving company.

The first step in this process involves locating a public shell company with whom to complete a reverse merger transaction. Once that is done, the parties involved negotiate the terms of the transaction, complete a due diligence review of the public company and finally complete the reverse merger transaction where the public company is the surviving entity. The cost of purchasing the public shell company typically comes out to around $350,000, which cost can be offset by the benefit of a relatively quick transaction. The time frame for a reverse merger can vary widely depending upon the parties and the companies involved, but can be completed in as little as 30-60 days if everything is in order and all parties are working together to complete the transaction in an expedited manner. It should be noted, however, that the completion of the transaction will require the delivery of audited and unaudited financial statements for the post-merger company.

Simultaneous with the reverse merger, the companies complete a private placement offering in which securities of the post-merger company are sold to accredited investors. The timing of this will depend upon the placement agent and the investors but will ultimately coincide with the completion of the reverse merger.

Finally, following the completion of the reverse merger and the private placement offering, the company will prepare and file a Form 8-K containing all material disclosure about the companies and the merger, including audited and unaudited historical financial statements, and a Schedule 14F containing all required disclosure relating to the change of the Board of Directors and the incoming/new directors to be appointed. Shortly thereafter, the now-public company would typically file a registration statement which includes the shares sold in the private placement, or else it may leave the re-sale of such shares subject to Rule 144.

Self-Registration

In a self-registration scenario, the registration statement is the instrument by which the company goes public.  As with a reverse-merger, the private company proposes a private placement financing transaction, but it then prepares a registration statement with a re-sale prospectus, which registration statement contains all disclosures necessary for the SEC to make a determination as to the company’s eligibility to go public. Once the registration statement is effective, FINRA must determine, upon review of a Form 15(c)211 whether the company qualifies to have its securities traded on a national exchange, such as the OTCQB. The registration statement will have created a public market for the trading of the company’s securities, which is one FINRA requirement.

The lengthy part of self-registration consists in the preparation and review of the registration statement on Form S-1. Form S-1 is a form for registration of securities that is filed with the SEC for the purpose of registering the sale (and/or resale) of securities of a company pursuant to the Securities Act of 1933.  The information required by Form S-1 is similar in scope to that of a Form 10-K annual report filed by a public company. In accordance with SEC Rules and regulations, Form S-1 contains certain disclosure about the business of the company, its management and shareholders, as well as audited and unaudited financial information about the company.

The preparation and filing the Form S-1 with SEC takes approximately four weeks, assuming that the company has audited financial statements that can readily be presented for inclusion in the filing. Once filed, the Form S-1 will be subject to review and comment by the SEC. This process involves receiving and responding to written comment letters from the SEC regarding certain disclosure and financial matters. This review process is known to be lengthy. The number and complexity of the comments received, and the time it takes for the company to prepare an amended filing and refile with the SEC, determines how quickly the rest of the review process will take. It typically takes about 120 days from start to finish.

In any case, the self-registered or reverse-merged Company will not be eligible to have its securities traded on the OTCQB until all of the comments are cleared by the SEC, and the SEC has communicated its clearance to the FINRA examiner that is reviewing the Form 15(c)211 application for trading of the company’s securities on the OTCQB.  The FINRA review will largely be due diligence and will rely on the SEC review and approval for it to get comfortable with the company.  The other key issue that they will look at is the ownership of the Company and will generally require the Company to have at least 35 shareholders owning at least 1,000 shares of the Company’s common stock.  There are a few other issues in the process that are worth looking at.

Conclusion

As compared to the reverse-merger, the self-registration process can take longer and it can be riskier given that there is no guarantee the registration statement will be declared effective. However, self-registration can be cost-effective in the short run and have the same end result as a reverse-merger—it will take a private company public. The decision as to which avenue is best for a given company depends on its priorities and circumstances, but the availability of more than one method of going public opens the way for companies to do what is most appropriate given their priorities and limitations.

About the authors

Gregory Sichenzia, Esq.

Gregory Sichenzia, Esq.

Gregory Sichenzia, a founding member, counsels public and private companies in all securities laws matters, from complex financing transactions and listings on various stock exchanges through everyday regulatory requirements. He has also been responsible for structuring innovative merger and acquisition transactions. Throughout his career he has represented many companies and investment banks in initial public offerings of securities, and has represented numerous public companies in private equity financing transactions (“PIPEs”) and the resulting resale regist
Gregory Sichenzia, Esq.

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    Richard A. Friedman, Esq.

    Richard A. Friedman, Esq.

    firm that is headquartered in New York and offers a full range of financial and business legal services. Mr. Friedman is principally engaged in the practice of Corporate and Securities Law, with a concentration on public offerings and private placements. His extensive experience includes reverse mergers (both domestic and foreign companies), secured and unsecured private equity financing transactions (PIPEs), as well as initial public offerings (IPOs), registered direct offerings (RDs) and shelf offerings.
    Richard A. Friedman, Esq.

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      Arthur Marcus, Esq.

      Arthur Marcus, Esq.

      Mr. Marcus was the Chairman of the Securities Law Practice at Gersten Savage LLP where he spent 22 years. Prior to joining Gersten Savage, Mr. Marcus was an associate at Kramer, Levin, Nessen, Kamin & Frankel LLP. Mr. Marcus specializes in advising small and medium sized companies on corporate finance, SEC disclosure matters, corporate governance, and private and public offerings, including equity offerings, high-yield, and convertible offerings.
      Arthur Marcus, Esq.

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        Jennifer R. Rodriguez, Esq.

        Jennifer R. Rodriguez, Esq.

        Jennifer R. Rodriguez joined the Corporate and Securities Group in 2014.
        Jennifer R. Rodriguez, Esq.

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