DD INFORMATINAL

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Hey Guys…found our board was dead last night, went to Proboard support ..they said server was done..geeze..we need a new server or what…anyway.. I still surfed and collected stuff for our little nice…some of the things I found…as follows:


www.quantilex.com/art200103301.htm

Backdoor IPOs: Merging with a Small Public Company
by James F. Verdonik and Gail P. Moseley of Kilpatrick Stoctkon LLP
Copyright 2001. Used with permission. All rights reserved.


It is March 2001 and you are wondering what is the best exit strategy for your business. The traditional Initial Public Offering ("IPO") route does not seem viable because of public securities market conditions. One alternative may be to merge your company into a public shell company or a small public company. According to one study, nearly half of the U.S. companies that listed as public companies from 1994 –1999 did so through mergers rather than through traditional IPOs.1
The Reverse Merger/Shell Merger in a Nutshell
A shell company is a company that is already public but usually has no significant assets or operations. Shell companies are typically the remains of failed or discontinued businesses, or are formed to obtain financing before commencement of operations. As a failed or discontinued business, the shell company has ceased its day-to-day operations but has maintained its public corporate structure. In other cases, the company may have some operations, but has a small market cap.
Essentially, in a reverse merger, a private company purchases control of a public shell company and then merges it with their private company to achieve regulatory status as a public company. The transaction is structured in such a way that the shareholders of the private company receive a substantial majority of the shares of the public shell company and thus, control of its board of directors. Typically the deal is accomplished through a combination of cash and an exchange of the private company's shares to the public shell company. The share exchange and change of control completes the reverse merger process and the private company becomes public. Finally, the shell company's name is usually changed to reflect the new operating business.
Advantages to Going Public
There are multiple advantages to backdoor IPOs via mergers. Some of the advantages include:
Liquidity - The shareholders and investors can more easily buy and sell the company's stock. Shareholders will more easily have a means of receiving a return on their investment or an "exit," if their stock can be publicly sold, subject to certain restrictions. This is particularly advantageous for companies that have done multiple private placements and that may have a hundred or more small investors. Each individual investor will have the opportunity to decide whether to sell or to continue as an investor. Liquidity is, however, often restricted because trading volumes in the market are low or because shareholders are required to sign lock-up agreements which restrict their ability to sell.


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Control of the Company – The people who controlled the private company usually control the public company. Often, the owners of the public company only receive 5% of the stock of the combined company.
Growth through Acquisitions – The new public company may be able to make acquisitions with stock, or a combination of stock and cash, allowing for more rapid growth.
Estate Planning - Estate planning for founders is easier due to the ability to establish a value of the stock held, and to liquidate that stock if necessary.
Stock Plans - The company may have greater ability to use stock plans to attract and retain key employees because there is a public market value for the stock.
Cost of Capital – Public companies can usually sell stock at higher prices than private companies because the investors have the ability to sell sooner. A shorter holding period often means reduced risk, which can translate into better pricing for public companies than for private companies.
Benefits of a Backdoor IPO, as Opposed to a Traditional IPO
There are certain advantages associated with a reverse merger transaction as opposed to an IPO. For example:
· The overall costs associated with a reverse merger are significantly less than the costs required for an IPO.
· The amount of time necessary to complete a reverse merger is usually considerably less than that for an IPO.
Even after most of the up-front costs have been expended, an IPO may be withdrawn due to an unstable public market conditions. A reverse merger usually is less dependent on public markets.
· An IPO usually requires a relatively long and stable company earning history. Often this is not required for a reverse merger.
· A reverse merger transaction does not require an underwriter.
One major difference between a traditional IPO and a back door IPO via a merger is that in an IPO the company usually raises a substantial amount of capital, which helps pay the expenses of being a public company and funds growth. In a reverse merger, however, the company can become public without raising capital, which means that a back door IPO does not by itself solve capital problems. Many back door IPOs are, however, accompanied by a private placement of securities to raise money. Less money is raised than in a traditional IPO, but the company may plan to raise capital through several private placements in the years after the merger.
Going Public and Choosing a Shell Company for the Reverse Merger
There are certain risks associated with reverse mergers. In the past, this type of transaction has been frowned upon, but reverse mergers have begun to reemerge as a viable alternative to the traditional IPO and are increasingly viewed as a practical means for technology-based companies to go public.
Some shell companies have histories that are disasters waiting to occur. When a private company merges with a shell company, it inherits the shell company's history, including its debts, liens, legal problems and other existing or potential liabilities. It is therefore imperative that proper due diligence is performed before entering into a reverse merger to ensure that the private company is fully aware of the shell company's previous operations and is not surprised by any hidden liabilities.
The New Over the Counter Bulletin Board ("OTCBB") Rules
In early 1999, the National Association of Securities Dealers ("NASD"), with the approval of the SEC, implemented a new requirement that issuers whose securities are traded on the NASD's OTCBB are required to make filings with the SEC. As such, non-reporting companies are not allowed to trade on the NASD's OTCBB, NASDAQ or any other stock exchange, unless they become a reporting public company. To become a reporting public company, a company must prepare and file a registration statement with the SEC and go through a review.
Reporting Companies
Reporting public companies are required to provide audited financial statements and make filings with the SEC. Reporting public companies can be listed on the NASD's OTCBB, NASDAQ or any other stock exchange, because they have already filed an SEC registration statement and completed the review process. There is usually no SEC review involved in a reporting company public shell merger; however, problems could arise when applying for a stock exchange listing. If they cannot be resolved, the company can apply to another exchange. As a result, when the contemplated reverse merger is with a reporting shell company, there is little risk of a private company spending money and not becoming public.
Non-Reporting Companies
Due to the NASD requirement, certain risks can arise in reverse merger transactions involving non-reporting companies. The SEC will review the corporate history, operations, and financial statements of both the private company and the public shell company retroactive a minimum of 3 years. If a problem arose that prevented the completion of the registration, the company would be unable to list its shares and the cost of the public shell company, legal and audit fees, would have been spent, without a benefit. Therefore, to reduce the possibility of this occurring, companies wishing to acquire a shell company for a reverse merger should consider choosing one that is already a reporting company.
Preparing to Initiate a Reverse Merger
Before making a decision to go public through a shell merger, the owners of the private company should be confident that their company is ready to be a public entity. A private company looking for a shell to become public company should have products and services that show growth potential and a comprehensive business and marketing plan. It is also important that the private company is adequately prepared for the change to public status, including a willingness and ability to abide by extensive filing and disclosure requirements.
Some private companies are incorporated as a Sub-chapter S Corporations. As such, they are limited to seventy-five shareholders or less. Therefore, if an S Corporation is considering a reverse merger, the company must first convert to a C Corporation where such limitations do not exist. Additionally, a company should assess its existing capital structure to ensure that it has sufficient authorized shares both to complete the merger and to raise capital as a public company. If necessary, the company should amend its Articles of Incorporation to accomplish this objective. Another issue to consider prior to going forward with a reverse merger is to determine whether the company's by-laws and corporate charter are adequate.
Finally, a company should have its accounting records in order and have audited financial statements prepared before completing a reverse merger.
Completion of an effective reverse merger is a significant undertaking, albeit less onerous than an IPO. It involves lawyers, accountants, business development specialists and others. If you are interested in a reverse merger, proper diligence at the onset can save time, money and headaches down the road. Investigate the owners of the public shell to determine that they are not stock manipulators. Check to make sure that the existing public company is not riddled with debt or other liabilities. Check to learn more about the company's trading history and records of prior infractions. Finally, make sure that your company is ready to be a public company. The reverse merger is an attractive transaction wherein you sell yourself to a public company and yet maintain control of the business, and, if executed properly, this a viable exit strategy for many companies.
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