Publicly Traded Companies Have Advantages

The advantages of public trading status are numerous and include the possibility of commanding a higher price for a later offering of the company's securities. Other benefits include:

•  Increased liquidity of the ownership shares of the company
•  Higher share price creating higher company valuation, sometimes as much a three to five times greater than book value
•  Access to capital markets through potential future stock offerings
•  Ability to make acquisitions of other companies using the company's stock
•  Ability to use stock incentive plans to attract and retain key employees.
•  Considerable tax benefits
•  The stock can be borrowed against in some cases.
•  The stock can become part of an estate providing future value.
•  Publicly traded companies have a greater prestige and are held in higher regard. This visibility reinforces marketplace and financial standings.

Going public through a Reverse Merger allows a private company to go public typically at a lesser cost and with less stock dilution than through an Initial Public Offering or IPO. While the process of going public and raising capital is combined in an IPO, in a Reverse Merger these two functions are unbundled; a company can go public without raising additional capital. Because of this, the process of going public is simplified greatly.

Reverse Mergers are generally with inactive SEC reporting public companies which usually have no assets or liabilities, no current operating history, and SEC qualified audited financials. Generally, Reverse Mergers can be completed in less than three to four months and the expense ranges from $100,000 to $300,000 with many variables. An IPO can take up to eighteen months from inception to completion and costs can range from $200,000 to $1,000,000, again with many variables.

Benefits of Reverse Mergers as Opposed to IPOs:

•  Significantly less expensive than the cost of an IPO
•  Dramatically faster than an IPO
•  IPOs can be withdrawn due to an unstable market condition, even after the upfront costs have already been incurred and cannot be recaptured
•  IPOs generally require greater attention from top management.
•  An IPO requires a long and stable company earnings history.
•  There is less dilution of ownership control.
•  No underwriter is required in a Reverse Merger.
•  No fees or commissions are paid to brokers for selling the stock; stock is placed with existing shareholders
•  Company receives higher valuation
•  The legal work is considerably less than in an IPO.
•  Private capital can be raised prior to the registration.
•  Public funding can be initiated after the initial Reverse Merger is complete. This may result in your receiving more money at higher valuations.
•  Debt can be converted to equity.
•  IPOs must have an exciting story attached in order to attract investors; the most seemingly mundane company can complete a Reverse Merger.
•  Liquidity increases. Investors can buy and sell stock.
•  There is greater control due to the fact that corporate insiders and existing shareholder own the stock as opposed to IPO "flippers" who may sell the stock at the first sign of a profit, damaging the share price.
•  IPOs sometimes attract "short-sellers" who play the market in an effort to force your stock price down
•  Company insiders are provided with an exit strategy.
    Higher Valuation of Stock

Types of Shells Can Vary Greatly

Trading shells come from companies that previously went public but have experienced financial hardship or even bankruptcy. They may or may not still be active companies and they may or may not be current in their SEC document filings. It is the responsibility of corporate counsel to "clean up" the shell: i.e bringing SEC filings current and addressing the numerous regulatory requirements inherent in the process of a Reverse Merger. Counsel will also begin to open the lines of communication with the shareholder base in order to bring them current on the details of the Reverse Merger, educating and informing them of the intentions of the new company and acquainting them with the corporate officers.

Keep in mind that the former company attached to the shell may have been completely different than the one that has acquired it. Shareholders may have invested in a software company five years ago and now own shares of an automotive company. The previous business of the shell has relatively little to do with its current use.

To ensure that they have a long-term perspective on the company, corporate officers who receive stock in the Reverse Merger do not receive immediately free-trading stock. These shares fall under the Rule 144 transfer restrictions. The SEC has recently taken a clear position that these types of so called "free trading" shares obtained in a "shell" transaction do not qualify as free trading unless separately registered or held for a holding period of a minimum of one year and usually two years. Acquiring control of a "clean" trading company requires sophisticated, experienced counsel in the performance of due diligence.

Most Reverse Merger transactions are structured so that 90% PLUS of the outstanding stock will be held by the owners of the privately held company. In order to qualify to trade on most exchanges or over the counter, some amount (5% to 20%) of the total outstanding stock needs to be "trading stock" (not owned by insiders or company affiliates) for the public investors.

Tax Implications & Initial Share Price

Almost all Reverse Mergers take advantage of the tax free, stock-for-stock reorganization provision of the Internal Revenue code. Capital gains tax is paid when the individual shareholder sells the stock in the public stock market (usually after the minimum one year holding period for control persons). That is, the shareholders of the newly merged company do not recognize a capital gain until after they sell the stock, even though the stock may have a much greater value after the merger is complete. The timing of the stock sales can be determined by each individual investor to suit their investment or tax consequences.

Future Financing

Restricted Stock

The U.S. Securities and Exchange Commission (SEC) has many rules and regulations that must be complied with. One of these regards the buying and selling of restricted stock. Restricted stock is stock that is not registered with the SEC, or stock held by insiders (even if registered). Insiders are generally directors, executive officers and persons or entities that they control or who control them. These persons/entities may sell stock under Rule 144 in any three-month period limited to the greater of: 1% of the outstanding shares of common stock and/or the average trading volume during the four calendar weeks preceding a sale.

Sales under Rule 144 must be made without violating: manner of sale provisions (in the market through a broker/dealer at current market prices), notice requirements (proper forms must be filed with the SEC under Rule 144 of the Securities Act of 1933 as well as certain reporting requirements under Rules 13 and 16 of the Securities Exchange Act of 1934), and the company must be current in its filing of the required SEC reports. Restricted stock can be sold or resold privately at any time. It cannot however, be sold through a stockbroker into the public stock market until the "restriction legend" is removed, usually by a Rule 144 transfer after a one to two year holding period or until the shares are fully registered.

How to Get Started

Although simpler and less expensive than and Initial Public Offering, Reverse Mergers are still complicated. It is essential that the parties seeking to initiate this process retain the services of an experienced securities attorney in order to guide them though the technical compliance requirements. Please note that a Reverse Merger is a transactional course of action that requires legal expertise, business experience and extreme attention to detail. It is critical that appropriate legal counsel be retained in order to spearhead this complex, but potentially lucrative, course of action.

Jean-Pierre & Jean-Pierre, LLC:

•  Efficiently and cost-effectively completes all necessary SEC filings.
•  Drafts all documents necessary to the completion of the Reverse Merger.
•  Provides access to quality, publicly traded shells.
•  Performs due diligence on the shell to be acquired.
•  Assists in post-merger structure growth consulting and overall corporate compliance.
•  Has numerous, well-established contacts throughout the investment banking community.
•  Assists officers, directors, affiliates and insiders in monitoring compliance with insider trading and reporting rules and in maintaining compliance with the Sarbanes Oxley Act.

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