In previous articles I have written for MicroCap Review, I have discussed and compared the various ways that a private company can become publicly-traded. Briefly, they are: (a) the traditional IPO; (b) the so-called “Slow PO;” (c) the relatively new Regulation A+; and (d) of course, the reverse merger.In those articles, I have stated my preference for using the reverse merger technique: it is by far the quickest, the most sure, and--although it doesn’t raise capital in and of itself—it can be far less expensive than a proposed IPO or a Reg A+ offering if they are unsuccessful. So, to summarize my thoughts about these techniques:These days, IPOs are almost exclusively accomplished by companies that are far larger than the usual type of company that completes a reverse merger, thus significantly limiting the number of companies that can even contemplate an IPO. Another important drawback for companies that want to go public via an IPO is that potential offerings are subject to market conditions—if the stock market is declining, the underwriter can either delay or even cancel the offering.The “Slow PO” is a term used to describe a method by which private companies become publicly-traded: a private company can raise money from investors over the years, build its shareholder base, and then make those shares publicly tradable. The Slow PO requires a broker-dealer to file a Rule 15c2-11 application with FINRA to clear the shares for trading. That application can take several weeks to be cleared, and does not result in the company raising any capital. So, the Slow PO can be used only by the relatively few private companies meeting these requirements.When it was promulgated in June, 2015, Regulation A+ was heralded as the panacea for smaller companies that want to raise capital in a public offering directly to the public, via social media and other ways to reach investors, both traditional and nontraditional. However, despite all of the hype surrounding it, very few Reg A+ offerings, other than local banks and real estate deals, have successfully raised more than minimal amounts of capital.The main reason I see for the lack of success of most Reg A+ offerings is that social media-type investors mostly want to invest in consumer oriented products, but have only limited capital available, thus requiring issuers to spend enormous amounts of upfront money to create the marketing program for the offering and to build a customer/investor base. Which brings me to reverse mergers. In the past 12 months, I have seen an increasing demand for clean public "shell" companies, as vehicles for the reverse merger (I’m using the term “shell” to describe companies that check both the shell box and non shell box in their SEC filings). My sources tell me that they believe the demand will continue, as the public markets keep hitting new highs (because of Donald Trump??). As a result of the continuing demand, the number of available shells has significantly decreased, causing an increase in the cost to purchase and reverse merge with a public shell.To be clear, not every company is suited to go public, whether by reverse merger or otherwise. In the opinion of experts I have spoken with, the companies best suited to go public are either the ones that are in the most innovative industries ("True Disrupters"), or those with a history of revenues and earnings. Both types of companies have the best long-term potential for up-listing to the NASDAQ or NYSE.Once a company goes public—again, no matter how they get there—the most challenging problem is establishing liquidity in the trading market. In my experience, many CEOs of newly-public companies often don’t fully understand that it’s far easier to grow the company and raise capital with an actively-traded stock. Going public does not create real (liquid) wealth overnight. Raising capital, like almost everything in business, is a competitive undertaking. Newly-public companies must compete with the likes of Apple, Amazon, the big banks, etc. when trying to raise capital, because retail and institutional investors are not throwing their money at a company just because it’s public instead of private.In order to build a post-reverse merger market, newly-public companies need to have a compelling story, to show Wall Street the significant upside long-term growth prospects of their company.The major upside of a reverse merger is not simply being public—it’s what the company does once it’s there.So, the consensus opinion of the experts is that reverse mergers, which have been around since the enactment of the Securities Act of 1933, will continue to be a strong, viable alternative to the other ways to go public. And, I strongly agree with that consensus.Many thanks to David Lazar of Zenith Partners International, for his insights.
