I asked a friend about OTCBB companies and their funding. This is what he wrote:
In short, you are entering a completely different world when you enter the public markets, particularly the OTC, which has its own mindset and service providers with that mindset. As an example, I know one of the other gentlemen that responded to you. He spoke "the game" by telling me about this network of investors he had. I presented him what I thought I was an interesting sustainable company. He said, the only way to do it was to get a shell where "we" would control the float. I remember thinking, "What does the company get?". Well, in truth, the company gets to virtually sell its soul for a few hundred grand and to dig itself a hole that most do not ever get out of.
In the OTC world, everything sounds good on the surface (easier access to capital, liquidity, etc.) but you are no longer a company - only a stock. Your whole future depends on generating and maintaining liquidity - and by "liquidity" I don't mean that the stock is freely tradable, I mean that there is a buyer for every seller. Of course you know what would happen if you don't. And liquidity is very expensive. In fact, just being public will be $150,000 a year even on a shoestring budget.
So let's say you did get a shell and raise some money and your investors are "liquid" as you say. You sell them restricted stock with a six month hold. ALL of that stock goes live the same day. You will inevitably get some selling pressure, which can start small and balloon. If you don't have any support on the other side, the stock gets hammered. All it takes is one guy starting to bail out and the masses follow. You cannot imagine how many times I've seen this. I can show you example after example.
This is the case with 9 out of 10 ten OTC stocks. Rarely does a stock sustain its value in the long run. The ones that do go up from the "IPO" price have spent upwards of a million dollars on promotion - often paid for in stock which also needs to be sold! Then if you need more capital, each subsequent round is a down round, adding to your dilution and headaches. The first thing a PIPE guy will do will bring up a chart and check your liquidity. That's all these guys care about. Not your business model, not your management team, not your strategy.
Frankly, the only thing shells are good for in my opinion is so the founders and early investors can liquidiate. This also happens all the time.
Once in a while, a new listed company hits everything just right and gets lucky, but it is very rare. The vast majority wish they had never taken that route (unless, again the founders have liquidated).
For myself, after 15 years in this business, I decided I was too honest and too good for that world. Almost everyone is a complete BSer. I never advise my clients to take that route. Perhaps, if ALL other methods of financing have failed, you structure the deal EXACTLY right, and have a detailed public market strategy, it could work. But it is at your (and your shareholders') own risk. And the probability of failure is much larger than the probability of success.
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