by Karen Rands

Traditional Underwriting

Time: 6 to 12 months

Cost: $175,000 to $500,000. (The company will be out of pocket
at least 50% of this amount prior to completion.

Capital: Typically raises more capital than other types of
transactions.

Problems: Underwriting may be delayed or canceled. Issue Price
may be changed by market conditions or underwriter.

Reverse Merger or Buy an Existing “Public Shell”

Time: 2 weeks to 60 days

Cost: $150,000 to $400,00

Capital: Does not raise money but stock is now valued and
tradable

Problems: Potential “skeletons” in acquired shell. Control
shareholders of operating company may receive restricted shares.

Advantages: Typically Reverse Merger or Public Shell Merger is
the quickest way to get public. Non-control investors may
receive registered or trading shares.

Merge with a Brand New Flex Financial Public Company

Time: 4 to 8 months

Cost: $75,000 to $150,000

Capital: May raise money and stock is now valued and tradable

Problems: None

Advantages: Public company can be “Custom Designed” to the
operating companies specifications. Shareholders of operating
company receive registered shares. New corporation so no
“SKELETONS” in the company. Financial expertise during the
transaction. Market support after the transaction. Automatic
shareholder base friendly to the “Small Cap” market.

Preparation for a Reverse Merger or Public Shell Merger

Locate a Suitable Public Shell - Public shells can often be
found by consulting with securities law firms or CPA - Audit
firms that deal with public companies.

It is important to start with a clean shell: Due diligence on
the public shell cannot be over emphasized, advice from your
securities counsel, auditors, and a financial consultant should
be utilized. As was mentioned, many shells are created for the
express purpose of merging with a private company. These shells
have no predecessor entities, and, as a result, little baggage
in the way of a business failure or other skeletons in the
closets.

Comprehensive Business Plan - Potential investors, public
shareholders, auditors, securities counsel, brokers and market
makers will want to see a well documented business plan.

Strong Management Team - Public investors demand strong
management teams.

Convincing Marketing Plan - Public companies need the ability to
show good sales and earning growth. Product or Service - Public
companies should be able to develop strong or dominant position
in their business segment. Financial Audits - SEC qualified
audited financial statements for your last two fiscal years.

Experienced Securities Counsel - Your attorney must be qualified
to deal with regulatory compliance, and the ongoing reporting
requirements of all public companies.

Have Public Company Experience: Your company should have at
least one person in senior management that has significant
public company experience. Financing consultants such as Flex
Financial Group, can often assist management in the complex
issues of being a public company and maintaining a good
relationship with the financial community. In fact, many
actually have a couple of shell corporations and, upon request,
can manufacture a clean public shell. A made-to-order shell
without the baggage of a business failure in its background can
sometimes be the way to go, but there’s often a cost involved.
You will most likely end up with the financing consultants as
minority shareholders in the new company, holding between 2
percent and 5 percent. However, in almost any reverse merger
transaction, the principals of the shell company keep a small
equity position in the company going forward. Therefore, this
surrender of equity is simply a cost of doing business.

Devise your financing strategy: A reverse merger is an indirect
route to raising capital.

Entrepreneurs must first consider how additional capital will be
raised after the deal is done. An experienced financial
consultant can be very beneficial in this area.

Requirements Necessary to Close a Reverse Merger or Public Shell
Merger

Business plan of merger partner. Sufficient information to
complete and file the required 8-K with the SEC.

Management information, including completion of the “Officer and
Director Questionnaire,” for all Officers and Directors
designated by the private company merger partner.

Agreement on structure and terms of merger.

Letter of intent with escrow payment made to public company or
its principal shareholders. (This must happen for the public
company to cease negotiations with other merger prospects.)

Audited Financial Statement, conformed to US, GAAP for the
private merger partner. The audit statements of the private
company have to be consolidated with the public company’s
financial statements.

Agreed merger fee in escrow with the securities attorney
representing the merger partner.

Consent from the majority, preferably 100%, of existing
shareholders of the private company to merge or exchange their
shares for shares of the public company.

Agreement for the Officers and Directors of the public shell to
be replaced with the Officers and directors designated by the
private company merger partner.

List of all shareholders in the private company that will make
the share exchange.

Number of shares to be outstanding “post merger”, and a complete
breakdown of share ownership post merger. Note: It is often
necessary for the public shell to do a reverse split and/or
cancel shares owned by the affiliates of the public share prior
to completing the merger.

Agreement on state the company will be domiciled in post merger.

Satisfaction of warranties and representations between public
shell and merger partner.

Designation of securities attorneys and SEC qualified auditors
that will represent the private merger partner. Preparation of
the share exchange agreement, stock purchase agreement,
definitive merger agreement, and all other documents necessary
to complete the merger.

Final preparation of the 8K that is required to be filed with
the SEC within 15 days of closing the merger. As stated earlier
this is required to contain consolidated audited financial
statements, but the SEC will allow an additional 75 days to file
and amended 8K with the audited statements.

It has been our experience that the private company’s ability to
deal with all these issues is instrumental in determining the
timing in closing the merger, and the long term success after
closing a reverse merger or public shell purchase.

Examples of Successful Reverse Mergers with Public Shells

Armand Hammer, world-renowned oil magnate and industrialist, is
generally credited with having invented the “Reverse Merger”. In
the 1950s, Hammer invested in a shell company into which he
merged multi decade winner Occidental Petroleum.

In 1970 Ted Turner completed a reverse merger with Rice
Broadcasting, which went on to become Turner Broadcasting.

In 1996, Muriel Siebert, renown as the first woman member of the
New York Stock Exchange, took her brokerage firm public by
reverse merging with J. Michaels, a defunct Brooklyn Furniture
company.

One of the Dot Com fallen angels, Rare Medium (RRRR), merged
with a lackluster refrigeration company and changed the entire
business. This was a $2 stock in 1998, which found its way over
$90 in 2000.

Acclaim Entertainment (AKLM) merged into non-operating
Tele-Communications in 1994.

Contact LAUNCHfn to learn more at http://www.launchfn.com/id51.html

About the author:
As a venture catalyst with LAUNCHfn & NBAI, accelerates the
capital raising process by delivering resources and capital.
$23.7 Million in funding transactions have been completed since
1994 through the Private Equity Investor Forum. View my Linked
In Profile http://www.linkedin.com/in/karenrands

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