Tip of the Week: Knowing the Pros and Cons of Reverse Mergers vs. IPOs
By David Feldman at 30 March, 2010, 10:28 am
To those who just recently started following reverse mergers, I think it is a timely opportunity to rehash why reverse mergers or other alternatives such as self-filings can be a better option than the traditional initial public offering (IPO). Let me briefly illustrate why a small to middle market company would seek out this option.
Benefits of a reverse merger over an IPO include: much lower costs, much speedier process, independence from the IPO market for success, less time consuming, less dilution in stock ownership, and the elimination of the need for an underwriter. I want to highlight the third reason for our purposes. The still struggling economy means one thing for IPOs, namely the closing of the fickle IPO window. Yet reverse mergers continue pretty much at the same pace every year (with a slight dip last year). The window is not typically shut for those companies wishing to go public through a reverse merger, and this resilience is just another reason why considering a reverse merger or other IPO alternative is suggested for small and middle market companies.
Anther substantial advantage of the reverse merger or self-filing is that you are not required to hire an underwriter. While IPO underwriters do serve an important purpose, some of the more aggressive ones look to remake your company for the IPO event. Sometimes the underwriter requires you to shut down a promising new venture that has not yet yielded profit. Or they want you to acquire something to create a larger revenue base. These moves may not be consistent with your company’s overall strategy.
Reverse mergers are a viable alternative route to the IPO, and even in up markets many companies choose the reverse merger route because of these positive aspects: lower cost, greater speed, and less dilution. Take a look at the new edition of my book: it has a whole chapter outlining the advantages and disadvantages of each option. At least make sure that these alternatives are arrows in your quiver as you consider a going public strategy.
Happy Passover, Easter, etc., to all my faithful blogees!
Just wondering if you have had any success in getting the regulators to overturn, or clarify the “Evergreen Requirement”. Sept. 2008 was the last update that I saw. Thank you for all your efforts.
Mike
Michael, if you search “144(i)” on here there are more recent updates. Bottom line: we think the SEC staff understands the issue and no one there has really tried to defend why a former shell is subject to this requirement forever. That said, politically it is not the ideal time to ask this pro-regulation Commission to look at something that they might consider de-regulatory. But we’re plugging away!
David