WHAT ARE THE PRINCIPAL FACTORS TO CONSIDER WHEN CHOOSING A CONVENTIONAL IPO OR A REVERSE MERGER?

Before we can decide whether a company should choose going public. through a conventional IPO or through a reverse merger, we first have to set forth the factors which are the most important to be considered.

Since most private companies seek to go public do so in order to more readily access the capital markets, the first factor is, which method best permits the private company to raise capital. If the company is sufficiently large enough to attract the services of an underwriting firm, which can commit to a firm underwriting, that method is without question question the best. Although the receipt of funds from a firm underwriting will require some months, there are a plethora of investors who will extend a “bridge loan” to the private company to provide the operating capital and other needs of the private company pending completion of the public offering and receipt of the funds therefrom.

However, most private companies do not qualify for a firm underwriting. Those companies have to consider the alternative of a self underwriting versus a reverse merger. One of the principal legal factors making a traditional IPO, self-underwritten, problematic is the fact that the private company’s capital raising abilities during the process are severely constrained. This is because once a registration statement is filed with the SEC for review, the company is generally precluded from raising equity capital on a private basis  until such time as the public offering is completed. This is because the very nature of filing a public offering document, such as an S-1, is that the company is making known to the to the public its willingness to sell securities and raise money. However, under the private placement exemption, sales cannot be procured by the means of any public communication. If any purchaser of the private offering obtained information about the company from the publicly made SEC filings, that would ruin the exemption for the public offering. That is not a good thing. That would give the purchaser in the private offering the right to rescind his purchase and obtain all of his money back.

But what of the other factors that should be considered?