TIMING ISSUES IN DECIDING BETWEEN A TRADITIONAL IPO AND A REVERSE MERGER IN GOING PUBLIC

We live in a rapidly changing, fluid world. Technology changes and becomes obsolete. Competitors arise. Government regulations change. Sometimes a growing business has a window, which will never be replicated, in which it has a chance and opportunity to grow. That growth requires capital. If a private company is unable to raise money in a timely fashion, it may miss a window. And, it won’t know that it  missed the window until after the fact when that mistake cannot be corrected.

Therefore, it is critical for private company contemplating an IPO versus a public merger when going public. to understand the different timing issues.

We will assume that a private company already has its financial house in order, that it has internally generated financial statements which are capable of being audited for the required periods (three years of audited financial statements, or two years in the case of a smaller company) within a reasonable period of time. This private company also has a detailed business plan, so that it knows what it needs to meet its goals and indeed knows what its goals are.

As the aphorism states, if one does not have a destination, then all roads are equal.

The importance of financial statements and in fact the existence of financial systems and procedures is critical for a company, because, how can management effectively carry out his duties unless it knows the current financial condition of its company?

The process of going public. through a traditional IPO involves filing an S-1 registration statement (or regulation A+ offering statement) with the Securities and Exchange Commission, and going through the review process. This process typically requires 3 to 6 months. It is possible to shorten this period of time, but not on a reliably predictable basis. The  better the quality of the registration statement, it is hoped, will lead to a shorter review time. However there is always an element of luck involved in this.

After the registration statement is effective, then it lies to the company to raise the money in this public offering. Once a certain minimum number of shareholders is reached, say about 30 to 40, then the company has two additional hurdles before it can be considered a fully public company. First, it has to persuade a market maker to submit its securities for trading on the over-the-counter market, and secondly it has to persuade the Depository Trust Company (DTC) to accept the company’s securities into the securities depository system. These activities can require one to  four months, depending, as with the S-1, on the quality of the application, some element of luck, and the financial parmeters of the company. Typically, the larger and more developed the company making this application, the faster it is processed.

On the other hand, in comparison,  going public. by reverse merger into a public  company will result in an almost instantaneous status as a public company. If the existing public company is not a “shell company” then even if shares are full privately by the company they can be resold in the public market in as little as  six months. The necessary caveat to this apparent advantage of the reverse merger project is cost. Time is money.