Reverse Merger Timeline

Preparing your company for a reverse merger is much less complex then preparing for a traditional IPO, but you are still preparing to go public and there are steps to be completed.  We have divided the process into four separate phases (the steps of each phase can often be completed in any order) below:

Phase One:

Internal Company Preparation

Phase Two:

Determine and assess shell market / choose a financing partner

Phase Three:

Due diligence and Negotiation of Acquisition Terms

Phase Four:

Close shell acquisition, file legal documents, address Wall Street
 

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Phase One:
Company Internal Preparation

This can be the most time consuming and complex piece of the shell merger process - often because this is where a majority of the work and preparation is performed by the Company internally.

• Financials Audits Complete - at least two years audits are required

• Legal and Securities Counsel - This step can be completed at a later stage (Phase Three). Your attorney must be qualified to deal with regulatory compliance, all reporting requirements of all public companies, and day to day legal questions that you may have. Often your legal bills will be the highest during your first year of being public - its a learning process that gets smoother as you go.

• Financials Staff - Make sure that you have the financial staff in place to support public audits and filings (CFO, Controller, etc.)

• Financial Audits: SEC qualified audited financial statements for at least your last two fiscal years. The audit statements of the private company have to be consolidated with the public company's financial statements.

• Strong Management Team: Public investors demand a strong management team that has proven to be be successful in the past. This being said, public experience is a positive but not necessarily a must. Ultimately, having a CFO that has public experience would be the most important position to have some sort of public experience due to the reporting requirements.

• Comprehensive Business Plan / Convincing Marketing Plan: Potential investors, public shareholders, auditors, securities counsel, brokers and market makers will want to see a well documented business / marketing plan. Companies need to prove to the investment community that they have a well through out plan of attack - a plan that is cost effective, achievable and efficient.

• Do Your Homework: THIS IS VERY IMPORTANT BEFORE MOVING TO THE NEXT STEP!!!   There  is a significant amount of information out there in the public environment on the shell merger process. Choosing the appropriate shell and financing partner can make or break a Company's success in the public markets.  It is all about credibility and costs. You are going to giving up equity in your firm to someone - just make sure that you have done your homework on who that person is and how they want to structure the transaction - giving too much away initially to the shell company without any capital associated with it does not make the most sense to me. Understand the objectives of the individuals involved, the process that they follow and the services (capital, consultancy, relationships, etc.) that they provide.

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Phase Two:
Determine and assess shell market / choose a financing partner

• Locate a Suitable Public Shell - Public shells can often be found by consulting with securities law firms, auditing firms, investors, investment banks or consultants.

• 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.

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Phase Three:
Due diligence and Negotiation of Acquisition Terms

• Structuring of shell:  There are many different types of shell structures that may be utilized during the reverse merger process.  Each structure has its benefits and its downfalls depending on capital needs, stage of the Company and current size.  Please visit our alternatives page for more information on each option and structure which will hopefully enable you to determine which structure best suites your future needs and goals.

• Letter of Intent: Once the Company has decided on a shell the Company must submit a letter of intent to acquire the shell. This often also requires a deposit into an escrow account made out to public company or its principal shareholders to ensure that the shell owners will stop all other negotiations and turn down any new offers.

• Public Shell History: Analyzing the historical past of a shell is extremely important when choosing the correct vehicle. When merging into an existing public company you not only acquire the ticker, reporting status and name of the Comapny but you also acquire the liabilities, litigations, history etc. that comes along with it. Making sure that you spend the appropriate amount of capital and timing analyzing the shell that is chosen is very much worth it in the long run and will save the company not only a lot of capital in the future, but also management time.

• Structuring investment:  If you are taking advantage of the public markets through a PIPE investment simultaneous with the reverse merger be very careful to choose the structure and investor very carefully. Please visit our Financing / PIPEs page to learn more about the various options available to a newly public entity.

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Phase Four:
Close Shell Acquisition, File Legal Documents, Address Wall Street

Requirements to Close a Reverse Merger or Public Shell Merger

• Legal Consent from Private Shareholders: Obtain the legal consent from the majority, preferably 100%, of the existing shareholders of the private company to merge or exchange their shares for shares of the public company.

• Shareholder Lists: List of all shareholders in the private company that will make the share exchange.

• Director and Officer Appointment: 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.

• Transaction Documentation: Preparation of the share exchange agreement, stock purchase agreement, definitive merger agreement, and all other documents necessary to complete the merger.

• Capital Structure: Determine capital structure of the new public Company post reveres merger

• Domiciled State: Agreement on state the company will be domiciled in post merger.

• Management Information: Management information, including completion of the "Officer and Director Questionnaire," for all Officers and Directors designated by the private company merger partner.

• Reps and Warranties: Satisfaction of warranties and representations between public shell and merger partner.

• 8K Preparation: Final preparation of the 8K that is required to be filed with the SEC within 4 days of closing the merger.  The 8-K must disclose the same type of information that it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934.

• Stock Certificates: Issue and distribute stock certificates to all investors

• File 8K: Complete and file the required 8-K with the SEC.

• Name Change: File to change name and ticker of the company to more accurately represent the new Company's operations

• 15c211: File a 15c211 if needed to receive a ticker and/or move to a higher exchange

• Registration Statement: If needed file a registration statement (SB-1, SB-2, or Form 10) to register shares in the transaction.

(See Sec Final Rule 33-8587, pdf file)

Filing a Form 211 to Receive a Trading Symbol

Rule 15c211 was designed to allow non-reporting public company’s securities to be quoted on the National Association of Securities Dealers’ (“NASD”) Over-the-Counter Bulletin Board (“OTCBB”) by filing some simple disclosures.

Now, companies seeking to obtain a quote on the NASD OTC/BB are required to file reports with the Securities and Exchange Commission (“SEC”), under Section 15D of the Securities Exchange Act of 1933 (the “Act”), as amended, or section 12G of the 1934 SEC Act.  A company who has filed a registration statement with the SEC using an SB-1, SB-2, or Form 10, will become a reporting company when the SEC declares the registration statement effective. Once the company is reporting, it is eligible to have a market maker file a Form 211 with the NASD. The 211 must be approved by the NASD, which normally takes 3 to 6 months, before the company can trade its stock on the OTC/BB.  The NASD will require 40 to 50 shareholders and sufficient public float to approve the 211 application.

If you need assistance in having a Form 211 filed with the NASD so that your company can trade on the OTCBB, we can help prepare that paperwork and introduce you to a market maker.
 

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