Securities Attorney for Going Public Transactions

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Methods to Go Public - S-1/1-A Registration Statement or Reverse Merger or Form 10 Shell

Why Should a Small Business Go Public?

Most small businesses and entrepreneurs need to raise capital for various reasons. There are several different sources of capital when you are a private company. You may seek the assistance of friends and family, angel investors, or venture capitalists. Many of my prospective clients or clients attempt to obtain this type of financing for their business or new venture. Private companies raise money frequently. Unfortunately, funders and money is hard to find for private companies. Company funders prefer publicly companies. I have attended several investor conferences, and I have several conversations with investors and I can say, generally, that most institutional or sophisticated only invest in public companies.

A public company does not have to be large. It can be very small. Yet public companies can be said to trade at 15x to 20x earnings whereas private companies tend to trade at 5x earnings. Ultimately, investors tell me they prefer public companies because of the disclosure requirements. Investors can trust what they can see. They trust public filings more than no filings. With new requirements after Sarbanes-Oxley, many investors believe that when public company management is fraudulent or deceptive in filings, the senior management could go to prison. A private company manager does not face the same level of scrutiny, transparency requirements, restrictions on stock sales, and potential prison, yet he is extremely limited in his capital sources compared to the public company that must report to U.S. regulators and the investing public.

I encourage companies who want to raise capital as a private company to do so. My firm supports you and will draft any private placement memoranda (PPM) or similar documentation in support of the process. If the process does not appear to be going as planned, I encourage going public in three different possible methods: reverse merger, registration statement (initial or direct public offering), or synthetic public vehicle.

Reverse Mergers

The reverse merger is currently a popular method for going public. An operating shell company, which at one point may have been an active publicly traded company on a stock exchange, issues shares to the shareholders of a private company sufficient to give those shareholders a majority interest in the public company, thereby effectively taking the private company public without the usual costs associated with an initial public offering, and giving shareholders of the private company control over the public company. It should be noted that the public company in the reverse acquisition is often a formerly active company, not one created solely to be a shell. The reverse merger transaction is fast and allows for an extremely high degree of certainty that once the transaction is complete your private company will be a public traded entity with a public float and free trading shares. Reverse mergers are often accompanied by a simultaneous, private investment in public equity, or PIPE transaction. The company's shares are sold at a slight discount to the public market price, and the company typically agrees to use its best efforts to register the resale of those same securities for the benefit of the purchaser.

Going Public via Registration Statements: IPOs and Direct Public Offerings

A registration statement is required to sell securities to the general public unless you have an applicable exemption under the Securities Act or the Exchange Act. A registration statement is used for an initial public offering and is submitted to the Securities and Exchange Commission. The SEC must clear the registration statement before the company may be considered a public company. An IPO involves an attorney, such as myself, drafting a registration statement that includes audited financials. You may do a public offering without audited financial statements. The registration statement contains the nature, quantity, and type of securities issued, disclaimers, the company's business plan, and associated risk factors of the company, and an opportunity to communicate with investors about your offering. A traditional IPO involves investment bankers who help companies raise capital and accompany the management team on "roadshows" or presentations to investors seeking to invest capital in your company. A direct public offering does not enlist investment bankers, but the company places the securities directly or does not raise capital until after the registration statement is effective. Once the registration statement is deemed effective, we must submit a Form15c211 to a market maker who will provide a market for the company's securities. The market maker sponsors the company for a ticker symbol. I will then assist you in obtaining DTC eligibility so you may get a ticker symbol from FINRA. Once the transaction is complete, your company is a trading company with a ticker symbol and a public float with free trading shares.

There are also mini-IPOs under Regulation A+, however, these transactions are beyond the scope of this discussion.

Synthetic Shells/Form 10 Shells

A synthetic shell, also known as a "Form 10 shell" or a "419 shell", is a public company that does not have a ticker symbol and has not yet obtained DTC eligibility. The company does report to the SEC and may be found on EDGAR. A Form 10 registration statement may be filed under the Exchange Act to register an entire class of securities, instead of registering a certain number of shares for a particular transaction under the Securities Act as with the Form S-1 or F-1/20-F. A Form 10 shell is formed by filing a registration statement for a company that has less than or no assets or operations. Once the registration statement is effective, the company is public, but it does not have a ticker symbol. The company's filings may be accessed from the SEC's website by searching for the name of the company. Form 10 companies still must report to the SEC and disclose information to the investing public and are considered public entities. Investors are willing to invest in these quasi-public entities because they meet the disclosure requirements of companies that have ticker symbols and a public float. Another company, often a private entity, will decide to merge into and be acquired by the Form 10 shell in a reverse merger transaction to go public. However, once the acquisition is complete the shares of the once private company becoming a public company do not freely trade. After the merger, the company has little time to disclose the transaction to the public in what is known as a "Super 8-K". The SEC has 60 days to respond to comment on the reverse merger into a Form 10 shell, but once the 60 days are over the private company is now public.  There is a one year holding period before the shares in a Form 10 shell may be trade on an exchange, unless the company registers the shares via an S-1 or 1-A and obtains DTC eligibility. The synthetic shells are easier to obtain, are more certain than a standard public offering, but the process takes more time and requires more filings. 

Costs and Timelines of the Going Public Transaction

The costs and timelines are important considerations in determining the method for going public. All transactions may be financed by a bridge loan. A reverse merger is the most certain method for going public and fastest process for going public, but also the most costly. A reverse merger may be completed in 30 to 60 days, but will cost upwards of $500,000. Attorney fees are normally $35,000 to $125,000 and may be some equity in the company for the transaction. Accountant fees are normally $20,000 to $45,000. The cost of the public vehicle is usually $50,000 to $350,000. This vehicle is, or should be, fully current on filings and financial disclosures, be SEC reporting instead of Alternative Reporting, be debt free, and have all taxes paid. The vehicle should also have more than nominal assets or operations and have a history of having more than nominal assets or operations. My firm can help your company obtain a bridge loan to pay for the going public transaction. 

The initial public offering/direct public offering may be a much lower cost alternative, but the full process may take anywhere from six months to one year since the SEC reviews the registration statement and often has comments for the issuer that require substantive amendments to the registration statement before the SEC grants the filing effective. Most of the cost in a public offering are attorney fees an investment banker fees. Investment bankers tend to charge $3,000 to $5,000 per month and a percentage of the capital raised. Many do not charge upfront, but charge 6% to 8% of the capital raised. My fees range depending on the size and complexity of the transaction and the expected capital raise. Attorney fees approach $175,000 to $250,000, but usually start around $50,000. Accountant fees range from $20,000 to $45,000. A bridge loan may also be obtained for any public offering.

The Form 10 shell reverse merger process requires the purchase of a shell (or the manufacture of one by my Firm) as well as the actual reverse merger. The shells usually go for $200,000 to $250,000. The reverse merger process cost is $35,000 to $125,000 for attorney fees. After the merger, many attorneys often charge a $10,000 per month consulting fee for public filings and to register the shares before the restriction period is lifted. The process may take from three to six months to complete.

Private Investments in Public Equity (PIPEs) after Reverse Merger

Once a reverse merger via a Form 10 shell or a fully trading operating company is complete, many firms will raise capital. A mentioned earlier, the PIPE transaction is much easier than raising capital as a private company via a private placement. Often, the same firm that provided the bridge loan either provides additional capital under a PIPE deal or that same firm will help find PIPE investors for the initial capital raise. 

My firm can help you determine which going public strategy is best for your company. Please contact me if you have any questions or concerns.

The Law Offices of Destiny Aigbe | Securities & Going Public Lawyer
Destiny Aigbe, Securities Attorney
1101 Connecticut Ave NW Suite 450
Washington, DC 20036
Telephone: (202) 854-8386

Advantages and Disadvantages to Going Public; Securities Lawyer - Destiny Aigbe, Esq.

Advantages of Being a Publicly Held Corporation and Registering Securities with the SEC

Stock as Currency. After successful registration, a private company that has become public may issue new shares and create a public market for its outstanding shares. Once there is a public market for a company's shares, investors may purchase and sell shares more readily. The public quotation of a price allows vendors, employees, and even debt holders to take stock in lieu of cash as payment for services or goods. When a company trades on the public market it receives a higher valuation as a result of its public market status. This same stock may be used as currency for transactions such as mergers or asset purchases.

Acquisitions using newly issued stock. A public company may use its stock to acquire other companies by issuing new stock to use as consideration for the transaction rather than cash. A public corporation exchanges its shares for the shares of the target company at a premium in order to buyout the target company and take control of its assets. 

Public Status improves Recruitment and Retention. A company may improve its retention and recruitment of challenging to obtain employees and managers because the public corporation can provide a liquid market for the stock as compensation. Certain fast growing companies such as biotech, pharmaceutical, telecommunication, 

The Economics of Capital RaisingIt may be a lower cost to utilize an exemption from registering securities publicly. A company that registers its securities avoids the challenge of negotiating with professional investors such as venture capitalists and can avoid toxic financing or unfavorable convertible debt financing. The registration of a firm opens that firm to public bond markets.

Maintain Control. A company that sells securities to the broader investing public maintains more control than a private company that issues debt or equity to sophisticated professional investors such as venture capitalists and traditional financiers. Venture capitalists often expect a say in future decision making in the company and will push for board seats, require contractual agreements, decide who will serve as management,and determine compensation for employees and the nature of future dividends or distributions, if any. 

Improved Access to Capital. Usually a company's balance sheet will improve after a going public transaction. Improved balanced sheets can improve access to capital and reduce borrowing costs. If a company qualifies, an automatic shelf registration can lead to a quick secondary offering for access to additional capital. 

Prestige. There is prestige associated with being a major shareholder, director, or officer of a public corporation. There is the recognition of success when a private company becomes a public corporation. The costs associated with filing and maintaining status on a stock exchange provides a floor for the success of firms that are public. The first or primary offering of securities may bring a public corporation issuer $1,000,000 to upwards of $5,000,000. 

Disadvantages of Being a Publicly Held Corporation and Registering Securities with the SEC

Disadvantages include costs, disclosures, and more. To learn the disadvantages of going public email us at or call (202) 854-8386. We are available 24/7.

The Law Offices of Destiny Aigbe | Securities & Going Public Lawyer
Destiny Aigbe, Securities Attorney
1101 Connecticut Ave NW Suite 450
Washington, DC 20036
Telephone: (202) 854-8386

Regulation of Investment Advisers

The Investment Advisers Act of 1940 regulates non-broker-dealers who are in the business of rendering investment advice. Professional investment advisers frequently market their services by publishing advice through newsletters, blogs, or other publications. More commonly, investment advisers manage funds through an investment company, an investment partnership, or otherwise through custodial accounts.

Section 203(f) of the Investment Advisers Act gives the SEC the authority to hold hearings and impose sanctions against investment advisers and their associated persons who violate securities laws. Relevant sanctions range from censure to suspension. The Investment Advisers Act requires registration of all non-exempt investment advisers. In addition to registration, investment advisers must file periodic reports with the SEC and be available for periodic examination by the Commission. 

Section 206 of the Act prohibits material misrepresentations and fraudulent practices in connection with the rendering of investment advice. Section 206 applies negligent misstatements, as well as to those made with the intent to defraud. 

The Investment Advisers Act also regulates contracts between investment advisers and their clients. The Act permits the performance-based advisory fees for qualifying contracts. Qualifying contracts under 17 CFR 275.205-3 include the requirement that the client is financially sophisticated and must understand both the method of compensation and the risks presented by such a performance-based system. There are protections against assignment of the contract between the investor and the investment adviser to prevent a random change in the quality or nature of the advisory services. If the investment adviser is a partnership, the adviser must provide for notice within a reasonable time of all the changes to the composition of the partnership, including changes to key personnel often specified in the offering documents.