Reverse mergers present several traps for the unwary. In fact, most reverse mergers fail. The stock starts trading at a high price and every one seems happy. But somehow, 3-6 months later, the stock is in the basement, never to see the light of day again.

 

A low stock price can present insurmountable obstacles for management. First, management cannot raise money without massive dilution of the stock. Second, management is beset with unhappy shareholders, some of whom look for reasons to sue the company and its management and accuse management of various wrongs. Third, the stock cannot be used to acquire other companies, assets and valuable employees. Finally, a low price is a bad reflection on the company and its management.

 

I would estimate that 80% or more of reverse merger companies wind up in this swamp. How do people get into this trap?

 

One of the most common traps is to fail to do an adequate investigation of the shell and its principals. Unseen liabilities can show up to afflict your company. Undisclosed contracts have been known to arise. The wrong shell promoters, even if they do not counterfeit your stock, can dump stock on the market when it is most inconvenient for you.

 

Another pitfall is to pay too much for the shell. First time shell buyers are not informed of the market prices, and can pay too much. Sometimes they buy shells with a defect, such as buying a Pink Sheet shell that is not eligible to use Rule 144. Or they buy a shell with defective records that prevent the company from registering with the SEC.

 

When the stock starts trading, most companies are victim to the old shareholders dumping stock on the market. The price suffers accordingly and worse yet this stock is often sold to supporters of the company who could put that money to better use inside the company and who suffer loss in the market.

 

Reverse merger companies often do ineffective investor relations efforts. Reverse merger companies are often prey for worthless stock promoters who do nothing and dump stock on the market.

 

Reverse merger companies sell stock to financial predators who will only buy stock at deep discounts if they can dump it on the market, sometimes using dubious securities law exemptions that cause the company serious trouble.

 

Most often, the reverse merger company fails to present itself in the best possible way to investors. Making effective investment presentations is a skill learned only after many years of trial and error.

 

How to be a success? Naturally, you will want to avoid all the above pitfalls. Moreover, you will start by making a game plan that will take you through the entire process in an integrated manner. There is no substitute for good planning and no substitute for execution of that planning. I hasten to remind you that good planning set goals, determines how they are achieved, monitors progress and anticipates problems.

 

Put together a team – legal, accounting, investor relations.

 

Before planning, study out the situation. How are similar companies doing in the stock market? What are investors doing? What are your own financial projections? Collect information on your business and its industry that you will need for presentations to investors. What is the interest of the financial media?

 

Set your goals – how much money do you want to raise? Will you be going back to the market later? Are you looking for liquidity for your shareholders? Will you offer stock options to employees? Where do you want the stock to trade?

 

Get your records in order. Nothing will hold you back more at critical times than having to find needed information. This is particularly true of accounting records, attack there first.

 

Start with an adequate budget. Locate sources of capital for funding at closing and afterward. Get committed investors.

 

Design an effective business plan and its positioning with investors.

 

Find the shell that is right for you, one that will help you meet your goals.

 

Plan out a continuing investor relations campaign, after closing and for at least one year later.

 

When a company grows, every wrong step limits its future. Too many mistakes can kill it.

 

Every right step can open new doors and enable new possibilities, some not even imagined as yet.