The IPO

A conventional IPO is done when you have an underwriter who is to sell the stock. The steps are these: the company searches out an underwriter and sells the underwriter on selling the stock. A filing is made with the SEC. A preliminary prospectus, called a “red-herring” because there is a red legend on the front warning that it is not final, is produced and the underwriter takes initial indications of interest from buyers and the other broker-dealers in the syndicate who will help in selling the stock.

When the SEC has no more comments on the filing, the issue is declared effective, the underwriter closes the buyers and the issue starts trading.

 

The Regulation A Offering

Instead of filing a full offering, you can file an offering under Regulation A, which allows you to sell up to $5 million of securities and does not require audited financial statements. The securities may trade in the public market.

If you use a Reg A offering, audited financials are not needed but they must be GAAP. You save the cost of buying a shell. You will have to file with the SEC. Form 211 will have to be filedand a trading market developed.

Form 10 Shells

A Form 10 shell is created when a shell company, a company with limited assets and business, files a Form 10 with the SEC. A Form 10 registers a company with the SEC under the Securities and Exchange Act of 1934, but Form 10 does not allow the company to issue securities publicly.That is accomplished by a registration under the Securities Act of 1933, a different statute than the Securities and Exchange Act of 1934.

The game plan of the Form 10 shell is to get the company registered with the SEC so that subsequent filings to register the stock proceed more rapidly. 

The procedure is that a Form 10 shell merchant, or perhaps  securities lawyer, or other professional in the industry, creates a new company, gives it enough money to withstand the initial expenses or an audit and filing, gets an audit that qualifies under SEC rules (an audit from a PCAOB accountant), and files a Form 10 with the SEC. The SEC may or may not comment on the filing. Once the filing has been commented on and corrected, the Form 10 shell merchant seeks a merger partner, an operating company for a reverse merger.

Note here that up to this point, there are no securities in public hands and the stock of the Form 10 company does not trade. There is no market maker and no trading volume. The stock is not listed anywhere.

When a reverse merger is agreed upon and consummated, the combined companies are one and a “Super 8-K” is filed with the SEC. The company will also find a market maker and a Form 211 will be filed with FINRA. The SEC may comment on the Super 8-K but is not required to do so.

When the stock is cleared for trading, trading starts, usually with relatively low volume, and high hopes on the part of the company that it will be able to develop trading volume one way or another.

Here are the advantages Form 10 shell promoters use to sell their wares:

First, they say you can obtain PIPE financing by telling the PIPE investors you are going to get the stock trading and develop a market so the PIPE investors have liquidity. I say that they must be talking to different PIPE investors than I am talking to as the ones I know want liquidity as fast as possible which means that the stock is trading with strong volume. it takes time and money to develop a market, even for a reverse merger shell that is already in the market with market makers. Also, there is always the risk that FINRA will hold up approval of your Form 211.

The second reason offered by Form 10 proponents is that you avoid the cost of buying a trading shell that is already registered with the SEC. This cost for a trading OTC BB shell is usually $250,000 to $500,000. The control persons of a shell get whatever cash they can from selling the Form 10 shell plus whatever stock they get to keep in the deal. The stock can be from 5-10% of the combined company.

Recently one of the leading reverse merger attorneys sold a batch of form 10 shells to the Chinese, reportedly for $15,000 each. That $15,000 barely covers the cost of filing and maintaining the shell. The cost of creating a Form 10 shell can be $35,000 to $40,000 to get it filed and the cost of maintaining it each year thereafter can be $20,000 each year.

From the operating company’s point of view, little time is actually saved in a Form 10. While the stock may have a market, until the stock has an actively trading market, private money will be hard to find. The important metric here is not time to trading, it is time to getting money!

If you an trading OTC BB shell,  you will have to file the Super 8-K with the SEC. Form 211 is not needed but you will have to develop the market as you would with a Pink Sheet shell.

If you do an S-1, you need audited financials, a Form 211, and to develop the market.

If you do the Form 10 shell, you will have some cost to buy it, you will file the Super 8-K and the Form 211 and then develop the market.

Reasonable men can differ here, but in my not very humble personal opinion, if you really want speed and damn the expense, you want the trading shell. if you want to have money and wait a few months, you are better off with filing an S-1 than paying for the Form 10 shell and getting nothing more than you would with an S-1.

If you cannot get audited financials, you are stuck with the Pink Sheet shell unless you file a Regulation A offering.

 

Self-Registration

At this point in time, there is much to be said for the self-registration.

A self-registration is simply an offering that takes the company public by registering the securities without an underwriter. The company registers stock for existing shareholders on Form S-1, finds a market maker who files a Form 211 with FINRA, and when everything is effective, trading starts.

The advantages of a self-registration are:

• You save the cost of the shell
• You do not have to give up a piece of your company to shell shareholders
• There are no selling shareholders from the shell to dump stock on the market.
• You avoid the stigma that has attached to the reverse merger process from the fraudulent Chinese-based reverse mergers.
• You do not have to worry about merging with a shell that has a hidden defect.

• The disadvantages are:
• You will need at least 50 shareholders
• You may not have enough shareholders to develop an active market
• Your company has to start to develop an active market from scratch
• If you cannot get audited financial statements, you cannot register (but may be able to use Regulation A)

• If an S-1 if filed, only if those buyers are already connected to the company can buy while the S-1 is being processed

Overall, we are much in favor of self-registrations.

 

NEXT: Reverse Merger Disadvantages