As you have read over the last 9 chapters there are many challenges when you are preparing to bring your company public via a reverse merger into an OTCBB shell. There is also a substantial financial and managerial investment that a company makes when it decides to go public. As stated earlier it is imperative for a company to retain an experienced consultant that can guide the company throughout the entire going public process and for a period of not less than 12 months thereafter.

The right consultant will not only guide the client company through the entire going public process but will also provide the professionals to handle all aspects of the transaction before, during and after you are a publicly traded company. The consultant should be able to locate a suitable OTCBB shell, provide professionals to perform audit, SEC, stock transfer agent, IR/PR functions along with market makers to make a market for your stock. These are just a few of the services that Ventana Capital Partners provides for its clients. If you are considering taking your company public through a reverse merger into an OTCBB shell please give us a call at 619 895 6900 or email me at Ralph@Ventana Capital Partners.com

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Many companies believe that achieving public company status is the end game when, in fact, it is the beginning of the game. Just because you have a publicly traded stock do not believe for a minute that investors will beat a path to your door.
The old adage of “built it and they will come” no longer exists in today’s economy.

There are over 3,300 public companies listed on the OTCBB alone. Including AMEX/NYSE, NASDAQ or NYSE listed companies there are over 10,000 public companies. So, if you want to build interest in your stock you have to invest in a multi prong approach for investor relations (IR). Unfortunately, the IR industry does not enjoy a stellar reputation. Many a company has been taken in by an IR firm that makes “pie in the sky” promises, charges outrageous fees usually in the form of a boat load of free trading stock and, in the end, performs a promotion of the company’s stock for the sole purpose of selling only their shares into the marketplace. This, my friends is called the classic “pump and dump”.

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After FINRA has approved the company’s name and symbol change along with the date the changes become effective for purposes of trading the company’s stock the next step is to populate the 1300 plus financial websites with the financial information of the new public company. It is important that financial websites display the correct information on the new public company. If not, potential investors will quickly loose interest in buying the stock in the open market. A company may see their name and symbol correctly displayed after two or three days of days but in the majority of new listings most of the critical information is either incorrect or missing. The company profile sometimes takes awhile to update so potential investors may be viewing information from the previous shell company. This is also true of the new number of issued and outstanding shares after the reverse merger and either forward or reverse split has taken place. Therefore, there is usually a void when it comes to financial information of the new company that should be available on all financial websites.

Before starting to trade the stock of the new OTCBB listed public company make sure the majority of the more popular financial websites have updated the corporate financial information. There is nothing more disappointing than starting an investor relations program only to find out there is no response because investors can not locate adequate information in a timely manner.

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The Company, through the assistance of their Consultant, will need to assemble a team of professionals to address all issues of the going public process. These include SEC attorney, PCAOB approved CPA firm, addition of new Officer and Directors, Stock Transfer Agent, IR/PR and market makers to name a few. The team will assist with due diligence for the purchase of the OTCBB shell, valuation, new capital structure along with the reverse merger of the private company into the shell.

Usually the CPA firm will complete the audit process prior to the Company purchasing the OTCBB shell. The audit process can take anywhere from two to six months depending on the size and complexity of the audit and how well the internal books of the Company are prepared. It is advisable to hire a well seasoned CFO who has public company experience to get familiar with the Company and prepare the internal financial information for the audit firm.

The SEC attorney will file appropriate filing(s) of documentation with the Securities and Exchange Commission (the SEC) to amend the Company’s Articles of Incorporation to increase authorized capital stock (number of shares), request either a forward or reverse split of the company’s stock and a name change to the new public company’s name. This process takes about 30 days. The SEC attorney will then file with FINRA requesting them to approve the name and stock symbol change of the Company. The FINRA process takes four to six weeks for approval. Once the Company receives approval by FINRA the Consultant will proceed with the IR/PR professionals he has retained to contact the online financial websites so they can update their databases with the new public company’s name, stock symbol and company information (10 day process) along with notifying market makers that the new stock shall commence trading in the near future. After the name and symbol change have been approved by FINRA the Company can also remit or issue the new stock certificates from the Stock Transfer Agent.

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The first step in performing an RTO is identifying the right OTCBB shell. The purchase of the shell is the single most important piece of the “going public” process. If you do not purchase the right shell the rest of the transaction will not come together and there could be substantial delays. The Company is best served with having their Consultant source and review the right shell. An experienced Consultant will know what to look for and what to avoid when purchasing a shell for a client. Shells have been rising in price as of late so expect to pay between $350K to $500K for a shell. The higher the delivery of shares the more expensive the shell. There is a shortage of high delivery Shell inventory so they have been selling at a brisk pace. Do not start shopping for a shell unless you are ready to write the check.

If a client is also seeking to raise funds through a PIPE (private investment in public equity) it is very important to purchase a specific type of OTCBB shell.

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An RTO, performed correctly, will allow a private company to go public into an over the counter bulletin board (OTCBB) shell within a period of 30 days. Prior to going this route a prospective company must have the last two years of their financial records prepared internally by a CFO, bookkeeper or local CPA firm. They will then engage a PCAOB certified CPA firm to perform the audit.

The RTO process is not quite as simple as it appears. RTO’s are complex transactions with several moving parts that need to be performed simultaneously.

It is important for a company to understand that the result of the RTO is in direct correlation to the professionals that are retained to assist the company with all aspects of the transaction from start to finish inclusive of valuation, capital structure, market support, capital raise, IR/PR, etc. Since there is a substantial amount of money that would be committed on behalf of the company it is advisable to hire an experienced consultant that can guide the company throughout the entire transaction process and for a period of at least 12 months thereafter. As we tell our clients: Going public is not the end game – it is the beginning of the game.

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There is a tremendous amount of money on the sidelines but what little is being doled out is being distributed in small amounts. Investors are demanding lower valuations of companies and want to be assured there is an established exit strategy for them to cash out. I would like to tell you that most investors are in for the long haul but that is simply not the case. In today’s environment investors are extremely cautious and their aversion to risk is keen. Investors may have a long term investment view but they still want the option to cash out if their investment goes north or south too quickly.

Companies need access to capital through the financial markets and investors need a specific exit strategy. The RTO solves both of those needs.

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Even 18 months after the darkest days of September, 2008, the financial markets are still very cautious. On May 9, the European Union announced a near $1 trillion bailout package for euro-zone countries in an effort to address the “sovereign debt” crisis that began in Greece but now threatens the stability of financial markets across the region. Even with this bailout announcement the US markets recently went into a tailspin. Volatility in the markets is alive and well in the US.

The global financial environment has made it particularly difficult for early stage and emerging growth companies that seek funding. Even established, profitable companies with good earnings history and established lines of credit have found that, in many cases, their business and personal credit lines have been cut in half.

Investors have hunkered down and are very cautious when it comes to investing in early stage companies that seek funding but are not yet profitable. Venture Capitalists (VC’s) have raised the bar and are now taking a longer period of time to perform due diligence (up to six months) and if and when they do decide to fund are demanding 70% to 80% of a company’s stock ownership.

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The financial crisis of 2008–present was triggered by a liquidity crisis in the US banking system and caused by the overvaluation of assets. It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. As banks consolidated great investment banking firms like Bears Sterns and Merrill Lynch were acquired while firms like Lehman Brothers were dealt a deathblow by the government and forced to file for bankruptcy. At the time SEC Chairman Christopher Cox stated Bear Stearns was “well-capitalized and apparently fully liquid” but “experienced a crisis of confidence” that led to its collapse.

During those dark days the credit markets contracted to the point of almost choking the life out of both large and small business owners alike.

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RTO (reverse takeover) have become the defacto way of going public in today’s economic times.  Once considered the ugly duckling, RTO’s, also known as reverse shell mergers, have been transformed into the beautiful swan.  This transition is largely due to the meltdown that took place in our financial markets in the third and fourth quarters of 2008.  As investment bankers ran for cover to preserve their firms most of the underwriters were either converted into banks so they could qualify for government bailout money or were swallowed up by larger competitors.  When the dust cleared not only had most of the major underwriters disappeared but those that survived were fighting just to stay afloat and had no intention of participating in anything related to a risk adverse investment such as underwriting an IPO for the foreseeable future.

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