As we have witnessed over the last few years, sometimes there is no market for IPO’s. Wall Street refers to this as the IPO “window closing”. After the stock market crash of 2000 the IPO window slammed shut, especially for smaller companies. Since then, the markets have slowly come back for larger companies whose IPO’s are in excess of $200 million. Basically, with the passing of the new Sarbanes-Oxley rules, underwriters do not believe the risk-reward justifies underwriting most micro cap companies. So they have taken the high road. They now concentrate on much larger established companies that are trying to raise billions of dollars.

This makes it extremely difficult for smaller companies to find an underwriter. Therefore, the best option left open to smaller companies is the reverse merger. This enables the company to go public and save a substantial amount of money versus the traditional IPO. There is also no concern about the IPO “window closing” because there is no underwriter involved.

IPO’s for micro cap companies may or may not see the go-go days of the late 90’s but they can still go public in a very cost efficient way. In essence, reverse shell mergers have become the de facto IPO marketplace for micro cap companies. I do not expect this to change in the foreseeable future.

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