In years past the SEC expressed a dislike for reverse mergers, particularly those in which a newly formed subsidiary is merged into the private target with the private company surviving as the wholly-owned subsidiary of the public parent. This is not because the structure is inherently poor but because the disclosure framework that existed at the time did not disclose enough information about the acquired private target for public investors to evaluate at the closing. However, over the past few years, the SEC introduced new rules requiring full disclosure, including audited financials, within four days after closing on a reverse merger transaction.

Like the traditional IPO, a company pursuing a reverse merger must consider all the post closing factors it must address. Market makers will most likely already be in place having traded the stock from the previous company that owned the public shell. It is a good idea to see how many market makers are currently involved in making a market and if you should obtain additional market-makers for the company’s stock. Most importantly is to obtain a corporate public and/or investor relations firm to communicate public information available about the company and to set up an Internet site that is SOX compliant for disclosure of financial information to the investing public.

You will have to assemble an independent Board of Directors to comply with public company corporate governance requirements, as well as a whole host of additional rules, committees, and expenses associated with being a public company. At this point you have already retained experienced, qualified outside certified public accountants and attorneys. Now is the time to start hiring more experienced “public company” managers, including a qualified chief financial officer, especially if you are seeking to raise capital.

Many of the above mentioned factors are often overlooked in the rush to become a public entity via a reverse merger. The best advice I can give you is this. BEFORE embarking on this journey take the time to write a five year business plan. Of course, this is the last thing an entrepreneur wants to do. But trust me on this. You are about to commit to spending a huge amount of money to take your company public. You only get one shot at doing this correctly. By writing the Business Plan you will crystallize your thoughts and your plans for the future of your company and will have a much greater chance of success.

If you are successful in establishing the public company via the reverse merger and demonstrate proper corporate governance and financial fundamentals you are heading in the right direction. If you can the grow your company, make it profitable and gain market acceptance then your stock will rise. Eventually, if all goes well, you will then get the opportunity move up to a more visible trading exchange such as NASDAQ or AMEX. This can lead to greater expansion and the availability of more liquidity for your company. At that point in time, you would have accomplished more and with less risk and cost than if you had pursued a traditional IPO.

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