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Going Public through a reverse merger, often with a PIPE (Private Investment in a Public Entity) or IPO is a landmark event. The steps a company and its management team take to prepare for public shell merger will have a significant impact on the success of raising capital in a PIPE offering or IPO process, and the after market for the company’s stock. Our first advice, therefore, is to consider the points below as early as possible in your planning process. Please note the market for IPO is generally limited the largest and most established private companies; therefore, most Public offering of less than $100,000,000 are done via private placement PIPE offerings in conjunction with a reverse merger.

  1. Have a compelling and convincing reason to Public Mergers.

There are many obvious benefits to be derived from going public. Going public by (IPO)or doing a simultaneous PIPE with a reverse merger enables the company to raise a large amount of cash in a single transaction, enhances the company’s net worth, provides access to future capital, and creates a “second currency” consisting of liquid tradable stock. An equally important consideration is the opportunity of being public provides for early-stage investors – primarily angels and venture capitalists – to exit from their investment. Lastly, the company can include publicly traded shares or stock options as part of its compensation package for recruiting and retaining key personnel.

Whatever a company determines its compelling reasons to Public Mergers are, they must be convincingly and adequately communicated to investors. Potential investors will quite naturally focus on how the money raised will be spent (the “Use of Proceeds”). From their point of view, the capital raised should be used to build additional value in the company and contribute to providing a future return on investment.

Failure to communicate the compelling reasons in a way that attracts the right investors may have important consequences down the road. It is ideal for management to bring term buyers in its sector. More often than not, it is the institutional investors who will be with the company in good market periods and bad. Large institutional investors can be likened to “public venture capitalists.” When a company needs additional financing, through follow-on offerings or private placements, it will turn first to the institutional shareholders that came through the PIPE or IPO investors.. Having the sponsorship of these buyers can be especially critical when the company needs additional financing during a market downturn.

Please note when doing a reverse merger, having a quality public shell and structuring the transaction properly is like the foundation in building a home. Public Mergers Institute has all most 40 years in assisting companies in going public and providing high quality public shells.

  1. Know the market valuation for similar public companies

In PIPE or IPO offering of common stock, a privately owned company sells a portion of its ownership interests to the general public (usually constituting retail and institutional investors).Management should identify public companies similar in size, industry and development to get an idea of expected pre funding market valuation. In general, a “stronger” company – one with established products, viable technology or proven management – is in a better position than a company lacking these advantages and will usually give up a smaller percentage of ownership than the “weaker” company must in order to raise the same amount of capital. In some instances, the valuation of the stock may be so punitive that in order to raise the amount of cash a company seeks, the percentage of equity issued to investors may transfer control of the company from the original owners.

The second task is to understand how your company’s performance may differ from the market’s performance – good and bad – and how that is likely to affect your company’s valuation. Generally, the placement agent or underwriter will provide you with a market analysis during his or her proposal phase. In fact, one of the determining factors for choosing one placement agent over another can be his or her understanding of the market and your company’s relationship to it.

Ownership by public investors, especially institutional investors, has a very real upside. Portfolio managers for institutional funds (e.g., mutual funds, pension funds and other private investment funds) have the expertise to understand potentially high-risk technology companies. If they hold a significant ownership stake in a company, they may decide to act as partners or advisors to the company, paying close attention to its business and financial management.

The market value of a company is very important and will be influenced by many variables. We spend a great deal of time discussing this with our clients at the beginning and during the course of the reverse merger and offering process. The key is to get on the table, as soon as possible, all of the variables that are likely to affect pricing. For example, what happens if earnings are projected to increase X% during the registration process and they increase Y%? What does this mean to the pricing of the PIPE or IPO? We also recommend that management read at least two complete sets of documents – pre-registration and post-registration – of companies that are similar to their own in order to become familiar with the range of disclosures required and to get a sense of the market for their stock.

  1. Be prepared for public scrutiny and criticism.

Companies are required by the Securities Exchange Commission (SEC) to disclose extensive information in the offering prospectus and later in periodic quarterly and annual disclosure documents. Included in these filings is information pertaining to revenue and executive compensation, management’s discussions and analyses of the company’s results, significant activity during the period (including contracts entered into and other matters affecting the company or industry) and a discussion of the direction of the company’s prospects going forward. This information will be available not only to analysts, investors and corporate partners, but to competitors as well. Management must be prepared for this loss of confidentiality, as well as an expanded scrutiny of short-term results.

This might appear to be a grind. However, many successful companies use these requirements as part of their strategic planning and control of operations. The management team of a newly public company will now deal with their Board of Directors and investors. Therefore, they will need to create a strategy for both groups. This process begins with a review of the current Board before the underwriter is engaged. The plan for investor relations must be complete before the road show commences.

  1. Have a sound business plan.

As already stated, investors are looking for a return on their investments. In the case of emerging technology companies, investors may encounter several years of losses in expectation of “hitting it big” in the future. Their hope is that the company will eventually increase shareholder value through technology breakthroughs or in other ways. In order to sell itself and its vision for the future, any company must develop a sound business plan for achieving its goals. Although any plan will need continual fine-tuning, investors want the assurance that management is adhering to its stated goals, and that – within reasonable parameters of success – investors may achieve acceptable returns on their investments.

After going public or completing the reverse merger you might not have to continue to prepare fancy business plans.” However, it is often useful to retain the discipline of the book. Our philosophy is to create a detailed list of goals and to measure the goals against actions being taken.

  1. Assemble an Public Company team that can go the distance.

A significant amount of money will be spent for the public shell and services performed by the underwriter, legal counsel and certified public accountants. The fees charged are only some of the costs involved; another is manifest in whether the work is performed with accuracy and on a timely basis. It is important to make the appropriate inquiries into each professional’s qualifications and track record, just as the professionals will be performing their own “due diligence” of the company.

The investment bank, or underwriter, will be the main distributor of the company’s securities, and will usually make distribution arrangements through other placement agents as well. Inquiries into the investment bank’s abilities should focus on the investment banker’s knowledge of the specific industry, experience with comparably sized deals, and the ability to provide investment analysis to support the after-market. The investment bank should also possess market-making ability that translates into attracting a sufficiently large number of investors and sustaining interest in the stock after the offering. Other areas to explore are the additional services available from the investment bank after the offering, including assistance in identifying future public or private capital sources or merger/acquisition candidates.

The company’s legal counsel will be the primary liaison to the other professionals on the reverse merger or going public team – the underwriter(s), CPAs and the SEC. Management will spend a considerable amount of time with their counsel, explaining aspects of the company, gathering and submitting documents, explaining transactions, and drafting the Registration Statement. Your ability to work comfortably with your attorneys can often be as important as the attorneys’ previous experience with IPOs.

The independent certified public accountant will audit the company’s financial statements, provide assistance with certain financial portions of the Registration Statement, assist in responding to SEC comments, and issue a Comfort Letter to the investment bank upon completion of the offering. The accounting firm’s qualifications should include substantial experience with public shells and reverse mergers, initial public offerings and other securities registrations, knowledge of the company’s industry, and the ability to provide the time commitment that is required to bring the IPO process to its conclusion.

Public Mergers Institute has seen the consequences of both good and bad teams. Our advice is to perform greater due diligence investigations on your going public team members than you would for a new employee.

  1. Get the accounting done in good order.

The months leading up to going public or a reverse merger are the appropriate time to discuss the accounting treatment of certain transactions and management decisions that are disclosed in financial statements.

The periods included in the PCAOB Audited Statement filed for a reverse merger will serve as a benchmark for subsequent quarters and year-ends. Inadequate reserves against inventory, accounts receivable and other assets: improper valuations of securities; long-term assets; and understatements of liabilities will have to be recognized in the future. This could depress future earnings. Because the trend of the company’s operating performance is important to the public market, the company should address these items so that the books and records offer a true and conservative account of financial conditions and operations.

The moment you start thinking about being a public company, start acting like a public company. The earlier you deal with the financial issues, the less expensive and disruptive the process will be, particularly with respect to prior years’ data. The requirements for financial statements depend on the type of Registration Statement being filed. Form S-1, which has the most extensive requirements, requires two audited balance sheets and three audited income statements. Other registration types require fewer audited periods.

  1. A public company should always operate for the benefit of their shareholders even at the expense of personal gain.

The company’s founders and senior management team have a fiduciary duty to the company and its stockholders. This duty requires management to avoid using their positions for personal gain by obtaining or exploiting opportunities that rightfully belong to the company. Opportunities for profit may include the acquisition of companies, land, or leaseholds that were presented and are useful to the company. There may also be business opportunities where a conflict of interest, or the appearance of a conflict of interest, is present – such as when a related party, or a company owned by a related party, is contracted to provide services to the company when the company sells a portion of its assets to a related party. An established procedure for obtaining independent bids, appraisals and board approval (excluding the related parties) will help guard the company’s interests.

Trading upon information not known to the public (“inside information”), or passing it along to others, is a violation of security laws. At times, management and other insiders may become aware of information that could affect the value of the company’s stock. Complying with “insider trading” laws means not acting upon this information, even when the result is a loss of value in their personal investment portfolios or foregoing personal enrichment. It is important for management to discuss sensitive matters on a “need to know” basis, have their policy in writing, and periodically distribute written reminders to employees that privileged information must not be discussed with unauthorized people. If anyone is uncertain as to whether an activity constitutes a conflict of interest or insider trading, he or she should speak to the company’s legal counsel.

Although there is a clearly defined line, which you must never cross, there are also areas that need legal interpretation. If in doubt, ask your securities attorneys or other professionals

  1. Ensure that all employees are above reproach.

The SEC, potential investors and the public are concerned with the background and reputation of highly placed individuals, particularly those in sensitive management positions, who are associated with a public company. Employing a management team with proven track records and good reputations enhances the standing of the company. It is often a due diligence hurdle that the company must clear successfully when an investment bank considers taking on the role as lead placement agent for a public offering. The reputation of a company’s key management team will also affect its ability to obtain future financing, consummate new business transactions, and attract additional qualified employees.

In the process of preparing the Offering Documents, questionnaires are distributed to key individuals in management and background checks are performed. The information this research provides will help in the preparation of the executive biographies that will be included in the statement. Management should take advantage of this opportunity to create a process that not only retains the appropriate background information for existing employees but also assures that similar information will be obtained for new employees as they are hired.

We strongly recommend the company have members of their senior management team that have hands on experience with public companies.

  1. Plan for the significant costs of going public.

Going Public and reverse merger with a public shell is an expensive undertaking for a company, with substantial costs inherent in the offering process. Such costs vary from company to company and may include:

Time demands on management – senior management will be involved in selecting the professionals (i.e., attorneys, accountants, underwriters, printers), writing the Registration Statement, providing documents and other support to the various professionals, and presenting at “road shows” to prospective investors.

Additional requirements for support staff – if a company’s financial statements have never been audited, their books and records may not be in order fro an audit. Also, there will be ongoing reporting requirements on a quarterly basis, thereby requiring fees for internal and external accountants.

The need for interim, or bridge, financing – this may be costly to obtain, whether due to high interest rates, the cost of grants of stock or stock warrants, pledges of collateral, or a combination of these factors, Such costs increase as time passes until the going public process is consummated, resulting in a decrease in the amount of net proceeds the company will receive.

Planning is the critical element in a successful reverse merger or public offering. One simple, but often overlooked, planning step is to define the responsibilities of every person involved in the going public process and schedule their tasks. We recommend that you appoint a coordinator to manage the process of getting the deal done and completing it in a cost-effective manner.

  1. Continue to dream.

As your company continues to evolve over the long term, you must remember that your goal, and that of your company’s stockholders, is straightforward – you all want the company to make money and grow. After going public, the company has not achieved its goal; it merely acquired a means thereto. Continue to focus on your dream, to make the company and its products or services something that no customer can do without. And one final thought…you must also have fun doing it!

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