Success in reverse: reverse mergers can help attain liquidity, growth and capital goals.

• Author: Stone, Ron
• Position: BUSINESSFINANCING

Small and mid-size companies under $50 million in revenues often seek growth capital at certain stages of their development. A strong established company with solid financial statements and a good earnings history is a good candidate for standard bank financing at competitive rates.

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Many companies that may have tremendous potential, however, do not qualify for standard bank financing and must find alternative financing vehicles. Such companies may be able to access the necessary capital by going public via a reverse merger into a public shell.

PROS/CONS OF GOING PUBLIC

A publicly traded company provides the following benefits:

Liquidity for investors: Publicly traded securities enable investors to decide when to divest their holdings. However, there has to be significant investor interest and trading volume in the aftermarket to achieve liquidity.

Acquisition Capital: The value of publicly traded stock is easily ascertainable and thus can be used as currency to purchase other companies. However, when you use stock in such a manner, that stock is restricted under SEC rules 144 and 415.

Higher Valuations: Publicly traded companies usually sell at a premium to private companies. The arbitrage between public and private often creates opportunities for acquisitions.

Greater Access to Capital Markets: Growing companies often look for growth capital. Public companies have greater access to capital on the open market, as they are more attractive to institutional investors than private companies.

Retention of Staff: Employee stock option plans provide incentives for employees and create shared goals between management and employees.

Prestige: Officers of publicly traded companies have increased prestige in their communities. (This is often a driving force in choosing to go public.)

Operating as a publicly traded company also presents certain challenges:

Less Confidentiality: For many owners, this is the most difficult obstacle to overcome. A public company must disclose all material information for the benefit of investors. Once available to the investment community, this information, both financial and operational, is also available to the company's competitors.

Burdensome Reporting Requirements: A public company is required to make quarterly reports to the SEC, have its financial statements audited once a year and make disclosures if any "news" events occur during the reporting periods. This process is cumbersome and costly...