Initial Public Offering

The other and more common method of going public is through an Initial Public Offering (IPO). The process involves attracting and retaining an underwriter, along with securities lawyers and auditors. A registration statement prepared and filed with federal and state regulators after which the company goes through an extensive review process that may take as long as 6 to 8 months to complete. Following the review process, the company goes on a road show and is presented to brokers and investors. The underwriter seeks subscriptions to purchase the company’s shares. If the subscriptions are sufficient, the underwriting becomes “firm”. The IPO is then closed, the company is public, and the company receives its portion of the offering proceeds.

Here are the typical associated cost and time in doing an IPO:

• Legal fees for corporate and underwriter’s counsel, including "blue sky" state registration, costs between $100-200,000.
• Audit work must be prepared by an SEC CPA, with historical years, preformed to SEC's SX requirements costs $75-125,000.
• Transfer Agent and Filing Fees cost between $20-40,000.
• Printing and Road Show costs $50-100,000.
• Underwriting sales commissions are typically 10% of proceeds.
• Underwriting expenses are typically 4% of the offering proceeds, plus free stock options/warrants.
• In addition to third party costs, the company’s CEO and CFO will each spend 700-1,000 hours on the project.
• All in all, an IPO takes approximately 12-18 months, start to finish and there is no guarantee of success.

At successful completion the private company is public and fully funded.

The inherent risk of an IPO:

• A firm underwriting does not mean that a company has a firm commitment from an underwriter to raise money.
• Securities regulators do not allow an underwriting to become “firm” unless the underwriter has 100% or more of the offering subscriptions from investors.
• If the market is not buying IPO’s when the offering is ready, or the underwriter is unable to sell the shares, the offering is aborted.
• The company will have paid the legal and accounting fees, some underwriting fees, printing and road show costs.
• The only costs not incurred are sales commissions and some underwriter expenses.

Public Shell Companies are either "Non-reporting" or "Reporting."

Non-reporting public companies are not obligated to provide audited financial statements or make filings with the Securities and Exchange Commission so long as the companies have fewer than 500 investors and less than $10 million in total assets. Non-reporting companies are not allowed to trade on the NASD's OTC Bulletin Board because of the new eligibilty rules, NASDAQ or any other stock exchange, unless they become a Reporting public company. To become a Reporting public company, a company must prepare and file a registration statement with the Securities and Exchange Commission and go through a full review, similar to the registration and review process required in an IPO. Non-reporting public companies can be acquired for $35-60,000 and will typically issue 90-95% of their shares to private company shareholders. A reverse merger can be completed within weeks. Legal and audit fees for a Securities Exchange Act registration cost anywhere from $30-60,000 and takes 5-8 months to complete, if all comments are addressed.

Non-reporting Public Company Reverse Merger Risk: The Securities and Exchange Commission will review the corporate history, operations, and financial statements of both the private company and the public shell company retroactive a minimum of 3 years. If a problem arose that prevented the completion of the registration, the company would unable to list its shares. The cost of the public shell company, legal and audit fees, would have been spent, without a benefit.

Reporting public companies are required to provide audited financial statements and make filings with the Securities and Exchange Commission. Reporting public companies can be listed on the NASD's OTC Bulletin Board, NASDAQ or any other stock exchange, because they have already filed an SEC registration statement and completed the review process. Reporting companies can be acquired for $95-150,000 and will typically issue 85-90% of their shares to private company shareholders. A reverse merger can be completed within weeks.

Reporting Public Company Reverse Merger Risk: There is no SEC review involved in a Reporting public shell merger. Problems could arise when applying for a stock exchange listing. If they cannot be resolved, the company can apply to another exchange. There is no risk of a private company spending money and not becoming public. The shell is purchased and merger closed concurrently. Listed and Reporting company: Occasionally a Reporting public shell company with a OTC Bulletin Board listing becomes available. These companies are the most valuable because a private company, merging into a listed Reporting public shell company, can begin trading its shares on the same day of the merger. Listed Reporting public shell companies can be acquired for $250-300,000 and will typically issue 80-90% of their shares to private company shareholders. A Reverse Merger can be completed within weeks.

Listed-Reporting Public Company Reverse Merger Risk: There is no SEC review involved in a Reporting public shell company merger. The public shell already has a OTC Bulletin Board listing. There is no risk of a private company spending money and not becoming public. The public shell is purchased and merger closed concurrently. Problems could arise when applying for a stock exchange listing. If they cannot be resolved, the company can apply to another exchange.