Going Public and Direct Public Offerings Provide Benefits in 2022

Going Public Securities Lawyers Direct Public Offering OTC Markets

Going public is still considered a benefit to issuers seeking to raise capital or obtain recognition of their business. Even in a down economy, private companies seek the perceived benefits of being publicly traded.   While there are a variety of ways to create a publicly traded company, each comes with its own unique requirements and risks.  The Direct Public Offering (“DPO”) eliminates many of the risks and expenses associated with reverse mergers into public shell companies. Issuers going public using a DPO also have fewer hurdles to obtaining electronic trading from Depository Trust Company (“DTC”).  

Reverse merger companies often encounter DTC chills and global locks because of prior unregistered securities issuances and the public shells prior management.

Types of Registered Offerings: Issuers going public with an Initial Public Offering (“IPO”) or DPO must file a registration statement pursuant to the Securities Act of 1933, as amended (the “Securities Act”). The most commonly used registration statement is Form S-1 for domestic issuers and Form F-1 for foreign issuers seeking to go public.

An IPO is where an investment banking firm assists an issuer with raising funds by selling securities that have been registered under the Securities Act.  Many issuers will not meet the income, asset, revenue or capital requirements that investment banking firms require.

A DPO involves an issuer filing a registration statement with the SEC, typically on Form S-1 (“S-1″), that registers shares from the issuer’s treasury.  Once the SEC declares the registration statement effective, the issuer then sells the registered securities directly to investors without the use of an underwriter. A direct public offering can also involve the issuer filing a resale registration on Form S-1 to register shares that its existing shareholders hold.  This method does not register securities for the issuer to sell to investors. 

SEC Review of Registration Statements.

After the issuer files the registration statement, it is then subject to review by the Securities and Exchange Commission (“SEC”).  After a review of the registration statement, the SEC may render comments that the issuer will address by filing amendments to its registration statement.  When all of the SEC comments have been answered to the satisfaction of the SEC, it will declare the registration statement effective.

Getting a Ticker Symbol

Filing a registration statement under any of the above methods will not cause an issuer’s securities to become publicly traded and will not result in the assignment of a ticker symbol.   After satisfying all the requirements of the SEC, the issuer then must comply with the requirements of either listing on a National Stock Market like NASDAQ or the NYSE or meet the criteria for quotation on the OTC Markets OTC Link to obtain a ticker symbol.

Establishing an Active Market

Generally, for OTC Markets issuers, the issuer must have 35 shareholders for the OTC Pink and 50 for the OTCQB that are held by non-affiliate investors and registered or held for 6 months if the issuer is reporting or 12 months if not. These shares in the aggregate should represent at least 10% of the issuer’s outstanding securities and are often referred to as the “ Public Float.”  The Public Float must also be somewhat evenly distributed without significant concentration in one or a few shareholders.

Form 211

Prior to the amendments to Rule 15c2-11 in September of 2021, FINRA required issuers to locate a sponsoring market maker to file a Form 211 (“211”).  Now this information can be submitted by the OTC Markets.  

After the information is provided, FINRA reviews the information and provides comments for the sponsoring market maker or OTC Markets to address.  Upon receipt of confirmation that all comments have been answered satisfactorily, a ticker symbol is assigned, and the issuers’ securities are publicly traded.

A Word About Reverse Mergers

By undertaking the DPO, the issuer has avoided the expenses and risks associated with a reverse merger transaction.  Reverse mergers are rarely done properly and have therefore become perceived by regulators as vehicles of fraud.  Most shell companies often have incomplete and sloppy records, pending lawsuits, and other liabilities, including securities violations.  A common misconception exists that a reverse merger is a fast and certain method of becoming publicly traded.  If proper due diligence is undertaken more often than not, the shell company will not pass the scrutiny of the SEC and/or FINRA.

In order to combat fraud that is associated with shell companies, both FINRA and the SEC have imposed significant requirements for reverse merger transactions.  Upon the closing of a reverse merger, under Rule 6490, the issuer must submit the merger to  FINRA for review and processing, which generally takes at least 60 days.  FINRA has complete discretion of whether to process corporate changes related to reverse mergers and other change of control transactions.  Owners of private companies are learning the hard way that reverse mergers are, more often than not, a costly mistake.

For further information about this article, please contact an SEC attorney at (561) 416-8956 or by email at [email protected].  This securities law and going public article is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship.  For more information concerning the rules and regulations affecting going public,  SEC registration on Form S-1 and Form F-1 for domestic and foreign issuers, IPOs and DPOs for NYSE, NASDAQ and OTC Markets and SEC disclosure requirements, please contact Hamilton and Associates at (561) 416-8956 or by email at [email protected].  Please note that the prior results discussed herein do not guarantee similar outcomes.