Go Public 101

Go Public Attorney

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 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

Initial Public Offering

An initial public offering (“IPO”) is where an investment banking firm assists an issuer with raising funds by selling securities that have been registered under the Securities Act of 1933, as amended (the “1933 Act”).  Many issuers will not meet the income, asset, revenue or capital requirement standards that investment banking firms now have and will go public without the use of an underwriter.

 Direct Public Offering

A direct public offering (“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 registers shares that are held by its existing shareholders.  This method does not register securities for the issuer to sell to investors. 

SEC Review

After the issuer files the registration statement it is then subject to review by the SEC.  After review of the registration statement the SEC may render comments which 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 it 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 the Financial Industry Regulatory Authority (“FINRA”), in order to obtain its ticker symbol.

Establishing an Active Market

Generally, FINRA requires that the issuer have at least 25 shareholders who hold either registered shares or with respect to Pink Sheet listed issuers, shares that have been held by non-affiliate investors for twelve months.  The majority of the 25 holders must have paid cash consideration for their shares. Additionally, these shares in the aggregate should represent at least 10% of the issuer’s outstanding securities and are often referred to as the “Float.”  The Float must also be somewhat evenly distributed without significant concentration in one or a few shareholders.

 Form 211

FINRA requires the issuers to locate a sponsoring market maker to file a Form 211 (“211”).  For issuers who are non-reporting, audited financial statements are not required in order to file a 211.

After the sponsoring market maker files a 211, FINRA reviews the 211 and provides comments for the sponsor 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.

By undertaking the DPO, the issuer has avoid the expenses and risk associated with reverse merger transactions.  Reverse mergers are rarely done properly and have therefore become vehicles of fraud.  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 scrutiny of qualified legal counsel.

In order to combat fraud that is associated with Shell companies, both FINRA and the SEC have passed new requirements for reverse mergers.  Upon the closing of a Shell transaction, under recently passed Rule 6490, the issuer must obtain FINRA approval which generally takes at least 30 days.  FINRA has complete discretion of whether to approve corporate changes related to reverse mergers.  Owners of private companies are learning the hard way that reverse mergers can be a costly mistake.  In reality, it is quicker and more cost effective to undertake a DPO than to do a reverse merger.

For further information about this article, please contact an SEC attorney at (561) 416-8956 or by email at [email protected].  This memorandum 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 and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or 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.