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Seeking Your Fortune: Using IPO Alternatives
to Find Wealth in the U.S. Stock Markets
By Michael T. Williams & Richard Oravec
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Find Your Fortune
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Advantages of Using IPO Alternatives to Go Public in the U.S. Capital Markets
There are many possible advantages to you and your shareholders if you pursue going public by using the various IPO Alternatives discussed in this book. Not all have to do with raising money, for example:
- Going Public in the U.S. Capital Markets Has the Potential to Increase the Value of Your Company and Your Personal Wealth
- Going Public in the U.S. Capital Markets May Increase the Prestige and Standing of Your Company
- Going Public in the U.S. Capital Markets May Help You Grow Your Company and Increase its Value by Facilitating the Acquisition of Other Companies
- Going Public Can Help You Attract, Retain and Motivate Management and Employees
You can use our handy Quick Reference Guide, located at the bottom of this page, to see related excerpts from the book.
We’ve also put some excerpts from each chapter of the book Seeking Your Fortune below.
[Click On Each Title To Open]
The Principal U.S. Capital Markets
If you are seeking your fortune by using an IPO Alternative to find wealth in the U.S. Capital Markets, you first need to decide which U.S. Capital Market you want to access. Here is a list of the principal U.S. Capital Markets:
Over the Counter (OTC) Markets
- OTCQB (and to the extent functional, the OTCBB)
- OTC Pink Sheet Markets
OTC Bulletin Board
NASDAQ OMX Group
- NASDAQ Global Select Market
- NASDAQ Global Market
- NASDAQ National Market
- NYSE AMEX Equities
You’ll learn about all of these markets and their differences, including different listing requirements. You learn about FINRA, Market Makers and Transfer Agents, too.
Selling Your Stock without Filing a Registration Statement with the SEC
The alternative to filing an SEC registration statement is to sell your company’s stock to shareholders in a transaction for which you need not file a registration statement with the SEC. This transaction is called a “Private Placement.” Private placements in the U.S. are done under an SEC regulation called “Regulation D.” Private placements outside the U.S. are done under an SEC regulation called “Regulation S.”
You’ll learn all you need to know about how all of these different non-public offerings work, including using general advertising and solicitation in the new Regulation D Rule 506 Offering to Accredited Investors.
Filing Directly with the SEC
We believe that all companies that do not qualify to go public through an IPO should carefully consider going public through filing a Registration Statement directly with the SEC rather than buying an expensive and most often unnecessary and certainly more troublesome Public Shell and using the Reverse Merger method to go public.
There is so much misinformation about the direct filing process that we are giving you a very detailed explanation of the process in this Chapter.
We think it is very important to understand this: The SEC is not like the FTC
- The FTC reviews mergers, examines and makes subjective decisions about the merits of the mergers, and sometimes blocks the mergers from going through.
- The SEC reviews the registration statement but makes no subjective decisions on the merits of your filing. The purpose of the SEC review is to ensure that all of the information required by the federal rules and regulations is included in the registration statement. The SEC does not block registration statements.
There are many things the SEC does not care about during the review process. So we’ve included the answers to many “Will the SEC care if …” In most cases, no matter what you think might make it impossible to go this public using the direct filing route, the answer is “No.”
The Authors’ take on Reverse Mergers
We are not anti-Reverse Merger, as some have alleged. We just think before you go pay hundreds of thousands of dollars for a public shell and go public through a reverse merger, you should carefully consider all other IPO Alternatives. Of course if you are going to get funding when the Reverse Merger closes (not later as some promise but almost never deliver), then you absolutely should consider this method. Other facts and circumstances may warrant using a Reverse Merger as well. We urge you to consult with your securities professional before you make any decision.
You Can’t Just Create Your Own Trading Public Shell
You cannot create a shell without free-trading stock; that is, stock which can be sold free and clear of all SEC restrictions upon resale.
- The SEC doesn’t allow you to register stock in a shell company under the 1933 Selling Stock Act. Thus, you cannot obtain free-trading stock by filing a registration statement with the SEC.
- Under Rule 144, the SEC doesn’t allow stock in a shell company, which is sold in a private offering, to be free-trading without registering such stock with the SEC.
- You probably can’t raise $5,000,000 and have a stock price above $5.00 per share which allows you to be a SPAC, as we discuss in this Chapter.
Why a “blank check company” doesn’t work
Even though the company is created through a filing with the SEC under the 1933 Selling Stock Act, the SEC has a specific rule, Rule 419, which provides that, even though the shares are registered, stock in this kind of a shell cannot trade so long as the company is a shell company.
Why a Form 10 shell doesn’t work
A Form 10 shell has no free-trading stock because it has no stock registered under the 1934 Filing Reports Act. So to trade you have to go through the entire S-1 registration process described above, including audited financials, in order to trade. They may look like a great deal because they are priced much lower than true OTC Market Trading Shells. They sound good because they are “registered with the SEC.” But in general they can be complete waste of your money (unless you just want to be SEC reporting and not OTC Market trading). We strongly urge you to contact an SEC professional before you potentially waste tens of thousands of dollars on something that does nothing for you.
Why a phony business plan Footnote 32 Shell doesn’t work
Although this shell has free-trading stock because it was created through a filing with the SEC under the 1933 Selling Stock Act, the SEC has stated in Footnote 32 that it is illegal to create a shell in this way.
Use Extreme Caution: Due Diligence in Reverse Merger Transactions
Due diligence is a key element in any reverse merger transaction. If there are problems with the shell in the reverse merger, you shouldn’t do the deal. However, the basic difficulty in reverse mergers is that you can never really know what happened in the shell’s past. There may be skeletons hidden so deep in the closet and so far off the record that you can never find them – no matter how long and hard you look.
In this Chapter we’ll give you some tips on what to look for if you want to buy a Public Shell and go public through a Reverse Merger
Crowdfunding is not like fundraising on charitable contribution sites like Kickstarter or Indiegogo.
There is a significant difference in the relationship between you and contributors who give you money on these and similar fundraising sites and investors who are purchased stock and/or loaning you money you must pay back on Crowdfunding sites, when they are legally permitted.
- You have no legal relationship with or obligation to a Contributor on a Fundraising Site.
- You have a direct legal relationship with and numerous legal obligations to a Shareholder/Lender on a Crowdfunding site. If you sell them equity, like common stock, they become stockholders. You have a legal fiduciary duty relationship created with them as your shareholders. This has many implications under the laws of the state in which your company is incorporated. If you sell them debt, they are a lender and you have the same obligations to pay the money you borrow back to them as if you’d borrowed the money from a financial institution such as a bank.
One other issue you may forget: Suppose you sell stock to 500 people. A year after you close your funding, many now call you and ask, “I want to be able to resell my shares. What market can I sell them on? I take them to my broker/dealer and my broker/dealer tells me there is no market. And the broker/dealer won’t deposit my shares. How do I resell them?”
Do you have an answer? This is an issue you must discuss with a securities professional before you Crowdfund.
In our opinion, it’s not Crowdfunding itself but what you do, or more importantly don’t do, before and after you Crowdfund that will present significant problems for you.
Other Capital Raising Issues
We’ll explain why, no matter what anyone else tells you , only licensed FINRA broker/dealers can legally raise money for you. We’ll tell you why and also tell you how you and the other officers and directors can raise money for you without violating the law.
For those of you looking to raise money, be very weary of people claiming things like they have a database of 38,000 potential investors or other money sources you can access or they will get to invest in your company – AFTER YOU PAY THEM FIRST. We’ve never met anyone who actually found that these people delivered on their promises.
Required Sec Filings After You Go Public
After you go public, the SEC requires you to file various reports. You probably know about Forms 10-K and 10-Q. But do you know all the things you may do that require you to file interim reports on Form 8-K?
Have you heard about Regulation FD?
This regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information.
The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional. For an intentional selective disclosure, the issuer must make public disclosure simultaneously. For a non-intentional selective disclosure, the issuer must make public disclosure promptly.
Under this regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
THIS MEANS: Unless you have a confidentiality agreement with someone, including potential investors in your company, you may not disclose to them in any manner information which is not already public.
This Chapter is written primarily by a non-lawyer, our Trading and Markets co-author. It’s not enough just to go public and meet technical SEC filing requirements. If you want to succeed after you go public, this Chapter will tell you what you need to know. As a bonus, it’s you won’t find anywhere else, including:
Financial Branding, Corporate Communications and Selling or Creating a Robust Market for Your Stock
After you go public, you still have work to do other than just make your required SEC filings. You want your company to get noticed by the market. You want your stock to trade at the highest possible price with the highest possible volume. This Chapter’s purpose is to discuss methods on how to do that through earning market support, creating shareholder value and managing shareholder and potential investor expectations, and understanding more about how stocks really trade. Understanding the following things will help you reach your goals after your company goes public:
- Duties of a public company;
- Market mechanics;
- How to attract investors and trading;
- How to execute a strategic marketing and communications plan if you are trying to raise money;
- The importance of investor relations;
- How to use shares for acquisitions; and
- How to use stock to pay employees.
Even if you just get the book to read this Chapter 7 and nothing else, you’ll find a treasure trove of information that you just won’t get from anyone else.
“Let’s just use stock or stock options to pay people instead of cash,” you may say.
Although stock-based compensation has the advantage of preserving your company’s cash, it may have unintended or unknown consequences both to your company and to the recipient of stock-based compensation. Make sure you fully understand these consequences before you use your stock as an alternative to cash for compensation purposes.
There are two primary issues we discuss in detail:
- Issuance of stock or exercise of stock options issued as compensation can create a big income tax bill for the recipient.
- Your company may have significantly increased audit cash expenses or big non-cash expenses that significantly lower your income you report to the market and your shareholders.
Many types of mergers, share exchange and other business combinations involve the issuance and/or receipt of your stock. This Chapter is not about the legal requirement, mechanics and documents and agreements required in a mergers, share exchange and other business combinations. That would be a whole other book. This Chapter discusses only the implications of stock issuance and/or receipt in these transactions as covered under relevant SEC laws, rules and regulations.
Using your stock instead of cash as currency in business acquisition or combination transactions certainly has advantages, but beware of SEC rules that may require you to file an SEC Registration Statement in connection with the transaction and also rules that may inhibit the recipient’s ability to resell their stock after the transaction closes.