How to Take a Company Public With Penny Stocks
Taking a company public with penny stocks can be done in one of two ways. The more traditional approach is to hire an investment bank to manage an initial public offering (IPO) of the company stock. The other method is formally known as a reverse merger, more commonly referred to on Wall Street as "backing into a shell corporation". This method avoids the expense of an IPO and eliminates some reporting requirements, but is generally seen as a method employed by companies unworthy of an IPO. For reference purposes, a penny stock is any stock that trades at $5 per share or less.
- Difficulty:
- Challenging
Instructions
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Going Public with an IPO
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Decide whether to launch an IPO or perform a reverse merger to go public. The advantages of going the IPO route are that the investment bank takes care of everything, including writing and printing the prospectus, raising the actual funds, and making a market in the stock after the IPO. The primary disadvantage of an initial public offering is the expense involved. Not only do you have to pay the investment bank their fee for taking your company public, you also have to pay for all the audits and due diligence that must happen before the IPO.
The second option is to perform a reverse merger. This is the generally less expensive, less invasive approach to going public. However, it is also viewed with skepticism by the market because it gives the impression of illegitimacy. Another disadvantage is that the vast majority of shell corporations available to perform a reverse merger are listed either on the Pink Sheets or the OTC Bulletin Board market, making them far less liquid than a stock trading on one of the major exchanges. If you have decided to proceed with a reverse merger, skip to Section 2.
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2
Audit the company's financial information. Any investment bank hired to take a company public will insist upon audited financial statements. Most banks will even give some guidance on which accounting firm to hire to perform the audit. Since everything will be reported to the SEC and must meet the minimum listing requirements of the various exchanges, it is critical to provide full disclosure. Anything short of that is considered securities fraud, and is punishable by hefty fines and jail time.
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3
Negotiate the valuation of the company. There is some ambiguity to the overall valuation of a private company. The investment bank will have guidelines that they use to arrive at a ballpark figure, but keep in mind that everything is negotiable. It is often in the bank's best interest to low-ball the value of a company going public, because that can help the stock price rise in the aftermarket. Aftermarket appreciation does not help the underlying company, however, because the only monies the company receives are the proceeds of the IPO minus the fees. It is therefore in the company's best interest to negotiate a higher valuation pre-IPO.
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4
Publish the red herring and complete the road show. When a company is going public, a prospectus is prepared detailing everything about the company, including the various risk factors involved in investing in the company. This first prospectus has a legal disclaimer stamped in red on the cover of the prospectus, and that initial prospectus is known as a "red herring" because of it. Once this prospectus is published, the officers of the company will be expected to travel to each of the bank's main locations to give a presentation to the banks employees about the company and why it is a good investment. This is known as the road show, or more commonly as the "dog-and-pony" show. This is usually completed 48 hours prior to the new issue.
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Launch the IPO. Once you receive final approval from the SEC to go public, give your bank the go-ahead and the regulators will assign a time and date that the new stock will begin trading. Once the full allocation of stock has been subscribed, you have a public company.
Going Public With a Reverse Merger
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Identify an available shell corporation. A shell corporation is just a publicly traded company that has gone out of business. Most will appear on the Pink Sheets, but you may find some still trading on the OTC Bulletin Board. They sell for a penny or two per share. The idea is to buy all the outstanding shares in the company.
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Contact the owners of the shell corporation. Keep in mind, these are defunct businesses 90 percent of the time, so the stock is just sitting there doing nothing. Many of the former owners would be happy to make some money selling their essentially worthless stock.
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Negotiate the price and buy the shell. When you find a former owner willing to sell the stock to you, negotiate a fixed fee for the outstanding stock. For example, if you have a company with 10 million shares outstanding and it is trading at 2 cents per share, that company is worth $200,000 on paper. Make the seller an offer and buy the corporation.
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4
Merge your company with the shell corporation. Once you have merged your company with the shell corporation, you take over that company's stock symbol and you are now a public company. Since you own all the outstanding stock, you may then begin to issue that treasury stock to raise money.
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