As the IPO market slowed, there has been a trend to more and more reverse mergers. As you may know, in a reverse merger, an operating company merges with a public shell or OTC shell to have publicly trading stock.

Generally, there are only two reasons to for going public, whether it is done with an IPO underwriter or through a reverse merger with a clean OTC shell. The two goals are to get capital and to get a liquid market, whether the liquidity is for the principal shareholders, employee shareholders with stock options or to attract acquisitions for stock.

For the company seeking venture capital, the reverse merger or pubic shell route seemed to be the only choice.

An SEC rule issued in 2005 requires companies merging with a public shell company to file disclosure with the SEC tantamount to the disclosure required in a full-blown IPO. This disclosure is filed in a Form 8-K, called a Super 8-K. The super 8-K must be filed within four days after the merger is closed.

With this rule, there are few if any time advantages or cost advantages to a reverse merger compared with registering stock for sale.

I believe that more and more we will find companies, especially companies seeking venture capital, choosing a self-filing or direct registration to go public. In a self-filing, the company does not buy a shell but rather simply files a registration statement with the SEC. This registration statement is much the same as the super 8-K filing in information, time and expense.

The advantages of a self-filing are easy to understand. In a self-filing, you are saving as much as 20% of the stock in the operating company that would otherwise go to the shell company shareholders. You also save having to pay at the same time a large amount of cash, typically $50,000 to $750,000, to the shell promoters, in addition to your legal and accounting bill.

Shell promoters may point to the fact that the shell already has a trading market. As a former OTC market maker who traded shells, many IPOs, and many venture companies, I can tell you with authority that the trading market for any shell is weak in volume and market makers. The trading market for any decent operating or venture capital company will easily surpass any shell's trading market you care to name.

Shell promoters further point to the fact that the shell comes with many shareholders. They call this distribution. However, when you start to look deeper, ask questions, and do the math, you can discover that this also is illusory.

If the shell is 60% owned by the promoters and has another 200 shareholders, this means that the average shareholder pre-merger owns one-fifth of one percent of the stock. In the reverse merger, even if the shell shareholders receive 20% of the stock in the combined company, this means that the promoters now own 12% of the combined company and the average minority shareholder of the shell company now owns two-one hundredths of one percent (0.0002) of the combined company.

If the operating company was worth $25 million pre-merger, the shell promoters now have stock worth $3 million to throw on the market. This is a large amount of stock to take off the market before further buying will push the price up.

This will not make for a good trading market. Based on my experience, the shell promoters will do whatever it takes to get cash fast, causing the shell stock price to collapse. The minority shell shareholders may not even be aware that they have stock in a new company.

Even if the operating company does a large amount of investor relations to promote their stock, the market usually collapses. As the price collapses, all investor interest in the company usually goes with it. It is very unattractive to investors if you stock is selling at a bid of $0.0001 per share?

Consider the effect of a weak stock on the goals of doing the reverse merger. Does a weak stock price help to raise cash or venture capital? No. Does a weak stock price provide liquidity to key employees? No. Does a weak stock price help management acquire other companies for stock? No. Thus, all of the original goals of the operating company are often crushed by a reverse merger done ineptly.

Self-filing have a better outlook. Selling stock to friends, family, employees and associates of the company can create two hundred shareholders. These people are likely to make loyal shareholders. The block of stock in the hands of the shell promoters is gone so there is no overhang of stock depressing the market.

For these and other reasons, we believe that the more you look at a self-filing compared to a shell deal, the more you are likely to want to do a self-filing to achieve your goals.

Whether your chose a shell or a self-filing, be sure to get a good advisor on the transaction. Naturally, the key skills you need are those of the corporate lawyer, the investment banker, the security analyst, and the market maker. I trust that you will discover the wisdom in having such a team behind you. There are many traps for the unwary in the financial markets and mistakes can be more than expensive, they may even stop your company's development altogether.