Reverse Merger into a public shell 

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Go public without an IPO Using an OTC Shell

Reverse Merger Information

Definition: What is a Reverse Merger

Go Public: Initial Public Offering

Reverse Merger Disadvantages and Risks

Reverse Merger Funding

Reverse Merger Investor Relations

Reverse Merger FAQ

Securities Laws Made Simple


Need for Audited Financials When Doing an IPO

or Reverse Merger to Go Public

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OTC Shell for Sale

Reverse Merger Plus



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Securities Laws Made Easy – SEC Registration

Kindly note well – this is only a summary of the relevant securities laws. It is an attempt to give you what you need to know in a simple, readable format. You must consult qualified securities attorneys that are experienced in this niche of the securities laws.

First, there came the Securities Act if 1933 which provided that all new issues of securities have to be registered (with certain exemptions) and created the SEC, the Securities and Exchange Commission. The Securities Exchange Act of 1934 was then enacted to cover trading in the markets.

Therefore, under the Securities Act of 1933, if you are going public, you have to register with the Securities and Exchange Commission.

If you were already trading, you filed disclosure statements of what is going on in the company with the SEC under the Securities and Exchange Act of 1934.

However, if you merge your company with a company that is already trading, in other words make a reverse merger with a public shell, you originally did not have to register.

As some unscrupulous people used this to get around making disclosure so they could fleece investors, the SEC came out with a rule providing that if you are going to merge with a public company registered with the SEC, you have to make a filing right away that makes essentially the same disclosure as you would if you were filing originally with the SEC.

Companies that file with the SEC generally require two years of audited financial statement certified by an accountant registered with the Public Company Accountancy Oversight Board (PCAOB).

Companies that are filing with the SEC trade in the recognized stock exchanges or in the OTC BB. However, there is also a market for companies that do not file with the SEC, the Pink Sheets.

Pink Sheets

The above covers companies that file with the SEC. However, some small companies do not have to file with the SEC. They trade in market known as the Pink Sheets.

The rules of the Pink Sheets encourage, but do not require, them to make disclosures but many do not. This lack of disclosure allows abuses and makes this a very risky market.

Companies that do not file with the SEC can use Regulation D, Rule 504 to raise money privately. The stock sold under the rule is only allowed to trade in certain very limited circumstances. Purchasers of this private stock generally will look to sell their stock under Rule 144. (See below).

Companies that want immediate trading for their stock can merge with Pink Sheet shells, but they should be advised the SEC can stop trading in their stock if it feels that the lack of disclosure is endangering investors.

Regulation A

Regulation A of the Securities Act of 1933 allows small companies to raise up to $5 million without audited financial statements. The stock can trade in the Pink Sheets. The company files with the SEC and while the SEC can decline to review the filing, it generally reviews it in the same fashion as if it were a regular filing to go public.

Getting Your Stock Trading -- FINRA, Form 211 and Market Makers

If you do not merge with an already trading shell, to get your stock trading, no matter how you became public, you have to get the stock quoted on the Pink Sheets, OTCBB markets or on a stock exchange. For small companies this means getting the stock trading on the Pink Sheets or OTCBB.

To have a trading market you need one or more market makers. This market maker must be a broker-dealer who is a member of FINRA and registered with the SEC.

To start trading, one market maker must file a Form 211 with the Financial Industry Regulatory Authority, FINRA, and make a market in your stock.

A FINRA rule says that market makers are not supposed to charge any fee for filing a Form 211. We polled all the market makers listed on Pink Sheets last year and all of them but one wanted a $10,000 “due diligence” fee or some such to file the Form 211. Given the expense and time involved, and the likelihood that filing for a fraudulent company is a bad reflection on them, we can hardly blame them for wanting to do due diligence. Other than that, we believe a market maker should be willing to file a Form 211 if it believed that substantial business would develop in trading the stock. Market makers make money mainly on volume. 

FINRA processes the Form 211 and requires that there be enough non-affiliated shareholders with free trading stock to make trading in the stock possible. They do not want this stock to be concentrated in a few hands.

You will have to document in detail how this stock was offered and sold and prove that this was in full compliance with all the securities laws and rules of the the SEC and the states. This stock has to bought in a bona fide transaction for investment and not simply gifted to the shareholders. 

You will have to prove that your company is not a shell as defined in Rule 144. You will have to show that you are in a bona fide business with assets and at least be a development stage company. 

You will have to produce a shareholder list from your transfer agent clearly showing free trading stock and an opinion of your securities lawyer that this stock is in fact free trading stock and not restricted. 

FINRA may stop the Form 211 if you have any connection with unsavory characters or if there is anything else they do not approve of.

If FINRA does not approve your Form 211, you have the right to appeal to the SEC. We would expect that any such appeal is likely to be unsuccessful.

Getting the right documentation, getting a proper list of shareholders, and selecting a market maker are important steps in the process.

Rule 144

Rule 144 is a rule that allows investor who have held fully paid for stock for six months for registered companies (12 months for Pink Sheet companies) to sell their stock in the public market subject to certain conditions and restrictions.

If you buy a shell company that has ever been a shell under Rule 144, you cannot use Rule 144.

Therefore, a merger with a company that is not considered a shell company for purposes of Rule 144 is much preferred. If you are stuck with stock in a shell company where you cannot use Rule 144, you may not be able to market your stock.

This is further discussed in my blog posting, What is a Shell Company?

Click here for the next important section, Self-Registration

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About Us John Lux

John Lux, has been an OTC market maker in new issues, shells and other companies, a security analyst, an investment banker, and attorney. He is an investor in venture and public companies.

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The Venture Capital Process or Why VCs Lose Money

Why Go Public?

Why Go Public, Make an Initial Public Offering, or IPO, or Reverse Merger

What Types of Companies Should Go Public, Make an Initial Public Offering or IPO

How to Sell the Underwriter on Your Initial Public Offering or IPO

The SEC Process for Initial Public Offerings or IPO

Reverse mergers and other ways to get your stock trading in the public market

Problems with Venture Capital and Venture Funding

Marketing Stock -- Reverse Merger -- Public Offering

Need for Audited Financials When Doing an IPO or Reverse Merger to Go Public

Traps for the Unwary When Doing an Initial Public Offering, IPO, or Private Placement

Stops on Going Public, Making an Initial Public Offering, IPO, or Reverse Merger

The Rocket Ride -- Going from Start Up, through Seed Money, Venture Capital, IPO

SEC Rules and a Reverse Merger instead of an IPO

Public Shells or OTC Shells for a Reverse Merger

Problems with using a Public Shell or OTC Shell to Go Public with a Reverse Merger

New Venture Funding

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An Alternative to Venture Capital Funding - Give Control to the Company

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OTC Shells and Reverse Mergers -- The Aftermarket is the Key

Rules For Securities Offerings and Private Placements

Registration Instead of a Reverse Merger to Go Public

Venture Capital Rocket Ride

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