Comparing Three Ways To Go Public

Traditional Underwriting

Time:
6 to 12 months

Cost:
$175,000 to $500,000. (The company will be out of pocket at least 50% of this amount prior to completion.

Capital:
Typically raises more capital than other types of transactions.

Problems:
Underwriting may be delayed or canceled. Issue Price may be changed by market conditions or underwriter.

Reverse Merger or Buy an Existing "Public Shell"

Time:
2 weeks to 60 days

Cost:
$150,000 to $400,00

Capital:
Does not raise money but stock is now valued and tradable

Problems:
Potential "skeletons" in acquired shell. Control shareholders of operating company may receive restricted shares.

Advantages:
Typically Reverse Merger or Public Shell Merger is the quickest way to get public. Non-control investors may receive registered or trading shares.

Merge with a Brand New Flex Financial Public Company

Time:
4 to 8 months

Cost:
$75,000 to $150,000

Capital:
May raise money and stock is now valued and tradable

Problems:
None

Advantages:
Public company can be "Custom Designed" to the operating companies specifications. Shareholders of operating company receive registered shares. New corporation so no "SKELETONS" in the company. Financial expertise during the transaction. Market support after the transaction. Automatic shareholder base friendly to the "Small Cap" market.

Preparation for a
Reverse Merger or Public Shell Merger

Locate a Suitable Public Shell - Public shells can often be found by consulting with securities law firms or CPA - Audit firms that deal with public companies.

It is important to start with a clean shell: Due diligence on the public shell cannot be over emphasized, advice from your securities counsel, auditors, and a financial consultant should be utilized. As was mentioned, many shells are created for the express purpose of merging with a private company. These shells have no predecessor entities, and, as a result, little baggage in the way of a business failure or other skeletons in the closets.

Comprehensive Business Plan - Potential investors, public shareholders, auditors, securities counsel, brokers and market makers will want to see a well documented business plan.

Strong Management Team - Public investors demand strong management teams.

Convincing Marketing Plan - Public companies need the ability to show good sales and earning growth.
Product or Service - Public companies should be able to develop strong or dominant position in their business segment.
Financial Audits - SEC qualified audited financial statements for your last two fiscal years.

Experienced Securities Counsel - Your attorney must be qualified to deal with regulatory compliance, and the ongoing reporting requirements of all public companies.

Have Public Company Experience: Your company should have at least one person in senior management that has significant public company experience. Financing consultants such as Flex Financial Group, can often assist management in the complex issues of being a public company and maintaining a good relationship with the financial community. In fact, many actually have a couple of shell corporations and, upon request, can manufacture a clean public shell. A made-to-order shell without the baggage of a business failure in its background can sometimes be the way to go, but there's often a cost involved. You will most likely end up with the financing consultants as minority shareholders in the new company, holding between 2 percent and 5 percent. However, in almost any reverse merger transaction, the principals of the shell company keep a small equity position in the company going forward. Therefore, this surrender of equity is simply a cost of doing business.

Devise your financing strategy: A reverse merger is an indirect route to raising capital.

Entrepreneurs must first consider how additional capital will be raised after the deal is done. An experienced financial consultant can be very beneficial in this area.

Requirements Necessary to
Close a Reverse Merger or Public Shell Merger

Business plan of merger partner. Sufficient information to complete and file the required 8-K with the SEC.

Management information, including completion of the "Officer and Director Questionnaire," for all Officers and Directors designated by the private company merger partner.

Agreement on structure and terms of merger.

Letter of intent with escrow payment made to public company or its principal shareholders. (This must happen for the public company to cease negotiations with other merger prospects.)

Audited Financial Statement, conformed to US, GAAP for the private merger partner. The audit statements of the private company have to be consolidated with the public company's financial statements.

Agreed merger fee in escrow with the securities attorney representing the merger partner.

Consent from the majority, preferably 100%, of existing shareholders of the private company to merge or exchange their shares for shares of the public company.

Agreement for the Officers and Directors of the public shell to be replaced with the Officers and directors designated by the private company merger partner.

List of all shareholders in the private company that will make the share exchange.

Number of shares to be outstanding "post merger", and a complete breakdown of share ownership post merger. Note: It is often necessary for the public shell to do a reverse split and/or cancel shares owned by the affiliates of the public share prior to completing the merger.

Agreement on state the company will be domiciled in post merger.

Satisfaction of warranties and representations between public shell and merger partner.

Designation of securities attorneys and SEC qualified auditors that will represent the private merger partner.
Preparation of the share exchange agreement, stock purchase agreement, definitive merger agreement, and all other documents necessary to complete the merger.

Final preparation of the 8K that is required to be filed with the SEC within 15 days of closing the merger. As stated earlier this is required to contain consolidated audited financial statements, but the SEC will allow an additional 75 days to file and amended 8K with the audited statements.

It has been our experience that the private company's ability to deal with all these issues is instrumental in determining the timing in closing the merger, and the long term success after closing a reverse merger or public shell purchase.

Examples of Successful
Reverse Mergers with Public Shells

Armand Hammer, world-renowned oil magnate and industrialist, is generally credited with having invented the "Reverse Merger". In the 1950s, Hammer invested in a shell company into which he merged multi decade winner Occidental Petroleum.

In 1970 Ted Turner completed a reverse merger with Rice Broadcasting, which went on to become Turner Broadcasting.

In 1996, Muriel Siebert, renown as the first woman member of the New York Stock Exchange, took her brokerage firm public by reverse merging with J. Michaels, a defunct Brooklyn Furniture company.

One of the Dot Com fallen angels, Rare Medium (RRRR), merged with a lackluster refrigeration company and changed the entire business. This was a $2 stock in 1998, which found its way over $90 in 2000.

Acclaim Entertainment (AKLM) merged into non-operating Tele-Communications in 1994.

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