Looking for Mr. Good Guy

Some people only view reverse mergers with an eye on the negatives – the "bad guys" and unsavory who exist in all corners of Wall Street but are associated frequently with reverse mergers. As I discuss in my new book Reverse Mergers, there are 11 signs to look for when trying to make sure a shell player or investment banker is legitimate:

• No Compensation – Principals, officers and directors of the shell should not be compensated for performing their functions.
  
  
• No Unnecessary Expenses – A shell should not need to pay rent or hire a public relations firm.
  
  
• Limited Fundraising (if any) at Reasonable Valuations – Any monies raised should be at a fair valuation and should be used solely to keep paying lawyers and auditors for SEC filings and related expenses (which should not exceed $25k-$30k per year).
  
  
• The Right Type of Shell – The shell should either have been a true, legitimate former operating business that was not intended to be stripped out of the shell or cease business, or was formed as a shell under Rule 419 or as a Form 10-SB shell.
  
  
• No “Bad Boy” History – Deal players should have nothing in their background, even if long ago, indicating criminal behavior, regulatory problems or a propensity to being involved in lawsuits.
  
  
• Proper Insider Reporting & Trading – The control shareholders and officers have not traded heavily in the stock, have fully reported their ownership and trading activity, and there is no indication of trading leading up to the announcement of a deal.
  
  
• No Inordinate Time Pressure – Everyone wants deals done quickly, but a legitimate player understands the need for a private company to do its due diligence and negotiate the merger properly.
  
  
• Backing Up Reps & Warranties – Good guys will at least discuss the possibility of personal guaranties or holdbacks to back up representations and warranties
  
  
• Good Advisors – Ideally the deal involves well-respected and well-known attorneys, auditors and investment bankers
  
  
• Due Diligence – An investment banker will insist on proper due diligence before completing the transaction
  
  
• Broker-Dealer Registration – Ideally, if the bank involved is raising money, then they should be an NASD-registered broker-dealer.