As described in detail in several chapters in
my book, many have recently discovered the benefits of the so-called “self-filing” method of taking a company public. In this case, no IPO takes place, and no merger or combination with a shell is involved. Thus there is not even a reverse merger. The company is in control of the process and timing (subject to the SEC of course) and there are other benefits, but there are drawbacks as well.
In a self-filing, a private company files either a Form SB-2 or Form 10-SB registration statement with the SEC to go public. There are different implications of each which I will describe below. Either way the SEC reviews the document and provides comments, which can take several months. In fact, I generally advise clients that the process overall should be expected to take five to eight months, but it can be both quicker and longer depending.
I believe a self-filing can only make sense if three conditions are present: 1) the company has sufficient shareholders (or can put them in prior to the filing) to qualify for trading on the OTC Bulletin Board; 2) the company is either able to wait for financing until the filing is declared effective by the SEC or can finance itself either before or in some cases during the pendency of the registration process; and 3) an experienced Wall Street hand is on board either on the management team or engaged to assist in “building a public company.” If you need a larger financing sooner, and your financing source will not provide funding before being public, a reverse merger with a public shell will probably be preferred, since it can be completed much quicker.
The benefits: as mentioned you control the process, there is no shell to negotiate with. There is no dilution from stock given over to shell shareholders in a reverse merger. Some become frustrated with the process of finding a clean shell and simply file themselves. This process also solves a big problem that arises occasionally in reverse mergers: namely, if your private company has more than 35 “unaccredited” investors, the issuance of shares in a reverse merger cannot be completed without a complex SEC filing. In a self-filing, no new issuance of shares occurs, so the problem is avoided.
The drawbacks: primarily the time delay is the biggest frustration. Also, shell promoters often help in the area of market support and investor relations after a merger, and this relationship is not present when you “do it yourself,” thus buttressing my suggestion to have an experienced player on board.
Which way to file if you are going for it? If you use SB-2 it should be because you have at least some shareholders who have held their shares for less than two years and would not have the Rule 144 exemption from registration available for trading. Registering their shares directly solves that problem. However, no private financing can be raised for the company while the SB-2 is pending. If a Form 10-SB is used, no offering is taking place, so financing can be raised. And even if shareholders have not held long enough, after the effectiveness of the Form 10-SB an SB-2 resale registration can follow immediately, and that will receive little review because the Form 10-SB will have just been reviewed.
The new Rule 415 intepretations, in our view, help self-filings, especially if a PIPE investment is completed before the filing. The SEC is more likely to view these as “completed” sales and not suggest the investor is an underwriter, and therefore a larger percentage of the company’s stock may be able to be registered for resale.
In almost all cases where a company is contemplating a reverse merger, it makes sense at least to look at whether a self-filing also might make sense.
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