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By Laura E. Anthony, Attorney at Law
Founding Partner, Legal & Compliance, LLC

West Palm Beach, FL – Thanks in part to numerous, well-capitalized, well-managed, and aggressive Chinese companies seeking public status on the Over the Counter Bulletin Board (“OTCBB”), reverse mergers hardly skipped a beat for the first half of 2009. In fact, if the fourth quarter of 2009 is any indicator of what is to come in the next 12 months, reverse mergers with OTC Bulletin Board Companies appear to be stronger than ever. In addition, reverse mergers for domestic companies are on the upswing as well.

Two Ways to Go From Private to Public

There are several specific constraints, guidelines and time frames that must be adhered to when taking a private company public on the Over the Counter Bulletin Board (OTCBB) trading system. The process of going from private to public is generally accomplished in one of two ways;

The private operating business can locate a clean domestic shell, one that is already trading on the OTCBB, and then merge into the reporting public company. The merger can be accomplished via several methods but the most common being either through a reverse merger or an asset purchase. In a reverse merger the private operating entity merges into the public shell with the private operating entity being the surviving entity. An asset purchase is completed and the public reporting shell purchases the assets of the private operating entity, usually using newly issued common stock as the consideration for the transaction.

The IPO

The second method would be for the Company to directly go public via an initial public offering (“IPO”). Generally to initiate an IPO a company will file as S-1 registration statement with the Securities and Exchange Commission (“SEC”) to sell shares of their common stock either directly (a “Direct Public Offering” or “DPO”) or indirectly by using the services of an underwriter.

Following the completion of the offering the Company must initiate a working relationship with a licensed broker dealer who in turn files a Form 15c-211 (the 211 process) with FINRA (formerly the NASD) in order to qualify to be quoted on the OTCBB. A Form 15c-211 can be filed prior to the completion of the offering.

15c-211 Process
The 211 process requires a Company to provide current adequate public information to the broker dealer, as defined in the Securities Exchange Act Rule 15c2-11, prior to that particular market maker quoting the securities of the Company or making a market.

After the initial market maker has quoted the securities of the Company for 30 consecutive days other market makers may quote the securities of the Company without submitted a new 211 application. This is often referred to as being “piggy back qualified”.

Of the two aforementioned methods, the weapon of choice still appears to be the reverse mergers with a trading public shell.

Reverse Mergers and Public Shells

The private company needs to locate a clean, trading OTCBB shell in order to initiate the reverse merger process. Working with legal counsel from as early on in the process can save inordinate amounts of time and money because it is easy for the reverse merger to become bogged down or completely derailed if the private company seeking public status pursues inappropriate shells down blind alleys.

A clean OTCBB public shell is one that to name a few but not all indicators: is current in its reporting obligations under the Securities Exchange Act of 1934, as amended; has no or minimal debt; has no outstanding unresolved SEC comments; has not had regulatory problems in the past; has no current or foreseeable regulatory issues; is not the subject of current or potential litigation; has not had frequent changes of control, name changes or changes in transfer agents.