Reverse Merger With a Public "Shell"

A "reverse merger" is a method by which a private company goes public. In a reverse
merger, a private company merges with a public company with no assets or liabilities.
(The public company is also called a "shell" corporation). The publicly traded
corporation is called a "public shell" since all that exists is its corporate
structure. By merging into such an entity, a private company becomes public.

The Private company merges into a public company and obtains the majority of
its stock (usually 90% or more). The private company normally will change the
name of the public corporation (often to its own name) and will appoint and
elect its management and board directors.

The advantages of public trading status, which are outlined in greater detail
below, notably include the possibility of commanding a higher price for a later
offering of the company's securities. Going public through either a reverse
merger or a registered spin-off (described below) allows a private company to
go public, typically at a lesser cost and with less stock dilution than through
an initial public offering (IPO).

In an IPO, the process of going public and raising capital is combined. In
a registered spin-off or reverse merger these two functions are unbundled -
a company can go public without raising additional capital. Through this unbundling
operation, the process of going public is simplified greatly.

The Private Company which has gone public obtains the benefits of public trading
of its securities, namely

• Increased liquidity of the ownership shares of the company


• Higher share price and thus higher company valuation


• Greater access to the capital markets through the possibility of future
  stock offerings.


• The ability of the company to make acquisitions of other companies using
  the company's stock.


• The ability to use stock incentive plans to attract and retain key employees
  


• Going public can be a part of a retirement strategy for business owners.
  The benefits of going public through a reverse merger, as opposed to an IPO:
  


• The costs are significantly less than the costs required for an IPO.


• The time is considerably less than that for an IPO.


• Additional risk is involved in an IPO in that the IPO may be withdrawn due
  to an unstable market condition, even after most of the up-front-costs have
  been expended.


• IPO's generally require greater attention from top management.


• While an IPO requires a relatively long and stable earnings history, the
  lack of an earnings history does not normally keep a privately-held company
  from completing a reverse merger.


• There is less dilution of ownership control.


• The company does not require an underwriter.


• You will receive a higher valuation for your company.

Once a company is taken public through a reverse merger, or a registered spin-off,
the financial markets hold the following future prospects in the capital markets
for the newly public corporation:

• The market value of a public company is often substantially higher than
  a private company with the same structure in the same industry.


• Capital is easier to raise for public companies because the stock has
  market value and can be traded.


• The public corporation may be used for special purposes, such as qualifying
  as a category two company for overseas offerings pursuant to Regulation
  S.


• The public trading price of the public company's securities serves as
  a benchmark for the offer price of a subsequent public or private securities
  offering.


• Acquisitions can be made with the stock since publicly traded stock is
  viewed as currency for mergers and acquisitions.


• Form S-8 stock can be issued for consultants.

It is essential that public companies, especially newly public companies,
actively maintain and manage a financial communications program.

A newly public company would be well-advised to invest in consulting services
to plan and execute a strategy for building and maintaining an interest in
your company within the financial community. Consultants are available to
assist the public corporation in providing corporate relations services intended
to increase awareness of your company on Wall Street.

Reprinted by permission:

Robert Bailey

Columbia Funding Group

Box:506 Sonora Drive

McPherson, KS

67460 USA

(316)-241-8865

(316)-241-6296 FAX

rdb@mkbs.net

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