joe_kruse's  Instablog

Lately there has been a few media entertainers pretending they actually conduct due diligence, in reality if they did they would know a few things about reverse mergers. 

The media entertainers choose to point out a few companies as reverse mergers and state that they have not been reviewed by the Securities and Exchange Commission.

1. First; one of these examples was not even a reverse merger – that’s just plain bad reporting….

2. Secondly; they often target companies that a) are listed on a major exchange, b) have a significant short interest, c) have raised money and filed S1 registration statements and d) abide by the financial filings regulations and auditor regulations of the SEC.  

Due to these attributes, that would mean:

1. These companies have been reviewed by the Securities and Exchange Commission similar to any IPO.

2. These companies have been reviewed by a senior exchange similar to any IPO.

3. These companies have often done a road show to meet investors similar to any IPO.

I am now confused what the difference is between a reverse merger and an IPO?  Except these companies are often smaller and need less money (which makes them unattractive due to investment bankers smaller fees involved).

It is extremely disappointing, and frustrating, that these media entertainers spout off on live television prior to doing any semblance of due diligence about the space.  Instead, they conduct a few “google” searches and claim that they have groundbreaking information for the investors, when, in reality they are truly ignorant to the very facts that they claim to “report”.

As a recap for those that are truly that lazy, or malicious. A majority of reverse mergers:

File Quarterly and Annual Financial Statements

• Reverse Mergers have to abide by the same regulations and rules as any IPO post listing.  They have to file quarterly reports, annual reports and the officers have to sign off that what they file is accurate.

PCAOB Auditors:

• Similar to companies that go public via an Initial Public Offering, companies that go public through a reverse merger also have to be audited by PCAOB auditors.

SEC Review and S1 Registration Statements:

• Reverse mergers exist due to the need for capital for smaller companies.  These companies go public via a reverse merger so that they can raise money and grow their business.  When they raise money 95% of the time they have to file S1 registration statement post financing.  These are the same statements that are filed with the Securities and Exchange Commission when a company goes public via an Initial Public Offering.

• Furthermore, often these companies actually have to file multiple S1 registrations statements during the course of a few years as they raise smaller sums of capital in multiple rounds of financing with multiple investors.  So this would mean that a number of reverse mergers actually get reviewed MORE OFTEN than a company that raises one large lump sum of capital during the IPO process as well given these financings are often with private institutions, that also means that more institutions perform detailed due diligence over a period of time, versus a basic road show that is completed during the IPO.