Securities Law Attorney- How To Go Public On OTC Markets? The two most common ways to go public is either through a reverse merger or an initial public offering. An initial public offering in turn can be either underwritten by an investment banker that acts as bookrunner or self underwritten by the issuing company. In addition, the offering can be a traditional S-1 offering or a new Regulation A+. I have already filmed a series of LawCasts discussing both reverse merger transactions and Regulation A+ offerings. Today is the first in a series that will be discussing self underwritten initial public offerings – which are often referred to as a direct public offering – a DPO.
First I want to give some background and basic overview of the marketplace today for going public transactions. Over the past decade the small-cap reverse merger and IPO. The decline was a result of both regulatory changes and economic changes. In particular, briefly, those reasons were: (1) the recent Great Recession; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments, including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems clearing penny stocks with broker-dealers and FINRA’s enforcement of broker-dealer and clearinghouse due diligence requirements related to penny stocks; (5) DTC scrutiny and difficulty in obtaining clearance following a reverse merger or other corporate restructuring and, significantly, DTC chills and locks; (6) increasing costs of reporting requirements, including XBRL requirements; (7) the updated seasoning requirements imposed by NYSE MKT and NASDAQ, including a twelve-month waiting period prior to qualifying for listing following a reverse merger; (8) the enactment of the Order Handling Rules in 1997; (9) Regulation ATS in 1998; (10) the enactment of Decimalization in 2001; (11) Sarbanes Oxley in 2002; and (12) Regulation NMS in 2006. However, despite all of the adversity to small businesses going public, the U.S.’s optimistic, entrepreneurial, capitalist nature forges forward and with the enactment of the JOBS Act in 2012 and continued political pressure in support of small business capital formation, the reverse merger and IPO/DPO market has been making comeback.
The fact is that the vast majority of new jobs in the U.S. are created by early-stage enterprises, and the ability to access capital markets is critical to the growth and sustainability to these enterprises. To the contrary, mature enterprises engaging in mergers and acquisitions tend to reduce jobs as they realize economies of scale, combine administrative functions and eliminate duplicate jobs within the merged entities or even close down underperforming divisions altogether. Both Congress and the SEC recognize the importance of supporting small business capital formation and going public transactions to the general health of the U.S. economy and job creation. In addition to the enactment of the JOBS Act, the SEC created the SEC Advisory Committee on Small and Emerging Growth Companies to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”
In addition, both the SEC and Congress are exploring and supportive of Venture Exchanges which I have written about and will speak about in future LawCasts. Various other analytical studies and programs have been initiated as well, including the new pilot tick size program. Moreover, the general economy has improved; the backlash from the Chinese company reverse merger issues has dissipated; although still an issue, many have found workarounds to the Rule 144 issues using Section 4(a)(1) and 4(a)(1½) exemptions; and DTC chills have become less problematic as the DTC has established usable pre-notice and corrective procedures for issuers. Despite difficulties, the fact is that going public is and remains the best way to access capital markets. Public companies will always be able to attract a PIPE investor, equity line or similar financing. For cash-poor companies, the use of a trading valuable stock as currency is the only alternative for short-term growth and acquisitions and the attraction of key executives. At least in the USA, the stock market, day traders, public market activity and the interest in capital markets will never go away; they will just evolve to meet ever-changing demands and regulations.