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Let's assume that
shell insiders have 3 million shares and buyer pays to take down these shares at an average price of US$4/share. The investor relations costs to create buying will be about US$750,000. At this point, reverse merger is still a good deal for buyer because they have spent a total of about US$950,000 against a registration cost of at least $1.7 million. They have saved US$750,000.
MANAGING THE FLOAT
The stock held by public is called "the float." As a general rule, float trades every quarter. If public can't sell their shares in any quarter, share price drops. If buying exceeds float, in any quarter, share price moves up. The three million shares of shell insider shares are now part of float. To hold US$4/share price, buyers must spend US$750,000 per quarter in investor relations' costs. In one year, their publicly traded shell will cost them US$3 million to buy shell insiders' shares and repeatedly find share buyers each quarter for resulting float. Almost always, investor relations' costs will eventually bankrupt public company. It's a downward spiral of high overhead, without offsetting income.
The reverse merger shell buyer seeking a fund or angel to do a Private Placement almost always fails. The potential investor should realize that public company will be spending more money on investor relations in year they must hold their shares than they will usually receive from their investment in public shell company. Logic and past experience correctly tells investor not to risk their money in Private Placement. The fact is less than 10% of investors in reverse merger private placements ever recover their risk capital.
A WISER PATH
If you are seeking a backdoor to becoming public in United States, it isn't buying a trading shell. Doing so is a trap that will leave your company with few options in two to three years. There is a far wiser path for CFO who understands dangers of Shell Trap. Learn it.
If you need help finding your way through backroads of public company process, you can email William Cate at: Beowulfinvestments@Earthlink.net
To contact author visit: [http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
