In a merger, reverse or otherwise, two corporations join together. One becomes the “surviving corporation” while the other becomes the “non-surviving corporation.”
The surviving corporation swallows up the assets and liabilities of the non-surviving corporation and the latter simply ceases to exist, or may survive as a wholly-owned subsidiary of the new parent company.
Some reverse mergers are structured as an exchange of shares or simple asset acquisitions. The transaction generally ends up as a tax-free reorganization under IRS regulations. Whether the deal is a merger, share exchange, or asset acquisition, the net result tax wise is typically the same.In general, the tax treatment of reverse mergers is very straightforward and in almost all cases, the parties avoid the payment of a tax as a result of the transaction.
After the reverse merger closes, the company is now a fully reporting public company with the company’s shares traded on the OTC:QB (providing the company is current on its financial filings).If the company meets the listing requirements of NASDAQ or another recognised exchange, it can apply to have its share capital traded on that market platform. The company will file quarterly and annual financial reports to keep the public aware of its business activities.
Self-registration is an alternative scenario, which saves a private company the estimated $350,000 cost of purchasing a public shell company. A private company accomplishes self-registration when it (I) completes a private placement financing transaction; (II) undertakes to become a publicly-held company by means of filing a registration statement covering shares to be sold by certain selling shareholders of the company, which will make it a publicly reporting company under the Securities Exchange Act of 1934; and (III) applies for listing on a US-based exchange. The process can be lengthy, but it is as effective as a reverse-merger in the long run and more cost-effective in the short run.
In a self-registration scenario, the registration statement is the instrument by which the company goes public. As with a reverse-merger, the private company proposes a private placement financing transaction, but it then prepares a registration statement with a re-sale prospectus, which registration statement contains all disclosures necessary for the SEC to make a determination as to the company’s eligibility to go public. Once the registration statement is effective, FINRA must determine, upon review of a Form 15(c)211, whether the company qualifies to have its securities traded on a national exchange, such as the OTCQB. The registration statement will have created a public market for the trading of the company’s securities, which is one FINRA requirement.
The lengthy part of self-registration consists in the preparation and review of the registration statement on Form S-1. Form S-1 is a form for registration of securities that is filed with the SEC for the purpose of registering the sale (and/or resale) of securities of a company pursuant to the Securities Act of 1933. The information required by Form S-1 is similar in scope to that of a Form 10-K annual report filed by a public company. In accordance with SEC Rules and regulations, Form S-1 contains certain disclosure about the business of the company, its management and shareholders, as well as audited and unaudited financial information about the company.
The preparation and filing the Form S-1 with SEC takes approximately four weeks, assuming that the company has audited financial statements that can readily be presented for inclusion in the filing. Once filed, the Form S-1 will be subject to review and comment by the SEC. This process involves receiving and responding to written comment letters from the SEC regarding certain disclosure and financial matters. This review process is known to be lengthy. The number and complexity of the comments received, and the time it takes for the company to prepare an amended filing and refile with the SEC, determines how quickly the rest of the review process will take. It typically takes about 120 days from start to finish.
In any case, the self-registered or reverse-merged Company will not be eligible to have its securities traded on the OTCQB until all of the comments are cleared by the SEC, and the SEC has communicated its clearance to the FINRA examiner that is reviewing the Form 15(c)211 application for trading of the company’s securities on the OTCQB. The FINRA review will largely be due diligence and will rely on the SEC review and approval for it to get comfortable with the company. The other key issue that they will look at is the ownership of the Company and they will generally require the Company to have at least 35 shareholders owning at least 1,000 shares of the Company’s common stock. There are a few other issues in the process that are worth looking at.
Tier I vs. Tier II Offerings
Companies pursuing a mini-IPO can choose between two types of Reg A+ offerings, Tier 1 and Tier 2.