Raising Capital

Raising Capital is one of the largest hurdles developing companies have to overcome. One tool they have at their disposal is the Reverse Merger. This transaction is done by a private company reverse merging into a public "shell" company that no longer is operational. The shell has basically gone out of business because its business model didn't work and it ran out of funds. Since it is a public entity, however, its stock symbol still exists and it still has shareholders. Unfortunately, the stock probably rarely trades.

Management of the public shell usually looks for a funding group that wants to buy a controlling interest in the shell and reverse merge a private company into the public shell. One group that helps private companies with such a transaction can be found at Reverse Merger Funding. Through its hedge fund, LeadDog Capital L.P., they can fund a reverse merger through a private placement.

These types of funding transactions have become very popular over the years. A Reverse Merger, if done properly can provide a quicker alternative to going public and raising capital than some other to access the capital markets.

One other tool for companies to consider, although not commonly used, is Regulation A. It was enacted by the U. S. Securities and Exchange Commission (“SEC”) to help developing companies that are trying to Raise Capital. It was enacted as an offering exemption to allow companies to raise capital by selling equity, such as common stock. Regulation A is an exemption that allows companies, public or private, that meet certain terms, conditions and disclosure requirements to make a public offer or sale of securities to raise capital.

Most companies that use this exemption to sell their securities for raising capital are either private companies that will likely seek a public listing in the near future or are already public and listed on the over the counter Pink Sheet market. It is not available to fully reporting companies that are on the OTC Bulletin Board.

The aggregate offering price permitted under Regulation A cannot exceed $5,000,000, including no more than $1,500,000 offered by all selling security holders, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities in reliance upon Regulation A. No affiliate resales are permitted if the issuer has not had net income from continuing operations in at least one of its last two fiscal years.

There are a few different financing structures that companies can use to sell their securities in a Regulation D private placement or Regulation A offering. They can structure the offering as a simple common stock offering; a convertible preferred offering in which the preferred stock is convertible into common stock at a fixed price; or a unit offering in which common stock or convertible preferred stock is sold together with warrants.

As you can see, Reverse Mergers, Regulation D private placements and Regulation A can be very useful to private companies that are in the process of raising capital to grow and expand. If you want to get more information on Raising Capital Through Reverse Mergers, visit this link Raising Capital through Reverse Mergers.

If you like to get more information about using Regulation A, visit this link Regulation A.

It is important to give careful and serious consideration to the structure of your offering. Take into account the amount you intend to raise and what your use of proceeds will be. Also, think a few steps ahead, like in a chess game, to see what you may need to raise in subsequent rounds of financing. What will your likely use of proceeds be at that time? Be sure to obtain competent legal advice before undertaking to raise capital through Regulation A, Regulation D or any other offering of securities. There are numerous regulatory requirements such as state “blue sky laws” and other state and federal regulations that must be complied with.

Give me a call if you have any questions about Reverse Mergers or Regulation A offerings. I can give you a free initial phone consultation. Joseph B. LaRocco 203-966-0566