Every company that goes public believes it will grow and increase its share value. Often, companies run into trouble; they can run out of funding, have production problems, distribution problems, management/employee problems, lawsuits, etc. So what happens when a public company goes “out of business”? Good question.

In many cases, these defunct companies maintain their public trading status and become “shell” companies. They generally have no business operations, little if any assets and trade for pennies. Some people think that these companies are worth a lot of money. Why? Because private companies that want to become public can purchase control of the shell in order to become public itself. It works like this: a fictitious HiTech Corp. goes public at $20.00 per share but several months or years later, runs into trouble and then closes down its business.

Although the company no longer has any operating business or any assets, the remaining officers and directors decide to maintain the trading status. The stock continues to trade sporadically at pennies per share. Along comes fictitious Genetic Biotech Corp.

Genetic Biotech Corp. wants to go public but can’t find an underwriter to raise capital for the high risk business, and it doesn’t want to wait the six to nine months it often takes to go public through a Direct Public Offering. Genetic Biotech Corp. needs to raise additional capital, wants to conduct mergers and acquisitions, needs to provide stock option incentives to their employees and wants to provide their existing private placement investors with some liquidity – so they want to go public.

The officers and directors of Genetic Biotech Corp. have heard some benefits of doing a reverse merger with a public shell company. They ask around and find that HiTech Corp. closed down its operations and have a bunch of angry stockholders who originally bought stock in their IPO at $20.00 per share…and it’s now trading for just a few pennies.

HitTech Corp. management knows that their shell company is worth a lot to Gentic Biotech Corp, so they offer to sell majority control of their company. And, it only costs $500,000 plus a few million dollars worth of stock! What a bargain!

The two companies retain lawyers and they consummate a merger transaction whereby the officers, directors and shareholders of Genetic Biotech Corp. take control of HiTech Corp. The remaining officers and directors of HiTech Corp. resign and the Genetic Biotech people take over. After the merger, the public shareholders of HiTech Corp. own stock in Genetic Biotech. The public company’s name is then changed to Genetic Biotech and wholla! Genetic Biotech is now public!

Sounds easy. Is it worth doing? Read our article: Shell Buyers Beware

There’s a better way to take your company public. Contact Public Financial Services, LLC for more information.