Reverse Merger, IPO Or Direct Public Offering (DPO), Which One Is Right For You?
Whether you're a business owner looking for a way to go public with your company, or an investor desiring a greater return and more transparency when it comes to equity shareholder value, you’ll find the information and tools you need in this blog post.
The Reverse Merger is the most common method of going public, DPOs require significant upfront expenses and regulatory compliance hurdles, but offer tax benefits for investors. Ultimately, it's an individual investor's preference as to which path they feel better suits their investment goals. That being said there are some things worth considering before making your decision such as cost of shares offered by different methods of going public.
The most recent financial numbers for the reverse merger, IPO, and direct public offering show that the exit costs for private companies involved in a reverse merger remain high. The Direct Public Offering (DPO), which is similar to an IPO in that there is a public offering of stock, but has no prospectus being filed with the SEC has proven to be the most optimal option for private companies.
A DPO offers immediate liquidity for well funded companies who want to raise cash. The private investors are able to get a direct piece of ownership in the company without waiting for an IPO. A successful private company can save a lot of money and time by pulling off a DPO, while an underfunded company can actually lose money. The direct public offering costs less than an IPO due to the fact that it does not need to spend as much on underwriting fees.
A reverse merger can be extremely expensive for companies who are unable to raise enough capital for the transition, making them susceptible to dilution of their stock value. This is why many private companies who choose this method seek outside investors prior to the reverse merger. In addition, in most cases, the reverse merger takes several months from start to finish which means less time is spent generating revenue, and more time and money are spent on executing paperwork and going through government filings.
In a DPO, the company already has a product and/or service that the public wants to invest in and that is what will ultimately drive the share price. With a reverse merger, the company brings a capital injection with no corresponding product or service. These private companies may need to spend extra time and money on marketing before they come out to market with their product but ultimately their needs will be met by existing investors or venture capitalists.
Private companies that choose to go through a reverse merger can end up without any liquidity at all if it does not go as planned with technological issues, governmental red tape, or investor push-back. This leaves those who have invested in the company without any value and no option for a refund. In most cases, however, the process is smooth and goes relatively quickly.
The biggest drawback to a DPO is that in order to get your shares, you must pay a large up-front fee for the number of shares you want to be sold and the price to be paid per share. Therefore, investors will not want to purchase as many shares as possible which can decrease the overall share dilution potential of the stock offering. In addition, a DPO is not an issuance of stock, which means that you will not receive dividends; instead your dividends are being held by brokerage companies or other investment entities.
The direct public offering, on the other hand, requires no up-front fees in exchange for a portion of the company stock. Instead, after an appropriate amount of time has passed since the company was incorporated, an IPO is all that's required to file a registration statement with the SEC which will finally release the shares into public ownership. The public will only receive a percentage of each share multiplied by their original investment. This can be very misleading to consumers who are purchasing shares not knowing that they are not receiving dividends.
It is important to remember that no one type of public offering is superior to the other, and that each has its advantages and disadvantages. The decision on which method to go with is ultimately a personal choice; it's up to you as an investor to decide what will best suit your needs.
The post Reverse Merger, IPO Or Direct Public Offering (DPO), Which One Is Right For You? appeared first on Stock Market Guru .
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Disclosure: I am/we are long SCHM.
Author: Matt Evjue CPA (Tax) and Dave Siegel David's Blog is owned by GuruFocus. Check out a few of our recent articles: 25 Stocks to Buy for Strong 1st Half Returns Can You Beat the Stock Market? 3 Ways to Take Your Portfolio to the Next Level The 3 Greatest Growth Stocks in the World Nasdaq Futures Are Back and Could Go Higher How Much Return Should Investors Expect in 2014? 5 Great Dividend Plays for 2014 Check out more from Dave Siegel. Follow him on Google+ . Originally published at GuruFocus . Reposted with permission.
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Conclusion:
SCHM is a best-in-class public company that has not proven to be growth oriented and is dominated by technology. The economic environment has become intensely competitive and we are not confident on the future viability of SCHM under current management. We believe that there are further longer-term risks to SCHM's business model, growth potential and financial performance, including the risk of regulatory pressure or complaints in the markets where it operates. This could result in the loss of customers or even put it out of business altogether. Management may also experience operational or market difficulties which decrease their ability to manage profitability.