Found this info. on the net concerning Exchange Mergers. Thought it might help give some insight on the process NETZ/ESVS in going through to accomplish their marriage. All in all Exchange Mergers take 1-3 months to complete and it looks like our company is headed in the right direction.
This post is long so you might want to print it out to read. I hope this help ease some frustration during this waiting period. Also, it might help explain why we are seeing turnover in management, offices being closed, etc.
Good Reading...
CWIII
The Exchange Merger Process
Operating companies are best, however, some start-ups can also use the Exchange Merger process. In some cases, your existing company makes an ideal Exchange Merger company when you also prearrange to acquire or combine with another compatible private company. What follows is a simplified step by step guide for executing an Exchange Merger including time frames.
Step 1
- Contact Venture Associates. Be prepared to generally and briefly outline your current status and goals for both the company and on a personal basis.
Step 2
- Have or be prepared to develop a written business plan. (You'll have to have this after the merger to instigate stock trading or obtaining additional financing. This includes historical and current financial information. Venture Associates offers consulting services for this step).
Step 3
- Within five business days, Venture Associates will identify a prospective shell company and provide you with corporate details* and total costs as well as the proposed structure for the transaction.
* Shares authorized, issued and outstanding, number of shareholders, state of incorporation, percentage and number of public company shares available, audited financial status, legal standing, and transaction timing.
Step 4
- Upon payment of an initial commitment fee ranging from $8,000 to $12,000 (plus a retainer for your legal counsel), the transfer process will begin. All working documents can be prepared and a closing date can usually be established within 20 days of mutual initial agreement.
Step 5
- Full payment** for the stock and the closing and delivery of your publicly held exchange merger company includes:
A. Minute book - updated to closing
B. Articles of Incorporation
C. By Laws
D. Resolution of transfer
E. Resignation letters from existing directors
F. Filing receipt of state of incorporation
G. Attorneys Opinion Letter attesting to the validity and condition of the public corporation
H. Certified Audited Balance Sheet
I. Stock certificates representing shares you purchase in names you designate (minimum 80% of the public company's stock)
J. Current stock transfer record (updated to closing date)
K. Computer printout and disk of shareholders (500 to 2000)
L. Copy of Form D as filed with the SEC
** Total costs for acquiring exchange merger companies depends on a variety of factors including the number of existing shareholders and complexity of the transaction. Firm pricing is provided at Step 2. Recent acquisition costs have ranged from $35,000 to $75,000. Note that this does not include legal, accounting or consulting fees on the buyers side.
MORE DETAILS
Public shells come in many sizes, current status and corporate structures. Venture Associates specializes in simple but effective Exchange Mergers. Some public shells may be partially or fully trading via the Pink Sheets, Bulletin Board, OTC or an exchange. These are more expensive to acquire, sometimes as high as $250,000 (without significant assets). Also, with more complex trading shells, it takes a great deal more time to execute the transaction and requires a
higher level of legal and accounting expertise. Acquiring trading and fully reporting shells is recommended for existing companies with multi-million dollar sales,
assets and net worth.
Recognize that after completing an Exchange Merger, technically, you have control of a publicly tradeable company. However, your stock is not yet tradeable. There are some additional hoops to go through. It is difficult to cite specific information for the process of becoming a publicly traded entity. We suggest that you contact us directly so that we can advise you as to how it pertains to your particular circumstances. Some general outlines follow.
If You Need Some Financing Prior to Trading. Commonly, companies have a need for some financing prior to instigating trading in their stock. They frequently need to build a track record of proving their product or service, obtaining more sales, building their management team, establishing strategic alliances or increasing market share. The proceeds are commonly used to offset the costs of making a secondary offering, working capital to support management's efforts to
obtain fully reporting status, and working capital in general. Most commonly, the total amount of interim financing is less than $1 million.
One of the best ways to raise less than $1 million is via a Regulation D Rule 504 private placement. Venture Associates offers consulting services to prepare the documentation needed for a private placement memorandum either before, simultaneous to, or after a merger.
Trading and Reporting Outline - If you obtain a fully reporting and trading public shell, you will have paid the price to have most of the items discussed below already in place. You will also, most likely, have a company with a current track record that reflects multi-million dollar sales, a market value of $10 million and three years of audited financial statements.
With an Exchange Merger, specially formatted for a smaller company, you trade having all the pieces in place for sweat equity and less dollar investment but with the opportunity to gain full reporting status with some additional time, effort and patience. Almost all Exchange Mergers initially strive to become a listed stock on
the Over-The-Counter (OTC) market, starting as Pink Sheet trading, as a Bulletin Board stock or listing with the Pacific Exchange and then moving up to the National Association of Securities Dealers Automated Quotation system (NASDAQ) Small Cap and ultimately, The NASDAQ National Market. Some companies opt to move over to the AMEX ECM, AMEX, or NYSE exchanges.
Since we're dealing here with the potential of Exchange Mergers, our concern is for smaller cap stocks. Assuming that you have completed a reverse merger and a Rule 504 private placement (complete with a business plan), you can then start the next steps of obtaining reporting company status and initiating a secondary offering. The money commonly raised from secondary offerings (ranging from $2 to $10 million) frequently give the company the necessary net assets to qualify as a full reporting NASDAQ company.
Obtaining Trading Status
After, or simultaneous to making an Exchange Merger as outlined above, there are some additional steps to obtain trading of your new public company's stock. The following outlines the primary topics this area includes:
STEP ONE
Complete merger acquisition
STEP TWO - (Many of these items are worked on simultaneously)
Complete business plan
Prepare and complete Rule 504 private placement offering (if needed)
Appoint attorney (securities counsel)
Restructure corporation (or establish new corporation as and if needed)
File amended Articles (as needed)
Obtain CUSIP number
Appoint Transfer Agent
Mailing to shareholders
Register with S&P, Moody's (Blue Sky exemptions)
Prepare and file Form 10 along with other disclosure documents with the SEC and NASDAQ
Appoint audit accountant
Prepare audited financials
Appoint Investor Relations Group
Assists in preparing due diligence package
Prepares promotional material
Determine Market Makers (stockbrokers)
Preforms due diligence
Receives trading symbol
Files Form 15 C-211 with NASD
Determines initial bid/ask stock price
STEP THREE
Begin trading of stock (Market Makers)
The timing and cost for the above steps varies considerably depending upon the company's needs and ability to pay the fees and expenses. Timing can be as little as one to two months from start to trading. Commonly, the time period is three to six months. Costs for steps two and three can be as little as $25,000 (depending on audit and legal expense). Commonly, the costs approximate $75,000 to $100,000.
Venture Associates can provide assistance in overseeing the above steps. Compensation is frequently taken in combinations of fees and equity.
Some Additional Comments On:
Trading Versus Non-Trading Shells - Trading shells are usually existing publicly traded companies that have fallen on hard times. Frequently, they are companies that went public some years past. They may or may not still be active companies and they may or may not be current in their SEC document filings. Most often, they have a clouded past as regards their financing activities and many can be on the verge of bankruptcy or have a large number and amount of
outstanding liabilities, both money wise and in their past business practices. While acquiring these trading companies can short-cut some of the time for the registration process, and while they may have a shareholder base in the hundreds or even thousands, the new shareholders run a large risk in assuming past problems and old liabilities. Usually, the time saved is small and the costs are usually greater. If the intention is to immediately trade on the NASDAQ, $4 million in net assets is required. Acquiring control of a "clean" trading company requires sophisticated counsel in the performance of due diligence.
Non-trading companies or exchange merger candidates such as discussed here, usually have no immediate corporate operating history. They require much less due diligence and although the SEC scrutinizes the filings, the concern is aimed more at the surviving entity than the pubic companies past.
Percent of Public Company Held - Exchange Mergers are normally structured to deliver 80% of their currently outstanding stock to the owners of the privately held company. In many cases, after the merger is completed, the private company which is now a publicly held company, will issue additional stock (and thus control a larger percentage) for additional financing, assets, acquisitions, or stock splits. However, keep in mind that some percentage (usually 5% to 20%) of the total outstanding stock needs to be "trading stock" for the public investors. Many of the existing stockholders in an Exchange Merger are owners of small amounts of stock (100 to 1000 shares).
Tax Implications - Almost all Exchange Mergers take advantage of a tax free, stock-for-stock exchange. Capital gains tax is paid when the individual shareholder sells their stock in the public stock market (usually after the minimum one year holding period for control person's). The timing of the stock sales can be determined by each individual investor to suit their investment or tax consequences. They don't have to wait for the principals of the company to decide to sell
the company.
Establishing The Initial Stock Price - The market makers, in conjunction with the company, determines the initial price for the stock. Perceived value, the sex appeal, track record and potential growth of the company have more to do with pricing than earnings multiples and current book values. Competent investor
relations and supportive market makers as well as management's ability to relate the company's potential to investors are of key importance.
On-Going Financing - Once an Exchange Merger company is trading, the company then has a number of ways to raise additional funds. Recognize of course, that management has to have a top notch plan and be capable of executing the plan. Positive results enable most companies to continue to raise capital via shareholder rights offerings, warrants, secondary offerings, institutional private placements, convert debt to equity, do stock splits and make acquisitions for stock as well as offer combinations of stock and debt. Once management has control, there are numerous possibilities to promote the increasing value of their stock holdings.
Restricted Stock - The U.S. Securities and Exchange Commission (SEC) has many rules and regulations that must be complied with. One of these regards the buying and selling of restricted stock. A "Control Person" is an entity, individual (or of the immediate family) who owns 10% or more of the stock, or who is an officer or director, and they must comply with certain trading restrictions. Although very complex, these restrictions require that these stockholders cannot freely
trade their public stock until they have held it for a minimum of one year. Restricted stock can be sold or resold privately at any time. It cannot however, be sold through a stockbroker into the public stock market until the "restriction legend" is remove, usually by a 144 transfer after the one year holding period.
Form 10 - All Exchange Merger companies should file a Form 10 and other documents with both the SEC and NASDAQ prior to the public trading of their stock. Your legal counsel will prepare and file this routine form with assistance of your audit accountants. Conditional listing approval can be requested upon filing and approval for trading is effective 60 days after receipt of Form 10, absence of comments.
Foreign Transactions - Frequently, privately held foreign companies are interested in establishing operations in the United States or obtaining U.S. public company status. Exchange Mergers are a simple way to obtain these goals. |
