Otc Shells and Reverse Mergers --the Aftermarket is Key
Small, growing companies that are private and need to raise money merge with an OTC shell in a reverse merger. They hope that the stock price will be high in the public market and that they can then sell stock privately, perhaps in a classic PIPE deal. The price in the private deal is usually a discount to the public price.
Unfortunately, whether or not the company does a PIPE deal, the stock performance of the new public company after a reverse merger with a public shell is often dismal. The usual reverse merger stock chart looks like a profile of a waterfall as the stock starts trading on high expectations, only to sink to near zero bid after a time.
Many reasons exist for a bad aftermarket stock price. First, the shell promoters will almost certainly be selling their stock. This stock will be a substantial part of the company. Even making an agreement to lock up their stock may not help much if they have given stock to others or kept stock in other accounts that are not part of the lock up agreement.
Next, the market makers may have accumulated the stock when it is down. When I was making markets in over 300 stocks, inevitably one of them would sink to next to nothing. When the stock went to a very small bid, I would accumulate the stock on the chance that the company would later be used in a reverse merger. As the price was extremely low, it cost me little to accumulate a large number of shares. When the reverse merger was announced, I would be eager to sell my position. After selling the position, I would cease making a market in the stock. So the company that anticipated having me as a market maker lost on both counts - I was a seller and I left the market.
There were also other market makers who specialized in low priced stocks. Unlike our firm, they had limited funds to take positions in stocks. These dealers supplied little if any liquidity in the market. When the stock went up, they would also sell and possible cease making a market.
Thus, many reverse merger companies that thought they were buying a shell with market makers were in fact getting no real market.
The only reason for a market maker to trade a stock is because he believes he will see a volume of trading that will allow him to profit from the spread. He knows that unless the company engages in aggressive investor relations, there will be no volume in a small company's stock and the price will go down. No new buying = price declines.
This bring us to the next reason reverse merger companies have bad aftermarkets - they have been told by their attorneys, their financial consultants, and the people who sold them the shell that once they are public, the company will have unlimited access to money.
In actual fact, all the company gets is an exit strategy that may be used to entice investors. You still have to grab an investor, wrestle him to the ground and extract his wallet. As the attorneys, the financial consultants, and the reverse merger company all make their money when the shell deal closes, they somehow neglect to explain what happens after the close. That is not their problem; it is yours.
The final reason reverse merger companies do not do well in the after market is the most evil. They may fall victim to short sellers.
Wall Street, as everyone should be aware, is not a place where mercy reigns supreme. It is a place inhabited by sharks. Sharks prey on the weak and the unwary.
Short sellers know that small companies need to have a continuous stream of money to grow. Growth requires constant new money, even profitable growth.
You need to make sure the stock price is up to get your money. When the shorts raid the stock, they know that pushing the price down can destroy the company. A low stock price not only stops the company from getting the money it needs or getting the money it needs at a good price, it tells everyone that the company is weak and likely to die. Customers, employees and investors will exit and avoid a company with a low stock price. Not knowing how to fight off short sellers can be deadly.
In sum, doing a reverse merger without a complete plan for the aftermarket is a trap for the unwary. A reverse merger company that is sold a bill of goods about a reverse merger being the total solution is likely to find its stock price headed down. You must have an investor relations and fund raising plan that includes recruiting investors and market makers and fighting off attacks by short sellers.
About the Author
The author, John Lux, has been an OTC market maker in new issues, shells and other companies, a security analyst, an investment banker, and attorney. He is a principal in several venture companies and private equity funds. You can learn more about reverse mergers, going public, raising money and developing a market for your stock at John Lux's website => http://www.reverse-merger.info and you can contact him there.
Input needed for Airsoft Gun Selection?
Got two offers up on the Table.
A M16a4 with Tokyo Marui internals and a Classic Army Shell. Shooting around 330 FPS, Going for 175 with Mag and Battery.
The Other...
M16a2: Tokyo Marui through and through, Upgraded to shoot up to 400 FPS.
Both are used, though tested and guaranteed by a very trusted local seller.
Thanks for the input.
I'd go with the M16A4. CA has great externals, but the internals, not so much. TM's have great accuracy, but as far as anything but the hop-up unit goes, I'd rather have a stock JG.
On the M16A2: TM only manufactures springs that fire up to 1J of kinetic energy with .20's. If he's telling you all the internals are TM, he's lying. If all the internals but the spring are made by TM, it's going to die. The upper receiver is also going to have a lot of wobble.
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