AN INVESTMENT OPPORTURNITY WITH UNUSUAL UPSIDE POTENTIAL

AN INVESTMENT OPPORTURNITY WITH UNUSUAL UPSIDE POTENTIAL

We would all like to find a company whose stock we could ride to the stars. You know, buy it for a dime and sell it for twenty dollars. That’s the stuff dreams are made of. Opportunities such as that are not very probable. But they are possible.

As private companies grow from infancy and become strong and profitable, many of them seek to expand by becoming publicly traded. This exposure, selling stock, puts money in the company coffers. Just look at Google. Their I.P.O., Initial Public Offering, at $85 per share has grown to $216 per share in a little over six months. That offering made many of their employees instant millionaires. Although relatively expensive this process of going public allows a company to immediately start selling shares. Many investors make money in the after-market, when and if the share price advances.

Another method for a private company to go public is through the less costly and faster process of creating a Reverse Merger. In this relatively low risk process, the company desiring to be a publicly trade company merges with a “Shell Company” that is inactive. That is to say, it has no assets or liabilities and is not a going concern. What the private company is doing here is acquiring the shell company’s corporate structure; including security and exchange commission qualified and audited financials (their history) along with the majority of the shell company’s stock without the usually required I.P.O. underwriter. The advantages of now having publicly traded shares of their company are numerous. They include the fact that company value is now in a more liquid form, enhancing the chances of share price increase. With shares now publicly trading, future stock offerings afford additional ways to raise capital, acquire other companies and entice new high profile employees to come into the fold.

After compliance with the S.E.C. Reverse Merger requirements, the private company can apply for an exchange listing. During the time the listing is being approved, usually a few months, the company stock will trade under the old name and ticker symbol. If you buy shares in the shell company during that time frame, you are actually buying an investment in the private company before the public realizes it is really public. These shares are usually bought at a deep discount to the price after the new name and ticker symbols take effect. How can you find these situations? Well, there are several web sites that you can search including message boards for clues that will lead you to a potential reverse merger. Some are listed at the end of this chapter.

Are you a gambling person? Do you like long odds… say 100,000 to 1? Well, my suggestion to you is to buy 3 or 4 shell companies after doing your “due diligence” and set them aside with no expectations for success. Then a year or two later when your fairy godmother looks favorably upon you, you may laugh all the way to the bank. Gains of over 9,000%, or more, have been achieved.

Just exactly what considerations are important during the due diligence process? For starters, it would be a good idea to compile a pool of exchange listed companies that want a reverse merger. Again, such lists are available on line, or may be discovered in a news release, or through S.E.C. filings.

The company should be, in terms of the trade, a “clean company.” We don’t want the company to be carrying any excess baggage such as pending lawsuits, loans - defaulted or otherwise. Also, it is very desirable for the company to have only common shares remaining, thus simplifying the merger. If there is cash on hand, that is a plus, but don’t hold your breath! If the company regularly reports to the security & exchange commission, much of the necessary information required for the merger is legally and publicly available, thus facilitating a speedy merger completion.

The company we are looking for will have a relatively small number of outstanding shares carrying a miniscule share price. Example: S.S.S.I. with 5,376,500 shares at a price per share of .0001, as opposed to a company like A.T.E.G. with 99,776,704 shares at a share price of .007. The higher number of outstanding shares opens the doors to reverse stock split possibilities that can reduce the value of your investment in the company going public. The higher share price reduces your value, too. Remember… buy low, sell high. After your short list has been prepared, say 10 choices make a watch list at a website like Yahoo finance and set a volume spike alert. The reason… large volume changes after long periods of inactivity are usually followed by announcements. The announcement may be that the merger is culminated. The price spike comes next… your signal to get in. That’s the reason for setting the alert. A price increase of 500% or more may take only a day, or so.


Parry Laird
The Novice Financier
http://www.thenovicefinancier.com