1. When does the company have to file? 10K SB has to be filed 90 days after the fiscal year. There is a 15 day extension available.
10Q SBs are filed three times a year, w/in 45 days of the fiscal Quarter (5 day Extension).
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2. What is a public Company? A company that has issued securities through an offering which are now traded on the open market.
These companies must file documents and meet stringent reporting requirements set out by the SEC, including the public disclosure of financial statements. Any company that issues stock to the public and is listed on the major North American exchanges is a public company. » BACK TO TOP
3. What does the phrase "Going Public" mean? Commonly referred to as an IPO, it's first sale of stock by a private company to the public. IPOs are often smaller, younger companies seeking capital to expand their business.
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4. What does it mean when a stock trades on the OTCBB? A stock that doesn't trade on a major exchange is said to trade over the counter (OTC). This means that the stock is dealt between individuals connected by telephone and computer networks.
Companies may also be listed on the OTCBB because they're unable to meet the initial listing requirements of the Nasdaq or NYSE. In these cases, companies may choose to test the waters of the OTCBB, using it as a stepping stone before leaping into the larger exchanges and markets. » BACK TO TOP
5. What is a "Penny Stock"? A stock that sells for less than $1 a share but may also rise to as much as $10/share as a result of heavy promotion. All penny stocks are traded OTC or on the pink sheets. » BACK TO TOP
6. What information can the Shareholder Management Firm disseminate to existing or potential investors? When contacting a Shareholder Management Firm concerning a certain security keep in mind that the Shareholder Management Companies are highly regulated by the SEC in regards to what information can be disseminated to the public..by law only information that has been released to the general public either through SEC filings or Press Releases can be discussed.
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7. What is a "Day Trader"? As of September 28, 2001 the NASD and NYSE amended their definitions of day traders. A new term that they use is "pattern day trader." An investor can be classified as a pattern day trader if one of the two following characterizes him or her:
1. He or she trades four or more times during a five-day span or,
2. The firm where the investor is making transactions or opening up a new account reasonably considers him or her a day trader.
Once an investor is considered a day trader, the brokerage must classify him or her as such and the investor is then subject to increased equity requirements. Mainly, the brokerage must require a minimum equity of $25,000 at the beginning of the customer's trading day. This minimum equity requirement has been introduced by the SEC and NYSE. Ensuring that any substantial losses can be offset by the day traders own equity, the requirement addresses the inherent risk posed upon brokerages by leveraged day trading activities.
A more restrictive margin rule has also been implemented. Day traders are permitted to purchase only four times their maintenance margin levels. If this level is exceeded, the firm must issue a margin call to the day trader who subsequently has five business days to deposit the funds before the account is halted from additional trading.
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8. What are Pink Sheets? A daily publication compiled by the National Quotation Bureau containing price quotations for over-the-counter stocks. Unlike a stock exchange, companies quoted on the pink sheets system are not required to meet minimum standards. The name comes from being printed on pink paper. » BACK TO TOP
9. Who does a potential investor talk to about gathering info concerning a certain public company? A potential investor in a security can collect data concerning that public company by viewing the SEC filings online at www.sec.gov » BACK TO TOP
10. What information is the Shareholder Communications Firm not permitted to give to the existing/potential investor? Shareholder Management Firms are not permitted to predict stock prices or recommend certain stocks based on any other information that is not readily available to the public for review. » BACK TO TOP
11. What is "Common Stock"? A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation common shareholders have rights to a company's assets only after bond holders, preferred shareholders, and other debt holders have been paid in full.
If the company goes bankrupt the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.
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12. What is "Preferred Stock"? A class of ownership in a corporation with a stated dividend that must be paid before dividends to common stock holders. Preferred stock does not usually have voting rights. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation.
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13. What does the term "par value" refer to? A dollar amount that is assigned to a security when representing the value contributed for each share in cash or goods. » BACK TO TOP
14. What is the difference between a market order, a limit order, and a stop loss order? A market order is instructing your broker to buy or sell as quickly as possible at the current market price. A limit order instructs your broker to buy or sell at a certain price as soon as the price of the stock reaches the price level you have specified. Limited orders can be entered as "Good until Cancel" or "Good for that Market Day Only." A stop loss order tells your brokerage to close your position if the trade goes against you for a certain amount (that you specify).
You can enter stop loss orders for both long and short positions. A long position is when you buy a stock anticipating the price to rise. Beginners should know that if they enter both a stop loss order and a limit sell order (at the same time) on a long position, it could possibly result in both the limit sell you desired, and a short sale you did not anticipate.
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15. What is margin? You can choose to trade your account with margin enabled or not. With margin, you have twice the buying power as you have cash. The brokerage simply lends you the money. You only pay interest if you hold stocks overnight. If you have an IRA account you cannot enable margin or short stocks on that account. Most brokerages will have a list of highly volatile stocks that they will not let anyone trade on margin and neither will they let you short these.
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16. What is shorting a stock? You simply borrow stock that you do not own (from your brokerage) and sell it with the obligation to buy it back at some point in time, to cover your short sale. You sell a stock short anticipating that the stock will go down and you will buy it at a lower price than you sold, thus making a profit. When you enter a sale order for stock you do not own, your brokerage will automatically consider it a short sale.
Some smaller brokerages may not have a large enough customer base to allow you to borrow stock to short. Some traders never short because of the unlimited risk involved. TradeWiser.com believes that traders will benefit from learning to use both long and short positions. But with that said, we also urge beginners to become profitable with long positions before going short. If you are on the right side of the market, it makes no difference whether the market goes up or down. Downtrends in the market frequently take place sharper and faster than uptrends. This happens because more traders play the market from the long side than do traders who trade both long and short. Bull markets don't continue forever, so learn to short
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17. How can there be unlimited risk when shorting? If you short a stock at $50 anticipating that it will go down to $45, but instead it goes up to $100 before you cover, then you have lost all the money you had in that stock. If it were to go up to $150 before you bought to cover your short, you would have lost twice the money you had invested.
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18. How do I figure the cost basis of stock that has split, giving me more of the same stock, so I can figure my capital gain (or loss) on the sale of the stock? When the old stock and the new stock are identical the basis of the old shares must be allocated to the old and new shares. Thus, you generally divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your new basis per share of stock. If the old shares were purchased in separate lots for differing amounts of money, the adjusted basis of the old stock must be allocated between the old and new stock on a lot by lot basis. » BACK TO TOP
19. When my stock split, the stock distributed to me was different than my original shares. How do I figure the basis of the shares of the two different kinds of stock? Usually, the company issuing the new type of stock will send you a letter explaining the tax consequences of the stock distribution, including how to calculate the basis in the two different types of stock.
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20. How do I calculate the sale of a stock that had a reverse split? Reverse splits are where your number of shares in a company's stock decreases. Your total basis remains the same; it is your per share basis that increases. You must divide your basis in the old shares by the number of new shares. For example, you own 4 shares of stock. Two of these shares have a basis of $15; each of the other two have a basis of $20 each. There is now a one for two reverse split. Now you have two shares. One has a basis of $30 the other has a basis of $40. If your receive cash because of the sale of a fractional share you have a capital gain or loss that is reported on Form 1040.
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21. Do I need to pay taxes on that portion of stock I gained as a result of a split? No, you generally do not need to pay tax on the additional shares of stock you received due to the stock split. You will need to adjust your per share cost of the stock. Your overall cost basis has not changed, but your per share cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain is the amount of the proceeds from the sale, minus sales commissions, that exceeds the adjusted basis of the stock sold.
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22. What are the "listing" requirements for the OTCBB? Because the OTCBB is a quotation service for NASD Market Makers, not an issuer listing service or securities market, there are no listing requirements that must be met by an OTCBB issuer. Accordingly, there are no financial requirements and there is no minimum bid price requirement. » BACK TO TOP
23. Are OTCBB companies considered to be "listed"? No, the OTCBB is not an issuer listing service, and there is no listing agreement between either the OTCBB or NASDAQ and the issuer. There are, however, certain requirements an issuer must meet in order for its securities to be eligible for a market maker to enter a quotation on the OTCBB. » BACK TO TOP
24. What are the eligibility requirements for the OTCBB? In order for a security to be eligible for quotation by a market maker on the OTCBB, the security must be registered with the Securities and Exchange Commission (SEC) or other federal regulatory authority that has proper jurisdiction (see below) and the issuer must be current in its required filings with such federal authority.
Domestic issues quoted on the OTCBB are limited to the following securities:
- securities of issuers that make current filings pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Act");
- securities of depository institutions that are not required to make filings under the Act, but file publicly available reports with their appropriate regulatory authorities;
- securities of registered closed-end investment companies; and
- securities of insurance companies that are exempt from registration under Section 12(g)(2)(G) of the Act.
- Foreign issues and ADRs must be registered with the Securities & Exchange Commission (SEC) pursuant to Section 12 of the Securities Exchange Act of 1934.
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25. How many market makers are required for a security to be on the OTCBB? A minimum of one market maker is needed. » BACK TO TOP
26. What are the listing fees for the OTCBB? There are no listing fees for the OTCBB. Market makers do pay a fee for participating in the OTCBB of $6 per security per month.
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27. Does the OTCBB have shareholder approval rules? No. The OTCBB does not have shareholder approval rules. » BACK TO TOP
28. How does a company get on the OTCBB? An issuer may not submit an application directly to be quoted on the OTCBB. A market maker must sponsor the security and demonstrate compliance with SEC Rule 15c2-11 before it can initiate a quote in a specific security on the OTCBB. » BACK TO TOP
29. How does a security delisted from NASDAQ or an exchange get on the OTCBB? Under certain conditions, Form 211 exemptions apply and a NASDAQ issuer undergoing delisting will be automatically added to the OTCBB on the day the delisting is effective. » BACK TO TOP
30. Can a company be "delisted" or removed from the OTCBB? OTCBB issuers that become delinquent in their required regulatory filings will have their securities removed from the OTC Bulletin Board. Further, all OTCBB issues must maintain at least one registered Market Maker to remain on the OTCBB. When the last Market Maker in a security withdraws from the stock, the issue is removed from the OTCBB after 4 days pursuant to Rule 15c2-11. An issuer cannot voluntarily withdraw from the OTCBB; only a market maker can voluntarily withdraw it's quote from the OTCBB. If an OTCBB security becomes listed on NASDAQ or an exchange, it will no longer be eligible and will be removed from the OTCBB. » BACK TO TOP
31. How do I buy or sell stock in a company that is quoted on the OTC Bulletin Board(OTCBB)? The process of buying or selling OTCBB stock is the same as buying or selling any other stock. You must open an account with a broker (a party that executes buy and sell orders). You cannot buy OTCBB stock directly from the OTCBB or the OTCBB.com.
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32. Can a security be traded on the OTCBB and Nasdaq at the same time? No. The OTCBB is a quotation service for securities which are not listed or traded on Nasdaq or a national securities exchange.
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33. What are some of the differences between companies quoted by an OTC quotation service and companies listed on a stock market? Stock markets (including NASDAQ and the registered exchanges, such as NYSE or AMEX) have specific quantitative and qualitative listing and maintenance standards, which are stringently monitored and enforced. Companies listed on a stock market have reporting obligations to the market, and an on-going regulatory relationship exists between the market and its listed companies. OTC quotation services (OTCBB, Pink Sheets) facilitate quotation of unlisted securities. As such, any regulatory relationship between an OTC quotation service and the issuers may be relatively limited or non-existent.
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34. What is the difference between OTC, other-OTC and OTC Bulletin Board (OTCBB)? And where do the Pink Sheets fit in? An over-the-counter (OTC) security is generally considered to be any equity security that is not listed on NASDAQ, NYSE or AMEX. The OTCBB and the Pink Sheets are both quotation services for OTC securities. NASDAQ operates the OTCBB service and permits NASD members to quote any OTC security that is current in certain required regulatory filings. The Pink Sheets is a privately owned company that permits NASD members to quote any OTC security and does not maintain regulatory filing requirements. An OTC security can be dually quoted on both the OTCBB and the Pink Sheets. As well, there are many OTC securities that are not quoted on either the OTCBB or the Pink Sheets; however, they have trading symbols assigned to them so NASD members can comply with trade reporting obligations and report transactions in these securities. These securities are sometimes said to be on the "gray market".
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35. What is the correct way to refer to the OTCBB or securities quoted on the OTCBB? Correct and accurate terminology when referencing the OTC Bulletin Board are as follows:
1. OTC Bulletin Board
2. Quoted on the OTC Bulletin Board
Any reference to the OTC Bulletin Board should never include the word "NASDAQ". OTC Bulletin Board, should you wish, may be abbreviated OTCBB.
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36. What does a fifth character "E" indicate for an OTCBB security? The fifth character "E" on an OTCBB trading symbol indicates that NASDAQ does not have information which demonstrates that the issuer of the security is compliant with the filing requirements of Rule 6530, either because the issuer is delinquent in the required filings, has filed an incomplete filing, or, for non-EDGAR filers, because NASDAQ has not been provided a copy of the most recent filing.
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37. What are the rules governing "Short Sales", and "Naked Shorting"? For years, management of many small-cap and micro-cap publicly-traded companies that have either traded on the Nasdaq SmallCap market, or on the Nasdaq run OTC Bulletin Board have complained about short selling, particularly the practice known as "naked shorting." Naked shorting is when the investor is not required to borrow stock before selling the stock short.
Many were skeptical that either the National Association of Securities Dealers (NASD), or the Securities and Exchange Commission would ever take action to correct what they believed was a major abuse in the over-the-counter trading system. In a move that surprised most Wall Street insiders, the NASD has significantly tightened one of its rules governing short selling.
Named by the NASD as "affirmative determination," the new NASD rule requires that brokers and dealers engaged in a short sale transaction ensure that the shares can be delivered within the three day settlement period.
Until this rule change, foreign brokers, specialists and other investors who weren't members of the NASD weren't covered under the existing "affirmative determination" rule. What that meant was that these short sellers had no requirement to represent to the broker-dealer through whom they were executing transactions that they would be able to deliver the securities by the settlement date.
This new NASD rule, which has recently been approved by the Securities and Exchange Commission, will have the greatest impact on short sales executed by or through foreign brokers. Many believe that much of the naked short selling has been conducted through Canadian brokers. Particularly vulnerable to naked short selling have been shares of companies traded on the OTC Bulletin Board.
Much of the abuse in short selling has taken place because it's been very difficult, if not impossible to "borrow" the shares of companies traded on the OTC Bulletin Board. As a result, individual investors, and institutional investors including many hedge funds looking to take a "negative bid" on what they have seen as over-valued OTC Bulletin Board stocks have executed their trades through Canadian brokers, where it's not required to borrow a stock before selling it. The NASD action closes this opportunity.
The NASD rule doesn't apply to Canadian brokers, who are not members of the NASD, but does affect them. This is because the Canadian brokers must execute their transactions through US brokers who are members of the NASD. The rule change makes it the responsibility of the US NASD member broker to ensure that their Canadian "customers" are in fact able to settle transactions within the settlement period.
Many investors and hedge funds have taken the position that short sellers provide a needed service to the market. But, many Wall Street insiders and management of public companies themselves have called for the complete abolition of short selling citing the significant downward pressure it puts on the shares of publicly-traded companies.
This new NASD affirmative determination rule is scheduled to take effect on February 20th 2004.
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38. What is a Reverse listing / Merger? Reverse listings are a viable way for small private companies to become publicly traded. They are often a feasible means for private companies that wish to go public without having to spend the the kind of monies and time that a traditional Initial Public Offering ("IPO") would cost or take. In a reverse listing, a public company buys a private company, and in the process of this listing, the private company becomes part of the public company, and thus becomes publicly traded. This paper is an exhaustive information piece that includes the anatomy of a reverse listing, a comparison of IPOs and reverse listings, the advantages and disadvantages of a going public via a reverse listing, examples of companies that have executed reverse listings, and essential data and statistics for companies wishing to learn about reverse listings.
We can help your company go public through a Reverse Listing; or if you are a public company seeking to go private, we can match a buyer with your company.
Many emerging private companies seek the benefits of being public but are not prepared or in a position to invest the time and expense related to a traditional IPO. An economical and time saving alternative to achieving public status is through a reverse listing into an existing public company. Unbeknownst to many entrepreneurs, reverse listings can provide an integrated, end-to-end value chain of vital access to capital.
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39. How is valuation of companies involved in a Reverse Listing Registration determined The valuation of companies involved in a Reverse Listing Registration depends on numerous quantitative and qualitative characteristics of the companies involved. Below is an overview explaining how to arrive at a valuation of a company in a Reverse Listing. The determinants of the private company and the public company are based on different factors, so the methods to use for a reverse merger are split into two sections: private and public.
Private Company
Trading Comparables
Trading multiples can be a useful way to value a private company that wants to undertake a Reverse Listing Registration. This method may use several different types of multiples to establish a market price. The reason trading comparables are so useful is that they show what the market is currently willing to pay for specific quantitative factors. Most multiples use one of the following:
Revenue
EBITDA
Net income
Net assets
Varsity Group underwent a Reverse Listing with Age Research on May 22, 2003. Age Research issued 9,343,920 shares to Varsity shareholders, comprising 80% ownership in the combined company. With 5 months revenue of $21,225,313 and no long term debt, an initial market capitalization of $23,126,202 implies an annualized revenue multiple of 0.45. Although this revenue multiple seems low, the company has experienced steady net loss, which obviously hurts its valuation. Proper multiples become difficult to arrive at when some companies have such poor operating performances.
In general, a number of similar companies should be gathered, using the average multiples to estimate the value of the company in question. Of course, as this example shows, a revenue multiple can overestimate/underestimate the value of a company if there are other things going on, such as high expenses or a lot of current liabilities.
Transaction Comparables
Other Reverse Listings provide a basis for current company valuations. However, since reverse listings are unique in that they involve a non-material, public company providing the registration requirements for the private company, the actual market value is difficult to establish.
Forward merger prices give an obvious market value that companies are willing to pay for certain revenue/etc multiples. Used in conjunction with trading comps, this valuation method provides a good estimate of the business.
Initial Public Offerings (IPOs) are somewhat common as a method of establishing market value based on certain criteria. However, since IPOs also raise capital, the prices reflect a different process. Also, the systematic underpricing of IPOs lessens the effectiveness of IPO comparables.
Discounted Cash Flow Analysis
The DCF method of valuation is not quite as usual in many instances involved with Reverse Listings. Remember that one of the benefits of a Reverse Listing is that not as long of a track record is necessary, compared to an Initial Public Offering. A DCF values a company well when earnings are easy to project. The private company usually does not have a long operating history to extrapolate from. Also, the private company is small, which generally goes hand-in-hand with high growth expectations. Both of these factors cause shaky earnings forecasts, rendering the DCF model less useful. While still helpful paired next to other valuation methods, the DCF model is not as significant here as it is for large, stable companies.
However, when dealing with development stage companies, sales and earnings projections may be all that is available. In this case, while uncertain over a wider range, the DCF valuation does provide a useful value, compared to trading comps. For example, PanaMed, a private company, completed a Reverse Listing with Micron Solutions, a publicly trading corporation, on March 7, 2002. Micron was a development stage company as defined by SFAS 7. PanaMed is also a development stage company, so revenue projections are difficult to make. Also, PanaMed's business plan is centered on FDA approval of a therapeutic drug. As a development stage company, revenue and earnings multiples are not helpful, since there aren't really any sales or earnings. An initial market cap of $169,348,354 means that a substantial amount of growth was expected from this company. With a current market cap of $1,003,546, we see how difficult it is to make some of the growth assumptions involved in a DCF of a development stage company.
Public Corporation
The valuation of the public entity is more dependent on qualitative factors. Since there usually aren't any real operations or assets, the value of a public corporation involved in a Reverse Listing is not going to be extremely large. Also, some of the following factors are more important in certain cases, so the valuation is partly dependent on what the private company is looking for.
What contributes to a higher valuation of a public corporation?
Clean history - a trading company with a past operating history requires due diligence to avoid hidden liabilities or lawsuits, which can be very dangerous
Trading status - already having an active stock price gives the issuer much more visibility, which helps subsequent offerings
Shareholder base - a wider shareholder base means more investors know about the company
Average trading volume - higher volume increases investor interest and creates a more liquid stock
Time to public - the faster a private company needs to complete a Reverse Listing, the more important are the trading status and market characteristics of the public corporation
There are many difficulties involved in finding a good estimate of company value, such as lack of long-term operating history or potentially changing business plans in the future. But while the valuation process can be time consuming, in the end this can make a big difference. Part of the Reverse Listing Registration Program is making sure your company is represented by a market price that fairly values your operations.
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40. What is a Pump and Dump? There is a thriving cottage industry of merchant bankers and entrepreneurs who specialize in orchestrating reverse mergers. Unfortunately, there are no barriers to entry in this field. Therefore, scams are common place.
Some have developed methods to accumulate large positions in the free trading shares of shell companies. A Reverse is consummated with a marginal private company, and the agents of the deal put together a massive publicity campaign designed to create activity in the stock. Unrealistic promises and absurd claims of corporate performance find their way to the public. The enhanced trading volume allows the scam artist to dump his shares on the unsuspecting public, most of whom eventually lose their money once the newly formed public company fails. This scam is commonly known as a "Pump and Dump." Here's some recent SEC enforcement action surrounding same.
Pump and Dump Cases:
http://www.sec.gov/litigation/litreleases/lr17673.htm
Securities and Exchange Commission v. Environmental Solutions Worldwide, Inc. et al., Cause No. 02-1575 JDD (D.C.)
Litigation Release No. 17673/ August 9, 2002
The SEC alleges that defendants perpetrated a massive stock fraud in the Nasdaq Over-the-Counter securities market, by issuing ESWW stock to various insiders through a sham private offering, and then "pumped" the market with a fraudulent promotional campaign, including press releases, spam e-mails, and a paid analyst report, all designed to artificially prime the market for ESWW stock. The promotional campaign had the intended effect, when ESWW stock jumped from $2 to $7 per share. Defendants then concurrently sold approximately $15 million of ESWW stock into the unsuspecting market.
The Commission's complaint alleges that based on the conduct set forth above, the defendants violated the following provisions of the federal securities laws, including Sections 5(a), 5(c), 17(a), and 17(b) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13b2-1, 13b2-2, 13d-1, and 16a-3.
The complaint seeks injunctions, officer and director bars, and disgorgement of ill-gotten gains plus pre-judgment interest as well as civil penalties.
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http://www.sec.gov/litigation/litreleases/lr17305.htm
Securities Exchange Commission V. Max C Tanner et al, 02 CV 0306(S.D.N.Y.) (WHP) (January 14, 2002)
Litigation Release No. 17305/ January 14, 2002
The complaint alleges that the Defendants engaged in a pump and dump scheme involving the stock of Maid Aide, Inc. ("MDAN"), a shell company trading on the Over-the-Counter Bulletin Board ("OTC-BB"). And that as a result of this scheme, MDAN traded at artificially inflated prices ranging between $5.00 and $9.35 per share, allowing the Defendants to dump more than 475,000 MDAN shares into the market for proceeds of over $3.7 million.
The Commissions complaint charges violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder.
In addition, the complaint charges violations of Sections 5(a) and 5(c) of the Securities Act and violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act.
Commission seeks injunctions prohibiting future violations of the securities laws, disgorgement, and civil penalties. The Commission is also seeking an order barring Tanner and Evans from serving as an officer or director of any public company.
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41. Are there any down sides of a Reverse Merger? After living through the Internet Bubble of the 1990's, most investors are familiar with the traditional IPO. It's the most widely recognized form of taking a company from private to public. However, what many people don't realize is that there are numerous other ways for private company to become publicly traded.
One widely used method is a Reverse Merger. Practitioners use a simplified, fast track method by which a private company can become a Public Company. This technique is more prevalent than most realize; in a white paper, it's estimated that approximately 53% of all companies going public in 1996 did so through a reverse listing and roughly 30% of new publicly listed companies in 1999.
During the internet boom, percentages of reverses fell because Wall Street firms had a huge appetite for IPOs, and many developmental stage companies with zero revenues and poor operational strategies were able to find their way to the public market through traditional IPOs. Reverse Mergers however in this market are poised to make a come back because of the limited number of IPOs being filed by Wall Street firms.
Reverse Mergers are also commonly referred to as Reverse Takeovers, or RTO's; however at Loyola Financial, we have a process quite unique to our firm and befitting an equally unique moniker: Reverse Listings.
At Loyola Financial, we want to separate from the traditional Reverse Merger pushers because there some important risks and negatives that issuers and investors alike should be wary of when dealing with traditional Reverse Merger firms.
There is a much higher failure rate amongst these companies versus the traditional IPO. Much smaller and less successful companies are able to become public through a reverse, and many are underfunded. Often these stocks trade very inefficiently in the absence of any sponsorship or following. At Loyola Financial, we have a special private placement that EVERY one of our Reverse Listing companies are channeled into a post close money raise in order to ensure that post close funding occurs.
There is a thriving cottage industry of merchant bankers and entrepreneurs who specialize in orchestrating reverse mergers. Unfortunately, there are no barriers to entry in this field. Therefore, scams are common place.
Some have developed methods to accumulate large positions in the free trading shares of shell companies. A Reverse is consummated with a marginal private company, and the agents of the deal put together a massive publicity campaign designed to create activity in the stock. Unrealistic promises and absurd claims of corporate performance find their way to the public. The enhanced trading volume allows the scam artist to dump his shares on the unsuspecting public, most of whom eventually lose their money once the newly formed public company fails. This scam is commonly known as a "Pump and Dump."
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42. What is the NASDAQ? The Nasdaq debuted in 1971 as the world's first electronic market. Today it lists companies across the spectrum, including technology, retail, communications, financial services, media and biotechnology. Its competitive electronic market structure provides an efficient and low cost marketplace, while a high level of regulation protects investors and fosters an equitable and competitive market.
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43. What is the AMEX? The American Stock Exchange, one of 2 major national stock exchanges, is the nation's most diversified financial marketplace spanning every industry sector and market size. A self-regulating organization registered with the Securities and Exchange Commission, it is an auction market, with prices being determined by bids to buy and offers to sell. Stocks, options, exchange traded funds and structured products are available. » BACK TO TOP
44. What is the OTCBB? Over-the-counter Bulletin Board is a de-centralized market (as opposed to an exchange), for securities not listed on a stock or bond exchange. Trading occurs via telephone and computer, linking geographically dispersed dealers. » BACK TO TOP
45. What does "Reporting" mean? Public Companies that we work with are "Reporting." Reporting public companies are required to provide audited financial statements and make filings with the Securities and Exchange Commission. Reporting public companies can be listed on the NASD's OTC Bulletin Board, NASDAQ or any other stock exchange, because they have already filed an SEC registration statement and completed the review process. Since the public corporation has an OTC Bulletin Board listing, there is no risk of a private company spending money and not becoming public. There is no SEC review involved in a Reporting public company merger. The public entity is purchased and transaction closed concurrently.
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46. Understanding the Balance Sheet Balance sheets can be intimidating until you take a little time to understand how they’re set up and what they can tell you.
Let's examine the increasingly ubiquitous coffee purveyor Starbucks (Nasdaq: SBUX - News). To make this a little bit more of a learning exercise, we'll review the results for its fiscal year that ended on Oct. 3, 2004. Then you can dig up the company's most recent balance sheet and see whether the company has improved.
Glancing at the balance sheet, we see $299 million in cash and cash equivalents, up 49% from the previous year (which was up 102% over the year before). A growing pile of cash is generally promising.
You usually want to see little or no debt. Between 2003 and 2004, Starbucks' long-term debt dropped from $4.4 million to $3.6 million (down from $5.8 million in 2001). That's good. If debt was substantial, we might peek at the footnotes to check out the interest rates. Low rates would indicate that the firm is financing operations effectively.
Next up, inventory. Valued at $343 million in 2003, it ended 2004 at $423 million, up about 23%. Rising inventories can indicate unsold products languishing on shelves, but since sales rose 30% year over year (as is shown on the income statement), the rise in inventory appears under control. (Ideally, inventory growth should not outpace sales growth.)
It's also good to measure inventory turnover, which reflects how many times per year the firm sells out its inventory. Take 2004's cost of goods sold (sometimes abbreviated COGS and appearing on the income statement) of $2.2 billion, and divide it by the average of 2003 and 2004 inventory ($343 million and $423 million averaged is $383 million). This gives us a turnover of 5.7, up from 2002's 5.6 and 2001's 5.3. The higher the better, so this is a good trend.
Accounts receivable are also worth examining. For 2004, they rose 14.5% over year-earlier levels, keeping pace with sales growth. Cool beans. If receivables were outpacing sales growth, that would be a red flag, requiring a little further investigation.
Finally, look at the "quick ratio". Subtract inventory from current assets and then divide by current liabilities. Starbucks' result is 1.21, which shows that there's enough cash (and assets readily convertible into cash) on hand to cover obligations. Quick ratios above 1.0 are desirable. It's also instructive to look at past years' numbers, to see if there are any patterns. In 2002, Starbucks' quick ratio was 1.09. It was 0.84 in 2001, which might have warranted keeping an eye on.
Many investors focus only on sales and earnings growth, calculated from the income statement. While that's important, long-term investors should also study the balance sheet to see how sturdy the underlying business is.
Motley Fool
By Selena Maranjian
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47. Private vs. Public Ever wonder what the difference is between a private and public company? A private company is one that's privately owned -- usually by one or a few people. Its owners don't have to reveal much about their business. And most investors can't invest in it.
A public company is one that has sold a portion of itself to the public via an initial public offering (IPO) of some shares of its stock. Therefore, it probably has hundreds or thousands of co-owners. If it's an American company trading on American stock exchanges, it's required, among other things, to file quarterly earnings reports with the Securities and Exchange Commission (SEC). These are also made available to shareholders and the public. A public company can't keep mum about how much it made in sales last year. It must report information like that -- its revenues, cost of sales, tax expenses, administration costs, debt load, cash level, and so on.
Here are a bunch of major companies that remain private: Cargill, Subway, M&M Mars, Bertelsmann AG, Bechtel, Publix Super Markets, IKEA International, (Fidelity Investments parent) FMR Corp., Seiko Epson, Amway, DHL Worldwide Express, Virgin Group, Rosenbluth International, Penske, S.C. Johnson & Sons, Enterprise Rent-A-Car, Hallmark Cards, Borden, McCain Foods, Hyatt, National Amusements, Purdue Farms, McKinsey & Co., and LEGO Company. Some of these firms offer shares to employees, but individual investors are out of luck.
Domino's Pizza (NYSE: DPZ) was private until recently, as were Goldman Sachs (NYSE: GS) and United Parcel Service (NYSE: UPS). Levi Strauss, once private, went public only to go private again. Just because an old, established firm is private doesn't mean it'll always be private.
If you'd like to make money in stocks, you'll need to stick to public companies. If you'd like to receive several promising stock ideas delivered via email each month, learn more about our suite of investment newsletters (which are offered along with some free research reports). Their performance may surprise you. You can also learn all about brokerages and find one that's right for you in our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?)
By Selena Maranjian (TMF Selena)
July 11, 2005
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48. What is an Equity Private Placement? A private placement is a private sale of Restricted Securities by an Issuer to a relatively small number of institutions and/or individuals.
The private sale of restricted Equity and Equity-Linked Securities (i.e, an Equity Private Placement) is executed under certain exemptions from the registration requirements of the Securities Act of 1933 (e.g., Regulation D, Regulation S, Rule 144a).
However, these securities are ineligible for resale into the public market until such time that either (i) a resale Registration Statement has been filed with the Securities and Exchange Commission ("SEC") and declared effective or (ii) resale is permitted under Rule 144 without the need for an effective registration statement. » BACK TO TOP
49. Rule 144a Rule 144a applies to securities which are offered or sold by a seller (e.g., Qualified Institutional Buyer ("QIB")) only to another QIB or to a purchaser that the seller and any entity acting on behalf of the seller reasonably believes is a QIB. » BACK TO TOP
50. Rule 144 SEC Rule 144 allows for the resale of Restricted Securities to the public in limited quantities. Rule 144 generally applies to Corporate Insiders and buyers of Private Placement securities that were sold under exemptions from the SEC's registration statement requirements defined in the Securities Act of 1933. Under Rule 144, Restricted Securities may be sold to the public by Corporate Insiders and buyers of Private Placements, prior to a two year holding period, without full registration of such securities under specific conditions and limitations. After a two year holding period, resale of such securities by non-affiliates of the Issuer to the public are unrestricted. » BACK TO TOP
51. Restricted Securities Securities acquired directly or indirectly from an Issuer, or from an affiliate of the Issuer, in a transaction or series of transactions which do not involve a public offering and are subject to resale limitations (e.g., Equity Private Placements). » BACK TO TOP
52. Registered Securities Securities acquired directly or indirectly from an Issuer, or from an affiliate of the Issuer, in a transaction or series of transactions under a valid and effective Registration Statement. Such securities are freely tradeable and do not have any resale limitations. » BACK TO TOP
53. Regulation S An exemption from the registration requirements under the Securities Act of 1933 for offshore sales of Equity and Equity-Linked Securities by U.S.-based Issuers. These Equity and Equity-Linked Securities are treated as Restricted Securities under Rule 144 with respect to resale of such securities to the public. » BACK TO TOP
54. Regulation D Regulation D is a series of six rules, rules 501-506, which describe three transactional exemptions from the registration requirements under the Securities Act of 1933 for sales of Equity and Equity-Linked Securities to U.S.-based Investors. » BACK TO TOP
55. Registration Statement Document filed with the SEC by an Issuer in order to comply with the registration requirements under the Securities Act of 1933 with regard to (i) offerings of securities to the public and (ii) resale of such securities to the public by purchasers of Restricted Securities (e.g, Equity Private Placements). The most common registration statements filed by Issuers regarding Equity Private Placements are Forms S-1, S-3, SB-1, and SB-2. Issuers must meet varying eligibility requirements in order to use a specific registration statement. Registration statements must be declared effective by the SEC prior to resale of the securities purchased in an Equity Private Placement. Alternatively, Investors may make resales of such securities to the public in accordance with Rule 144. » BACK TO TOP
56. Registered Direct A placement of Registered Securities by an Issuer to a limited number of Accredited Investors. The most common Registered Direct Placements involve a placement of Equity and Equity-Linked Securities. » BACK TO TOP
57. Qualified Institutional Buyer An entity, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of Issuers that are not affiliated with the entity. » BACK TO TOP
58. Public Float The number of common shares of an Issuer, or the market value of the number of shares, that are available for trading by the public. Shares held by Corporate Insiders or affiliated companies are not included in the public float. » BACK TO TOP
59. Securities Act of 1933 An act of Congress which governs the issuance of New Issues of securities. It requires the registration of securities, disclosure of pertinent information relating to new issues so that investors may make informed decisions. The oversight of this function is the responsibility of the Securities and Exchange Commission ("SEC").
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60. Secondary Offering In contrast to a Primary Offering where the seller of securities is the Issuer, in a Secondary Offering the seller is any entity other than the Issuer. In a Secondary Offering, the Issuer that originally issued the securities does not receive any proceeds.
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61. PIPE All PIPEs:
non-Rule 144a AND Registered Direct placements.
non-Rule 144a (PIPE transaction):
Placements involving equity and/or equity-linked securities that are executed by Issuers in reliance upon certain transaction exemptions as provided for under the Securities Act of 1933, as amended - Section 4(2), Regulation D, Regulation S and other miscellaneous exemptions.
Registered Direct (PIPE transaction):
Placements that involve the issuance of PRE-REGISTERED equity and equity-linked securities (e.g., shelf sale) by an Issuer to a LIMITED number of accredited Investors.
Rule 144a:
Placements that involve equity and/or equity-linked securities which are offered or sold by an Issuer ONLY to Qualified Institutional Buyers (QIBs) or to purchasers that the seller and any entity acting on behalf of the seller reasonably believes is a QIB.
Notes:
PIPE = Private Investment in Public Equity
Rule 144a transactions typically involve intermediaries (e.g., investment banks and/or placement agents) and the issuance of convertible securities.
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62. What is the Advantage of Micro-Cap Stocks? The smaller and more obscure a security, the more likely it is to be undervalued by the market. With this in mind, why would anyone attempt to beat the market by investing in giant large-cap companies that are already efficiently priced?
The sad truth is that most investors do this every single day. They chase after lumbering giants like Wal-Mart (WMT), Cisco Systems (CSCO) and Intel (INTC), and as a direct result they usually earn lackluster returns.
In our personal investing we take an entirely different approach to the market -- one that is not only well supported by a wealth of academic research, but that has also proven to be wildly successful over an extended period of time.
Let us suggest you start by ignoring Wall Street, CNBC, and other mainstream sources of financial information. These widely available, traditional media outlets aren't going to provide you with the edge you need to outperform the broader market. After all, the financial press devotes nearly all of its coverage to gigantic domestic and multinational corporations. With so many analysts and pundits following each of these corporate behemoths, their share prices tend to be very efficiently priced. As a result, they almost always reflect all publicly available data.
In general, the more closely a stock is covered by institutional investors, Wall Street analysts and the financial press, the more efficiently priced that stock will be. It's extremely difficult to get an edge when trading or investing in these securities because it's almost impossible to uncover data that other folks have missed.
We need to put the odds in our favor. With this in mind, we focus our efforts exclusively on discovering inefficiently priced micro-cap stocks. These tiny companies are largely ignored by Wall Street's major players, and as a result, their underlying prices often do not reflect all publicly available information. By taking advantage of these mispriced micro-cap securities, we've managed to develop a lengthy track record of impressive gains.
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63. Venture Capital One problem many new businesses face is raising sufficient capital. A business in it's primary phase will also face a difficult challenge getting a bank loan. One alternative is venture capital. Venture capital firms offer capital in exchange for equity in a company. This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.
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64. Asset Based Financing Asset based lending has become increasingly popular as a means of financing growth and providing working capital. Asset based financing is a general term whereby a lender accepts as collateral the assets of a company in exchange for a loan. Most asset based loans are financed against accounts receivable and less often, against inventory since receivables are among the most liquid of a company's assets followed by inventory. Receivables are favored by lenders since they self-liquidate in a short period of time by themselves and are not susceptible to problems such as shrinkage or physical damage.
Another type of asset based lending rapidly gaining popularity is factoring. Factoring is defined as the purchasing of a company's accounts receivable on a non-recourse basis.
Asset based lending may be the best source of working capital for companies in turn around where traditional bank loans may not be available, or for new and rapidly growing companies where high levels of growth cause the business cycle to outpace the collection of receivables.
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65. Long Term Debt Long term debt is one of the initial financing avenues a company should pursue. Most long term debt takes on the form of a loan where the interest and part of the principal are paid back in equal installments over the life of the loan. Some of the sources for business loans include the following:
commercial banks
government sponsored loan programs
private lenders
small business investment companies like Loyola Financial » BACK TO TOP
66. Lines of Credit A line of credit loan is designed to provide short term funds to a company in order to maintain a positive cash flow. Then, as funds are generated later in the business cycle, the loan is repaid. Most commercial banks offer a revolving line of credit, where a fixed amount is available. As funds are used, the "credit line" is reduced and when payments are made, the line is replenished. One advantage of a line of credit is that the no interest is accrued until the funds are withdrawn, but the line is immediately available for the company’s cash flow needs.
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67. Letters of Credit A letter of credit is a guarantee from a bank that a specific obligation will be honored by the bank if the borrower fails to pay. Letters of credit can be useful when dealing with new vendors who may not be assured of a company's credit worthiness. The bank would then offer a letter of credit as an assurance to the vendor of payment. Although no funds are paid by the bank, the credit requirements for a line of credit and a letter of credit are similar.
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68. Loan Workouts A loan workout is the process of repaying a problem loan in a fashion that is most agreeable to the lender and the company. Among the steps involved in a successful workout are maintaining communication with the lender, creating a revised payment schedule, and forming a workout team composed of the company's management, representatives from the lending institution, and legal counsel to manage the process.
One of the initial steps in workout proceedings is to recognize that repayment of the loan will not occur. The earlier the company recognizes that a problem exists, the greater their flexibility in dealing with the problem. Financial consultants who specialize in loan workouts are also available to coordinate the efforts of the company and the lender. These consultants can direct the workout team's efforts and suggest solutions to the problem.
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69. Floor Planning Although relatively new as a financial instrument, floor planning is
another asset based lending approach in which companies can finance
their inventories. In floor planning, inventory is financed based on
the credit of the vendor as well as the company receiving the
financing. The inventory purchased acts as collateral until the sale is
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70. Small Company Offering Registration Another type of equity financing is a small company offering registration or SCOR. Since the laws governing private sales of securities are somewhat restrictive, SCORs provide a means of selling common stock to the public. Companies can trade their common stock over the counter rather than deal with the difficulties that initial public offerings face. » BACK TO TOP
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