As the regulators turn up the heat on small public companies, and on small companies seeking to go public, weighing all options is essential in order to ensure small companies give themselves the best chance to succeed. However, at times, the analysis of the options leads to complete inaction, which can be a worse result for a company and its shareholders, particularly if the company is looking to go public to access certain financing. As an example, we are seeing this issue a lot with reverse mergers right now. With the SEC seemingly issuing a new shot at reverse mergers every week and clearing firms and DTC hiking up the requirements for companies that have recently undergone a reverse merger, many private companies that thought they wanted to go public through a reverse merger are frozen either in the shell review process (no shell seems to be clean enough) or in the determination whether to go the reverse merger route at all (versus say a direct IPO).
Companies are spending months trying to work through these issues, time that could have been spent starting down the direct IPO road, such that at the end of the day they have saved themselves only a month or two of time by doing a reverse merger than they would have spent going down a direct IPO route and have spent much more money (shell cost) and have all the contingencies and risks of the public company shell they acquired to worry about. While there is no substitute for good due diligence, and I am certainly not advocating taking any steps without proper due diligence and advice, in the reverse merger world, for instance, a leap of faith has to be taken at some point as there are just no answers regarding what the SEC may do in the future, or how DTC may react to the reverse merger transaction in terms of DTC-eligibility of the public company. There are many things companies can do to minimize the risk (primarily through good legal advice and proper planning), but there are no guarantees. At a certain point making the decision to go public has been made and once the route has been determined there is only so much analysis that can be done to alleviate the concerns of taking the next steps. Don’t get caught up allowing the analysis to paralyze the entire process or that paralysis may be more costly than the risks the company is trying to avoid.
