Going Public

By: Roy Salisbury | Tuesday, June 6 2017

When investors talk about alternate exits for private companies beyond the traditional IPO they are usually referring to reverse mergers, if not outright acquisitions. However, another route is gaining some traction with sophisticated investors – the Form-10 process. Although it can be used in combination with reverse mergers, SEC rules applied to reverse mergers have shifted interest towards a more direct Form-10 approach to public markets.

The Form 10 approach can help match the demand of interested investors with the right company, at the right time.

A Form 10 filing is used by private companies to register a class of securities with the SEC. However, these securities do not need to be publicly traded. A company can voluntarily file a Form 10, and after a 60 days SEC review period, have an effective requirement to publish 10K, 10Q, and 8K documents just like any publicly traded company. Once the Form 10 is in effect, institutional public equity funds that have been restricted from investing in the private company can now invest in these public, yet non-trading securities. The structure of the transaction is like a PIPE (Private Investment in Public Equity), but there is not a traded price quote to use as a reference.

Once these investors have valued the company and invested accordingly, the company may float securities on the OTC (Over-The-Counter) exchanges with a registration statement or 144 shares that mature past the restriction/hold period and can become free trading, these shares must be held by non-insiders and not be considered a control person. Companies can also issue convertible debt that can convert into free trading shares after a minimum hold period and again the holder must be a non-insider and not be considered a control person.

Retail investors can pick the shares up, albeit with some potential liquidity challenges.