4 min read
22 Jun

So before we begin let’s start by defining a few key terms:

 1.    S-1 is a registration statement filing that gets submitted for examination and final approval by the SEC. Once approved the company can raise money based upon the terms set forth within the S-1 (i.e.) minimum/maximum of how much money can be raised, what price Shares will be sold, and how long the company could raise money post effectiveness of the S-1.


2.    15c2-11 – After the company decides to close the Capital Raise pursuant to the S-1 Prospectus,  a 15c2-11 Application form is submitted by a Market Maker on behalf of the issuer to FINRA. Once approved the company will be granted a ticker symbol. 


3.    DTC Eligibility – In simple terms it allows a company to electronically trade. The application will need to be submitted on behalf of a DTCC participant clearing firm as a sponsor. There are different levels of electronic trading such as FAST or DWAC which we will not get into at this time.


For those of you that are not familiar with the steps of getting a company listed using an S-1. You first need to get a S-1 (Prospectus) approved by the SEC, then find a Market Maker to file a 15c2-11, and then file for DTC Eligibility. After attaining DTC Eligibility, you need to get shares deposited with a broker and execute the first trade. As you will see reading further, all of this is much easier said than done!


Just preparing the S-1 can take close to 3 months in itself. As you will need two years of Financial Statements or from the company's inception, in order to get Audited Financials in the first place. Always assume that getting Audited Financial Statements will take longer than expected. Especially if the company needs to Audit the last 2 years.  


Drafting of the S-1 is a very meticulous matter.  Just see the Table Of Contents below. 


Prospectus Summary    

Risk Factors     

Use of Proceeds     

Determination of Offering Price     

Dilution of the Price per  Share     

Plan of Distribution; Terms of the Offering     

Management’s Discussion and Analysis or Plan of Operation     

Description of our Business and Properties     

Directors, Executive Officers and Control Persons     

Executive Compensation     

Security Ownership of Certain Beneficial Owners and Management     

Certain Relationships and Related Transactions     

Description of Securities     

Shares Eligible for Future Sale     

Anti-Takeover Provisions     

Legal Proceedings     

Disclosure of Commission Position of Indemnification for Securities Act Liabilities     

Interests of Named Experts and Counsel     

Additional Information     

Reports to Security Holders     

Financial Statements     


On top of preparing and filing this monster of a document, you then get reviewed by the examiner assigned to you by the SEC. SEC Examiners are very thorough and diligent (as they should be) in making sure the company’s disclosures are adequate and proper. After 30 days, SEC comments should be received, it is now the job of the company, Lawyer, Accountant, and Auditor to address all of the comments and respond back to the Examiner. The process of the comments and response period can go on average 5-7 times before getting the green light from the SEC. Getting SEC approval can be an arduous experience for some companies. It involves simultaneously juggling between your Lawyer, Accountant, Auditor, and SEC Examiner. All the while you cannot raise Capital, and you need to keep paying for on-going expenses, including updating your financial statements each quarter. Which potentially could slow you down after the end of each quarter. 


Fast forward approx. 9 months from the day you started, and after all that hard work, the day has finally come and your S-1 is now finally deemed EFFECTIVE!!!!!! Now you can finally raise Capital, right? Nope! Now you must file for Blue Sky applications within the appropriate States which you plan on raising Capital in. This will slow you down for about 60 days, or so. 


Ok, so now you have raised your minimum Capital requirement outlined in your S-1 in order to proceed to the finish line. The last step will prove the hardest though, since you still need to find a Market Maker to file a 15c2-11. And guess what? There are currently a very limited number of Market Makers (only two that I know of)  in the entire U.S. willing to file 15c211’s with FINRA for start-up’s and small emerging growth companies. Since there are only a limited amount of firms doing it, you could imagine that they are extremely in demand, and backed up with eager clients needing their assistance. 


Assuming you were able to gain FINRA approval, and got assigned your trading ticker symbol, now you need to file for DTC Eligibility and then your Market Maker must submit/execute the first trade. Attaining DTC is easy (about 30 days), but getting the first trade done is extremely difficult. Keep in mind that if a company’s shareholder does not deposit shares within 30-60 days, you run the risk of losing DTC Eligibility, and having to repeat the DTC process all over again. 

Now that you are finally finished with all of this “red tape”, and can finally get back to putting your energy into growing the business, like you previously did before you even got started on this whole process. I personally am exhausted just writing about the whole process, let alone actually do it.


After investing all your time (16-24 months) and resources in Legal,Transfer Agent, Audit, Accounting, Blue Sky, and DTC Eligibility fees.  Now, please look back in retrospect and ask yourself the following questions:


1.    Are the company’s overall sector valuations still very hot right now? Did we miss out on the right market conditions in order to go public?

2.    If we could’ve gotten to market faster, would that have enabled the company to raise capital faster, and execute the company’s business plans faster?

3.    Would the resources of the company, mainly management's time be better spent actually managing and growing the business rather than spending all of this time jumping through hoops in order to go public? 

4. Did the company miss out on key acquisitions or partnerships during this going public timeframe?


If the conclusion to your answers is that the company and management would have been much better served had they found a faster less burdensome legal alternative.  Whereby they were able to raise Capital immediately via gaining access to the capital markets much faster.  Let’s say within 30 days with certainty, by purchasing a listed company.  Avoid unwanted “red-tape”, and free-up Managements time towards the most important goal of the company, which is actually growing the business, and improving its bottom line.  If this all sounds ideal, then perhaps a Reverse Merger is for you….


“Red tape will often get in your way. It’s one of the reasons I often carry scissors!”


Richard Branson.


(It is interesting to note that Richard Branson's own company Virgin Galactic recently went public via a Reverse Merger).

The information provided on in this blog post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this blog are for general informational purposes only.  Readers should contact their attorney to obtain advice with respect to any particular legal matter.  No reader, user, or browser of this site should act or refrain from acting on the basis of information on this blog without first seeking legal advice from counsel in the relevant jurisdiction.