It's the time of year when many of us contemplate gifts for our friends and family. Choosing a gift for some will be harder than for others.
          For the business person in your life who seems to have everything, how about giving them a public company?
          Many entrepreneurs have the goal of one day becoming "public." That is, their stock publicly trading on one of the exchanges. The traditional initial public offering (IPO) to become publicly traded involves a lengthy accounting, legal and underwriting process. Costs can be $500,000 to $1 million.
          However, a technique called "reverse merger" may allow a private company to become public in a fraction of the time -- just in time for the holidays.
          In a reverse merger, the private company's shareholders purchase control of a public shell, possibly for as little as $35,000. A public shell is a publicly listed company with no assets or liabilities. All that exists of the original company is its corporate structure. By merging into such an entity, a private company becomes public.
          The transaction can be accomplished within weeks, resulting in the private company becoming a public one. If the shell is a reporting, SEC-registered company, the private entity avoids much of the expensive and time-consuming review process with state and federal regulators, because the public company already has completed the process.
          Upon completion of the reverse merger, the name of the shell company usually is changed to the name of the private one. If the shell company has a trading symbol, it's changed to reflect the name change.
          An information statement, called an 8-K, must be filed within 15 days of the closing. The 8-K describes the newly combined company, stock issued, information about officers and directors, and audited financial statements. The 8-K must disclose the same type of information required when registering a class of securities under the Securities Exchange Act of 1934.
          If the shell company is already listed on the NASDAQ Bulletin Board exchange, the registered or "free trade" shares can continue to trade. To trade new shares, the newly combined public company must first register the shares with the SEC. This process takes three to four months and normally requires filing an SEC Registration Statement SB-2 or SB-1.
          If the shell company doesn't have a symbol, an application for a symbol is typically made to the NASDAQ Bulletin Board. The application for a symbol requires filing a Form C211 by a member of the National Association of Securities Dealers.
          Although reverse mergers are receiving more scrutiny from the SEC than in the past, there remain advantages, including:
          - Due to the liquidity available through the public exchanges, publicly traded companies enjoy substantially higher valuations than private companies.
          - Raising capital is frequently easier because of the added liquidity for the investors, and it often takes less time and expense to complete an offering.
          - The time required to secure public listing is considerably less than that for an IPO.
          - The costs are significantly less than the costs required for an initial public offering.
          - No underwriter is needed. This is a significant factor to consider given the difficulty smaller companies face attracting an investment banking firm to commit to an offering.
          - Acquisitions with public stock are often easier and less expensive.
          - Lack of an earnings history doesn't normally keep a privately held company from completing a reverse merger.
          - Stock options or stock incentives can be useful in attracting management and retaining valuable employees. In extreme cases, special stock known as S-8 stock may be issued to employees in lieu of regular salary.
          - Public company stock provides a long-term exit strategy for the founders and is easier to use in estate planning for the principals.
However, disadvantages of going public (including through a reverse merger) are:
          - Complete (and expensive) financial disclosure is required for publicly held companies under the SEC regulations.
          - There are substantially higher costs of regulatory compliance for the audit, legal and investor relations work.
          - Owners of the private company often give up some equity percentage in the merger (usually between 15 percent and 20 percent).
          - Management must devote additional time to public company activities.
          - Increased visibility brings a higher level of liability exposure.
          - Founding management may become distracted by the opportunities owning publicly traded stock offers. The distractions can become so severe; management might even forget to keep running the business.
          There are thousands of Web sites explaining and offering assistance for reverse mergers. Many are investment consultants who also are selling public shells. Some of the more well-known are:
          www.gopublicintheusa.com
          www.reversemerger.com
          Greenwood Village firm www.keatinginvestments.com
Local author James Arkebauer, founder of Venture Associates (www.venturea.com) in Denver, has written an excellent book: "Going Public: Everything You Need to Know to Take Your Company Public, Including Internet Direct Public Offerings" (Dearborn Financial Publishing, $29.95), available at bookstores.