Website design By BotEap.comSmall growing companies that are private and need to raise money are merged with an OTC shell in a reverse merger. They hope that the share price will be high on the public market and that they can then sell shares privately, perhaps in a classic PIPE deal. The price in the private offer is usually a discount from the public price.

Website design By BotEap.comUnfortunately, whether or not the company does a PIPE deal, the performance of the new public company’s stock after a reverse merger with a public front is often dismal. The usual chart of reverse merger stocks looks like an outline of a waterfall as stocks start trading on high expectations, only to sink to near zero supply after a while.

Website design By BotEap.comThere are several possible reasons for this poor performance. First, the front promoters will almost certainly sell their shares. This action will be a substantial part of the company. Even making an agreement to lock your shares may not help much if you have given shares to others or held shares in other accounts that are not part of the lock agreement.

Website design By BotEap.comSecond, substantial blocks of shares may be held by market makers. When you were making markets on more than 300 stocks, one of them would inevitably plunge almost to nothing. When shares went to a very small offer, he would accumulate the shares against the possibility that the company would later be used in a reverse merger. Since the price was extremely low, it took little effort for me to accumulate a large number of shares. When the reverse merger was announced, I would be eager to sell my position. After selling the position, you would stop making a market in the stock. So the company that anticipated having me as a market maker lost on both counts: I was a seller and I left the market.

Website design By BotEap.comThere were also other market makers who specialized in low-priced stocks. Unlike our firm, they had limited funds to take stock positions. These traders provided little to no liquidity in the market. When the stock went up, they would also sell and possibly stop making a market.

Website design By BotEap.comTherefore, many reverse mergers that thought they were buying a front with market makers were actually not getting a real market.

Website design By BotEap.comThe only reason a market maker trades a stock is because they believe they will see trading volume that will allow them to profit from the spread. He knows that unless the company engages in aggressive investor relations, there will be no volume in a small company’s stock and the price will go down. No new purchases = price drops.

Website design By BotEap.comThis brings us to the next reason why reverse merger companies have bad secondary markets: They have been told by their lawyers, their financial advisors, and the people who sold them the shell that once they go public, the company will have unlimited access to the money.

Website design By BotEap.comIn fact, all the company gets is an exit strategy that can be used to attract investors. You still have to grab an investor, take him down, and extract his wallet. Because the lawyers, financial consultants, and the reverse merger company make money when the phantom deal closes, they somehow forget to explain what happens after closing. That’s not your problem; it’s yours.

Website design By BotEap.comThe last reason why reverse merger companies don’t do well in the secondary market is the baddest. They may fall victim to short sellers.

Website design By BotEap.comWall Street, as everyone should know, is not a place where mercy reigns. It is a place inhabited by sharks. Sharks prey on the weak and the unwary.

Website design By BotEap.comShort sellers know that small businesses need to have a steady flow of money in order to grow. Growth requires constant new money, even profitable growth.

Website design By BotEap.comTo get this money, reverse mergers, indeed all companies, need to keep their share prices high. When the shorts raid the stock, they know that pushing the price down can destroy the company. A low stock price reflects poorly on a company. He says that this company is weak and is likely to go bankrupt. He says that this company cannot raise money at a good price. Customers, employees, and investors will exit and avoid a company with a low stock price. If you don’t know how to survive the ravages of short sellers, your business is in grave danger.

Website design By BotEap.comIn short, doing a reverse merger without a complete plan for the secondary market is a trap for the unwary. A reverse merger company that is sold a list of assets that a reverse merger is the total solution is likely to find its share price heading lower. You should have an investor relations and fundraising plan that includes recruiting investors and market makers and fighting short seller attacks.