Following are some of the primary benefits entrepreneurs and their companies can reap with a reverse merger transaction:

• Imperviousness to market conditions: Conventional IPOs are risky for companies to undertake because the deal depends on market conditions over which senior management has absolutely no control. That is, if the market is off, the underwriter may pull the offering. The market doesn't even need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal, causing it to run out of gas on the runway.

  But with a reverse merger, the deal rests on whether the people who control the shell like the private company and desire to be acquired by it. Market conditions have almost no bearing on the situation.

• Compressed Timetable: Regular initial public offerings can drag on for a year or more, from when the idea pops into the chief executive's head until he or she actually gets a check. Unfortunately, when a company transitions from an entrepreneurial venture to a real public company fit for outside ownership, senior management's time is at its most valuable. Time spent in seemingly endless meetings and drafting sessions can have a disastrous effect on the growth upon which the offering is predicated, and even nullify it. In addition, during the many months it takes to put together an IPO, market conditions can deteriorate, closing the "IPO window" on a company.

  By contrast, conditions permitting-which means, among other things, two interested and willing parties-a reverse merger can be completed in 30 days.

• Reduced Expenses: For a real IPO, it can cost as much as $200,000 just to get a preliminary prospectus on the street. To actually bring the deal to the closing table, the costs increase. A reverse merger, however, can be done for $95,000 to $150,000.

• Corporate Income Tax Shelter: Many shell companies have what is known as a tax-loss carryforward. This means that a loss incurred in previous years can be applied to income in future years. When this occurs, the future income is sheltered from income taxes. Since most active public companies become dormant public companies through a string of losses, or atleast one large one, there's a better than average chance the shell you meet will offer this opportunity.

  (As discussed in the following pages, however, the shell company's previous history can rub off on you, which turns out to be one of the biggest drawbacks to reverse mergers.)

• More Ways To Raise Money: The primary reason to do a reverse merger is the greater number of financing options that become available to companies once they are public. Some of these include:
  1. The issuance of additional shares in a secondary offering
  2. Exercise of warrants. Warrants are options that give the holder the right to purchase additional shares in a company at predertermined prices. When many shareholders with warrants -- which a public company can easily issue -- exercise their option to purchase additional shares, the company receives an infusion of capital, as shown in the chart below.
  3. Private Offerings. Many, many more investors will step up to the plate for a private offering of shares once they know there is some sort of mechanism in place for them to resell their shares if the company succeeds. Most investors realize that even a successful company may not be able to go public if market conditions are off. But a company that is already public ....that's a different story. If it succeeds, there is a greater likelihood of developing a market for its common stock that accurately represents the company and lets investors sell their shares.

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