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Go Public Through the Back Door

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Forget about an initial public offering, says Tim Halter, president of the Halter Financial Group, in Dallas.HFG specializes in helping private companies identify and acquire or merge with dormant or bankrupt publiccompanies. The private company then assumes the "shell's" public presence, usually on the NASDAQsmall-cap market.

"Read the classifieds in the Wall Street Journal on Thursdays," Halter says. "That's where shells areadvertised for sale. The number of ads is definitely greater this year over last year." Public shells are alsooffered on the Internet at sites like www.gatewaysg.com.

Advocates say such a "reverse merger" is a cheap alternative to an IPO. There's no prospectus to print, noroad show to orchestrate, and no underwriter to split the proceeds with, Halter explains. But there's alsonone of the hoopla or credibility that comes with a successful offering. What you do get is a sure deal.Halter says reverse mergers work best for small companies that already have access to capital and stillwant to be public. "You have the benefits of being public, like liquidity for investors, stock for acquisitions,access to a source of capital, and a superior valuation," Halter says. "All of those things have to do withbeing public. None of those things have to do with going public."

If reverse mergers are so great, why doesn't everybody do them? Because some have been a breedingground for charlatans, according to Bruce Kirchhoff, author of Entrepreneurship and Dynamic Capitalism."There's no question that it's cheaper to do a backward merger, but you focus too much attention onfinancial manipulations, and that raises suspicions," Kirchhoff says. "If you're a really good company, youshould be able to do an IPO."

One cofounder who took his company public through a reverse merger is John Venners of KFx Inc., a Denverenergy company. KFx's deal hit a snag when several long-forgotten shareholders from the original shellcompany resurfaced. The original shareholders immediately sold their shares, and Venners's stocktemporarily slumped. "There are pluses and minuses to doing a reverse merger," he says. "A downside isbeing vulnerable to a second agenda that some of the early shareholders might have."




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