Why are Reverse Mergers Often the Victims of Short Sellers?

There is a great deal of abuse going on in the OTC Bulletin Board Market and a lot of money is being made as result of it. Regulators are trying to deal with the problem but are unable to put a halt to it, unless they take drastic steps which will be detrimental to the small and micro-cap market.

The small and micro-cap market is an essential part in bringing small and mid-size companies public through Reverse merger and Regulation D (504) offering, these are the two most popular methods used by small and mid-size companies to go public.

This two avenues are prefer by small and mid size companies because they simpler and less expensive than the traditional IPO, It can be refer to as a simplified fast track method by which a private company can become a public company.

I described the process in detail how small and mid-size companies can go public in previous articles, if you miss them, you can email me and I will be happy to explain it.

I have over 25 years of experience in the securities industry as market maker and trader. In my own brokerage firm and with a couple of the largest wholesalers in Wall Street. I believe my experience qualify me to write on the subject with clarity and honesty from a birds eye view.

I believe in short selling as a legitimate way of providing liquidity to the market as an essential part market making, that is not what I am referring to.

A short position is established when somebody sells a stock they do not own hoping to be able to buy it bac at a later day for a lower price.

There are several reasons why selling short the stock of companies that have gone public through a reverse merger is profitable and easy, I will identify them and suggest ways that this can be stopped once all for all without affecting the legitimate short seller who are willing to sell and bear the risks associated with carrying a short position. Reason number one (1). Corporate shells, in order for an operating private company to go public in a Reverse merger it must merger with a public shell. A public shell is what remains when a public company is bankrupt or liquidated, also some shell are created as Blank Check companies,

A Blank Check company has shareholder and maybe some cash in its books but nothing else, they are created by enterprising entrepreneurs for the sole purpose of merging an operating private company into it.

What happens is that when the shell owner sell the shell to the private company he retains 5-15% of the shares for himself, on top of collecting any where upward of $500,000.00 for himself. And even if he signed and agreement not to sell for a year, most of these people can not be trusted and will at some point dump the stock or have somebody create a short position in their behalf.

Solution: The shell owner must be made to sell the entire position and be content with the money, which in most cases represents an enormous profit. I don't have anything against anybody making a lot of money, I am all for it because I also stand to make a lot of money, I am against the way they do it.

(2). The shareholder base: In order for a company be listed on the NASDAQ Small-Cap market or the OTC Bulletin Board it must have a specified number of shareholders to qualify for listing.

(2A). Improper due diligence: Prior to purchasing a shell the private company along with the consultant that they retain to assist them in the Reverse merger should do a complete review of the shareholder list. some of those shareholder may have excessive number of shares and the true beneficial owner may be the shell owner or the consultant himself, there are a lot of smooth talking wolves posing as consultant who are operating in conjunction with the shell owner.

Solution: First run the consultant's named and his previous employer through google and see if he has been convicted of any securities related crimes and has been barred from participating in any stock related transactions. Second write the regulator and request that consultants be required to have a website with their name on it, most of this unscrupulous character operate in a stealth manner so that regulators can't detect their activities.

Petition the Securities and Exchange commission requesting a reduction in the number of shareholders require for listing, and if a shell has too many shares outstanding don't buy it!

(3), Market Makers: Market makers in OTC Bulletin Board Securities are permitted to maintain a short position in securities that they are acting as market makers, but what some trader do is they register for a stock and go out sell stock on the bid (the price other market makers are willing to pay) and immediately cease to make a market in the stock and keep the short position.

Technically when a trader does this, he is circumventing the intent of the rule which allows market makers to short a stock in his role as a market maker.

Solution: Require traders to remain acting as market makers until they purchase the stock back, also regulators must make clearing agent to enforce the rules concerning the delivery of the securities on settlement or execute a buy in (buy the stock back and charge the seller) if the seller fails to deliver the stock within the prescribed period of time.

I believe that these reforms will go a long way in altering the climate for participant in Reverse merger, and in removing the vultures the prey on unsophisticated business owner from the market place.

But until the regulators act the responsibility is on the business owner to perform the proper research, if I sound like a crusader maybe that is because the industry has been good to me and I hate to see the vultures taking it over.

Joseph D. Quinones, President of Genesis Corporate Advisors has spent over 25 years in the securities industry. In 1992 he founded JDQ Financial Group, Inc. and proceeded to build it up from a one man operation to the point where it employed many traders, advised numerous client and generate millions in revenues.

If you are thinking about doing a reverse merger and have questions contact us at: www.genesiscorporateadvisors.com

Email: josephquinones@genesiscorporateadvisors.com

---

Small Business Support Equals Survival

Support is critical for your small business survival. You may... Read More

Common Mistakes When Planning Your Medical Spa

Everything starts with a business plan: If you don't have... Read More

Keeping your Business Alive

As long as you eat and breathe you will stay... Read More

Packing Material Thats Cheap!

Shipping materials can be expensive! Even the styrofoam "peanuts" can... Read More

Small Business and Wichita

Owning a small business in Wichita, KS might not be... Read More

How to Give Informative Talks

Why should you do informative talks to smaller groups?Informative talks... Read More

Trailblazer Interview with Diane J. Levin, Partnering Solutions

Today is a Red Letter Day! It's special because today... Read More

Carwash Franchisor Case Study

There are only a handful of car wash franchises in... Read More

How to Remove Stress from Owning a Business... Forever!

I meet and talk to hundreds and hundreds of business... Read More

The Most Important Decision of Your Massage Business Career

Don't you find that there are so many decisions you... Read More

Five Tips for First Time Entrepreneurs

It seems so long ago that I started my first... Read More

Janitorial Cleaning Service: Getting Started

A janitorial cleaning service is one of the best businesses... Read More

Mobile Car Wash and Cleaning Post Office Jeeps

If you own a mobile truck washing, pressure washing or... Read More

How Is the LEGAL SYSTEM Dishing Out JUSTICE in Your Town?

Thankfully, most of us will never find out. That is... Read More

How to Protect Yourself & Your Business

As a business owner, you already know how important it... Read More

Financial Dose for Business

The goals of businesses have undergone much evolution from the... Read More

10 Cardinal Rules for Business Growth

After over 30 years of participating in hundreds of businesses,... Read More

20 Great Ways to Market Your Business Locally

Whether your target audience is in your neighborhood or across... Read More

Secrets of Cleaning Truck Trailers in Your Fleet from a Veteran Truck Washer

Cleaning the trailers towed by big trucks is not easy,... Read More

5 Steps To Success for Small Business Owners

Everyone wants to succeed in life. Most people want to... Read More

Retail Customer Opportunities for Pressure Washing Companies

Pressure washing companies must look for customers in the retail... Read More

Small Business Owners - Form a Relationship with Your Bank Manager

It's just like a marriageTo expect a bank manager or... Read More

Making Your Purpose Your Business Step #2- Getting From Point A to Point B

In my previous article, Step 1, your challenge for the... Read More

Boston Market; Mobile Auto Detailing

Boston itself covers 50 square miles of concrete and traffic,... Read More

Creative Metrification - A Technique to Improve

Some things in business are relatively easy to measure ?... Read More

The Joy and Hazards Of Finding Your First Office

Q: I have outgrown my home office and need to... Read More

Top Ten Resolves for Building Your Business in 2005

1. Resolve to build a consistent network system.Since referrals are... Read More

How to Start a Pet Transportation Business

Pet Transportation Services are needed as the number of pets... Read More

Excuses Franchisees Make; When They Violate Exclusive Territory Agreements

One of the biggest excuses franchisees of home based and... Read More

Drivng Home the Point - An Outsourcing Story in China

A few years ago, I visited Beijing for the first... Read More

Small Business And The Ability To Find Market Place Opportunities

Marketing is one of the four corner-posts of a solid... Read More

A Small Business Consultant Can Help in Many Ways... But One Thing He Can?t Provide

A consultant must remember that the business belongs to the... Read More

Small Business Spoiler - Procrastination

One of the most common issues that comes up for... Read More