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

In The News:


pen paper and inkwell


cat break through


Janitorial Cleaning Service: Getting Started

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

Avoiding the Small Business Cash Flow Roller Coaster

A solopreneur I know disappears from my radar screen for... Read More

Tips For Successful Home Show Businesses

Opportunities for home show businesses have never been more abundant.... Read More

Be Nice to Your Payroll Department

Ok, so next to the taxman, your company payroll department... Read More

Street Wars Between Mobile Car Washers and Mobile Auto Detailers

There is much competition in the mobile auto detailing business.... Read More

Frodos Journey: What It Can Teach You About Marketing Your Small Business

Just recently, I took a break and caught "The Return... Read More

Beginning an Internship Program

CONSIDERATIONS FOR YOUR INTERN: Specify the number of hours the... Read More

Reclaim Equipment Detailing Industry and NPDES, EPA, Storm Water Rules

It behooves every professional mobile auto detailer to stay up... Read More

Simple Business Tactics Are Your Key To Success

In a world full of complications sometimes we overlook the... Read More

Change May Be Your Ace in the Hole

Whether it has been thrust upon you by external market... Read More

Reverse Merger: Have They Taken the Reverse out of Reverse Merger?

Are the promoters and consultants destroying the market for Reverse... Read More

Environmental Pressure Washing in Pennsylvania

If you run a mobile car wash, mobile fleet washing... Read More

What are the COSTS Associated with joining Leads Groups?

When it comes to cost, how much can you afford... Read More

Excuses Franchisees Make; When They Violate Exclusive Territory Agreements

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

Retail Customer Opportunities for Pressure Washing Companies

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

Small Business Operators - 7 Reasons You Should Change Your Accountant

A recent survey showed that only 28.7% of small business... Read More

De-Ionization Decisions in Mobile Car Washing

Many mobile car wash operators would like to add de-ionized... Read More

Boston Suburban areas a good choice to run a business

BioTechs even with the latest news had shed over 1000... Read More

Pressure Washing Business and Post Fire Cleanups

Many have not experienced a fire up close. One year... Read More

Entrepreneurs Go Virtual!

With the massive explosion of start-ups and home businesses developing,... Read More

Five Facts and One Motivating Factor Behind a Successful Home Business

All legitimate home business entrepreneurs insist and announce loud and... Read More

Be Prepared When Business Investors Look Beyond Your Business Plan

You have spent considerable time pulling your business plan together,... Read More

Incorporating a Small Business: S corporations versus C corporations

If you've been considering incorporating your small business, you've probably... Read More

Hispanic Small Business Advantage

One thing I have noticed in my travels to different... Read More

Franchise Buyers from Hell

I ran a franchise company for many years, a car... Read More

Become The Squeaky Wheel and Watch Your Business Skyrocket!

Providing high quality customer service is a must for any... Read More

Family Business and Conflicts

What is a Family Business? A family business is basically... Read More

Patient Records - Your Responsibilities

As a practise gets larger & larger the associated problems... Read More

Small Businesses With Work Trucks; A Warning

If you are a non-operator owner of many work trucks,... Read More

Site Selection - Slice of Life, A Car Wash and Detail Center DownTown

There is a continual trend we are seeing which I... Read More

Small Business Franchise Opportunities

Many businesses offer small business franchise opportunities. There are many... Read More

Small Business Pricing Strategies

TACTIC #1 -- Never simply slash your prices, unless you're... Read More

The Inside-Out Business Plan? -- Your Small Business Plan in 10 Easy Questions

Writing a business plan for your Solo Entrepreneur business doesn't... Read More