Why are Reverse Mergers Often the Victims of Short Sellers
Below is a MRR and PLR article in category Finance -> subcategory Stock Market.
Why Reverse Mergers Are Targets for Short Sellers
Overview
The OTC Bulletin Board market is rife with exploitation, allowing some individuals to make substantial profits. While regulators are striving to address these issues, their efforts might lead to drastic measures that could harm small and micro-cap markets.
Key Terms
- 15c211
- Reverse Merger
- Direct Public Offering
- Regulation D
- Pink Sheets
Simplified Path to Going Public
Reverse mergers and Regulation D (504) offerings are favored by small and mid-size companies for becoming publicly-listed because they're simpler and more cost-effective than traditional IPOs?"essentially a fast track to going public.
I've detailed these processes in previous articles. If you're interested, feel free to contact me for more information.
A Professional Perspective
With over 25 years of experience in the securities industry as a market maker and trader, both in my own brokerage and on Wall Street, I have a broad view of the issues at hand. While I support short selling as a way to provide market liquidity, problems arise when it's abused.
Why Reverse Mergers Attract Short Sellers
1. Corporate Shells
To go public via a reverse merger, a private company must merge with a public shell, which sometimes originates from liquidated or bankrupt companies, or is created as a "Blank Check" company, only existing to facilitate such mergers.
Once the shell is sold to a private firm, the original owner might retain 5-15% of shares and substantial cash while possibly dumping the stock or facilitating short positions through deceitful practices.
Proposed Solution: Require the original shell owner to sell their entire stake, profiting from the sale itself without owning residual shares.
2. Shareholder Base and Due Diligence
To qualify for NASDAQ Small-Cap Market or OTC Bulletin Board listings, companies need a certain number of shareholders. Yet, some shareholder lists may conceal excess shares controlled by the shell owner or consultants, who might have misleading motives.
Proposed Solutions:
- Conduct thorough investigations on consultants and shareholder lists.
- Use Google to check for any securities-related offenses by consultants.
- Regulators should mandate consultants to maintain websites for transparency.
- Petition the SEC to reduce shareholder number requirements.
3. Market Maker Practices
OTC Bulletin Board market makers can maintain short positions while trading. Some traders exploit this by shorting the stock and ceasing market making, skirting regulations.
Proposed Solution: Mandate traders to stay active as market makers until they cover their positions. Regulators should ensure clearing agents enforce timely settlements.
Conclusion
Implementing these reforms could substantially improve the environment for participants in reverse mergers and protect businesses from predatory practices. Until regulatory changes occur, business owners must conduct diligent research.
For more information, visit: [Genesis Corporate Advisors](http://www.genesiscorporateadvisors.com)
You can find the original non-AI version of this article here: Why are Reverse Mergers Often the Victims of Short Sellers .
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