Monday, December 12, 2011

Startup Companies

Startup companies are a dream of individuals and institutional investors. Along with lower sustenance costs and a high potential of return on investment, startup companies also provide more scalability than an established business. In spite of the high failure rate associated with startup companies, their potential to grow with minimal resources and scalability to direct the growth in any direction has made them a popular investment choice. However, the intellectual property of startup companies plays an important role in deciding the value of the company. While 75% of the value of a public company is based on its intellectual property, 100% of the value of a startup depends on its intellectual property. This dependency of investor enthusiasm on the intellectual property has forced startup companies to look for newer ways to raise capital such as direct registration, reverse mergers, self registration etc.

Reverse merger is a cheaper and faster counterpart of IPO. When an existing public company becomes inactive and has any assets meeting with the exchange requirements, it may continue to be traded on a stock exchange. However, a company with no assets is normally traded in the OTCBB (Over the Counter Bulletin Board) or in the Pink sheets. A startup company may buy such "shell"s and continue to use the trading public stock. Though this is the fastest way to go public, it also had its share of disadvantages such as the new company stock trading without complete disclosure. In order to prevent abuse of the reverse merger option, the SEC review process mandates the submission of a Form-8K within four days of the merger. Since this was no different that issuing a public offering, the startup companies were now forced to find better alternatives.

Direct registration is a process where startup companies issuing the shares hold the shares, and the buyer is identified as the owner of the shares. Direct registration refers to registering the buyer's name in the books of the company and can be done by directly purchasing shares from the company. While similar to owning paper certificates, it also reduces the burden of paperwork. However, a minor disadvantage is that the shares cannot be sold at any time. Since the shares have been bought from the company, the share selling may happen once at the end of the day, week or month.

Despite their advantages, the aforementioned approaches are expensive. Self registration with the SEC is a cost-efficient alternative. This can be done by meeting the reporting requisites of the SEC review process. This way, the investor confidence in the shares increases. Moreover, registration with SEC is a better choice since unregistered companies are allowed to trade only on Pink sheets and other OTC forums.

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