What is a 'Reverse Merger'?
-A 'Reverse Merger' (RM) is a method by which a private company can become a public company. To do a reverse merger, an already public company will issue shares to acquire a private company that has a business and value to it. Normally the public company has little or no actual value, other than the fact it is already active for public trading (having a stock symbol and exchange listing). This public company is known as a 'shell', or 'shell stock'. This is an accurate metaphorical name since the "shell" is a legitimate company, but has nothing of value "inside".
Reverse mergers, or reverse takeovers (RTO) as they are also known, are a popular method for a private company to become public. Most people know of the IPO (initial public offering) as a way for a company to go public, but the reverse merger is not as well known. It has some key advantages and disadvantages in comparison to the IPO. On the good side, a reverse merger is much cheaper and can be completed faster. On the bad, there is no capital raised through the process, unless dilution occurs after its completion. There is much less exposure for the stock since major investment banks are not involved, and the stock generally trades on a small exchange such as the OTCBB or PinkSheets.
For penny stock investors, reverse merger plays can be the most profitable of them all. Many RM stocks have exploded more than 1000%, the highest of recent reverse merger stocks, LFZA (now USSE) soared to a high 420,000% greater than pre-RM prices. Investors must be careful, however, since companies have been known to use the reverse merger as a means to create a "pump and dump" scam. If the company proclaims outrageous profits, assets, or projections, beware. If it sounds too good to be true, it probably is. Some of these stocks might be a good trade, but usually only in the very short term. A legitimate company with realistic claims and a sound business model may be a very good investment. These types of stock slowly work their way toward fair market value as investors methodically accumulate shares.
Read More about Reverse Mergers Here
What is a 'Forward Split'?
-A 'Forward Split' (F/S, FS) is the opposite of a reverse split (see next page), and is most commonly done at a 2 to 1 ratio. For every share you own, after th
e F/S you will own two shares at half the price each. This is normally done to bring high prices down to more attractive levels for small investors. A forward split is usually a good sign of company growth and continuation of the share price increase. A forward split is normally not a common occurrence for a penny stock, since the price per share (PPS) is already very low. Penny stock companies would be more interested in higher prices which are required for 'uplisting' to bigger exchanges (NYSE, Nasdaq, etc).
Check out the OTC/Pink Forward Split Board Here
What is an 'Uplisting'?
-An 'uplisting' is the process of moving a stock to trade on a higher exchange. In the penny stock arena, the most common uplisting is from the PinkSheets to the OTC Bulletin Board (OTCBB). While it is possible for an OTCBB stock to uplist to a big board such as the NYSE or Nasdaq, it is a very rare occurrence. The reality is that few penny stocks actually succeed to the point that they meet the requirements of a listing on a big board. Stocks that are able to uplist, are showing real promise to be considered as a good investment.
An uplisting is a sign of continued growth and success. Once again, however, beware of companies that promise an uplisting and then never seem to deliver. It is often only a ploy to create buying which the company can sell shares into. No deadlines, missed deadlines, and scarce information on the companies financial performance are all red flags when a company is promising an imminent uplisting. Uplistings take a substantial amount of time and money due to the required audits, paperwork, and legal issues. If the company has never issued any reports of their performance, chances are that they either have a long way to go to become uplisted, or have no business being uplisted in the first place.
What is a 'Buyback'?
-A stock 'buyback' is the act of purchasing shares from the open market by the company. These shares were once issued in the initial formation of the public company, and/or as a means of raising capital. To increase share value and entice investors to purchase and hold a position, the company can buy back shares. This is essentially the reverse of dilution, and has a very positive effect on the stock. While a rather rare occurrence, successful companies that value their shareholders have been known to roll profits into a buyback program.
Penny stock investors must, however, be wary of scams that promise a stock buyback, while in reality the company uses the "good news" to sell shares. Often times, the press release will state that the company plans to buy back "up to" a certain amount of shares. "Up to" could mean the company is only going to buy one single share! While the hype of a stock buyback on a scam stock could provide ample opportunity for a profitable trade, long term investment in this case is not a good idea. Again, if the company is promising things that seem too good to be true, beware.
To stay safe playing buybacks, only invest in companies that are fully reporting (ie: OTCBB stocks or better), show a solid and viable business model, and profits on their financial reports. Otherwise, the company most likely has no means at all of affording a stock buyback.
What's Next?
-Next we will learn about "Bad" company actions, and how to identify them.
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