Although a frequent critic of the Securities and Exchange Commission's ("SEC") often belated regulation of Wall Street, I want to take this time to compliment the federal regulator on an excellent Investor Bulletin, which sets forth in a comprehensive manner the nature of reverse mergers - and also provides investors with compelling reasons to approach such deals with care.
As a public service, I would like to reiterate the SEC's investor checklist for reverse-merger deals, as noted on Page 4 of the Bulletin:
Take Precautions: Look for Reliable Information
Investors should be careful when considering investing in the stocks of reverse merger companies and should make sure that they have accurate and up-to-date information about a company before investing.
Research the Company: Always research a company before buying its stock, particularly if the company has been subject to a trading suspension or has been delisted from an exchange. Evaluate the company's finances, organization, and business prospects. This type of information often is included in filings that a company makes with the SEC.
Review the Company's SEC Filings: This information is free and can be found on the Commission's EDGAR filing system.
Be Aware of Companies that do not File Reports with the SEC: Some companies are not required to file reports with the SEC. These are known as "non-reporting" companies. Be aware of the risks of trading the stock of such companies, as there may not be current and accurate information that would allow you to make an informed investment decision. Because an operating company that is not required to file reports with the SEC is, by definition, a non-reporting company, historical information about that company is likely to be limited. Further, information about a public reporting shell company that a non-reporting operating company merges into, in a reverse merger, would not be relevant to the operating company.
Be Skeptical: Whenever someone gives you a "hot" tip, always ask what motivated them to do so. Make sure that you do your own research instead of relying on what somebody has told you. Keep in mind that information from online blogs, social networking sites, and even a company's own website may be inaccurate and sometimes intentionally misleading.
Read the full-text of the Investor Bulletin: Reverse Mergers (June 9, 2011)