Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

• Whistle-blowing:  the law requires that public companies create a process for employees to alert an independent member of the board of directors to any concerns
• Officer Certifications:  CEOs and CFOs are now required to to certify, subject to civil and criminal penalties, that the financial statements are properly stated
  
• Internal Controls and Audits:  the law set out new standards for internal controls and audits
  
• 404 Audits:  section 404 of the law requires a thorough audit of the financial system and controls, typically at very high costs
  
• Ban on loans to officers: the law also bans loans to officers
  
• Independent Board Members:  the law requires a majority of independent board members for most companies
  
• Independent Audit Committees: the law also creates standards for the audit committee, including a strict definition for financial experts serving on the committee

I have been considering of late the ethical implications of over-regulation. While over-regulation is difficult to define, let's presume for a moment that we could agree on what that would mean.

If the rules of play within a given arena, say securities regulations, are too complex to be followed by many practitioners, three problems arise.

First, and of greatest concern, is that participants may feel compelled to ignore certain rules simply because they can't understand and implement all of the required nuances. Having made the decision to disregard certain regulations, a psychological barrier has been breached--the practitioner is now choosing to break the rules. The threshold for rule-breaking becomes the ethical debate rather than whether or not to comply.

There are two groups of people reading this post; I apologize to both of you because I'll try to take the time to write this post so as to be relevant to both groups.  One group knows what a reverse merger is and wonders why I suggest that you run away from it.  The other group wants to know what a reverse merger is and why I suggest that you run away from it.

For group two, a reverse merger is a merger between a private company, typically with a small but promising business, and a public company that has discontinued its operations, leaving only a "shell" with publicly traded shares.  The transaction is usually structured with the public company acquiring the private one and subsequently changing the name of the public company to the name of the private company.  Because the public company had no operations, it likely had no officers.  The private company officers become the officers and directors of the public company.  Voila, the private company is public without a public offering.  Oftentimes, a third party or parties, will contribute equity capital to the newly combined company to provide needed capital.

It sounds easy enough, so you ask, what's wrong with that?

In a political context, we talk about liberal and conservative, Democrat and Republican, Bush and Clinton.

In accounting, we talk about aggressive and conservative.  The traditional notion was that accounting entries that resulted in understating actual earnings were “conservative” and entries that led to overstating earnings were “aggressive.”  The question for entrepreneurs and executives might be, “which is best for maximizing the value of my business?”

The SEC and FASB (the folks who define Generally Accepted Accounting Principles or GAAP) view it as their primary objective to end this discussion in favor of being “simply right.”