More and more small and medium-sized investment banking firms are devoted to raising equity capital for private, emerging growth companies including biotechnology companies as they become publicly held through the reverse merger process.

For most private growth companies, an initial public offering may be infeasible, too expensive or time-consuming, or lack sufficient investment banking interest and market reception. For these companies, a reverse merger can offer an attractive alternate route to raising growth capital and becoming public. In such a transaction, the private company is merged with a publicly traded 'shell' company with current SEC filings, and immediately becomes public as a result. This process provides several advantages to the company, including:

Biotechnology companies, in particular, may need successive infusions of capital during the product development cycle. Once publicly traded, biotechnology companies can potentially expand the range of investors available and willing to finance them. Executives of private growth companies may find that these advantages outweigh the drawbacks of being public, such as compliance with the Sarbanes-Oxley Act of 2002. If thoughtfully structured and well executed, a reverse merger can significantly enhance shareholder value for the private company.

In conjunction with the reverse merger process, the investment banking firm would serve as a placement agent for private equity capital, in the range of anywhere from $5 million to $25 million. From an issuer's perspective, coupling a round of financing with a reverse merger can significantly lower the cost of capital. Frequently, this financing technique compares more favorably with the valuations and attendant dilution presented by traditional venture capital firms, primarily because of the premium associated with a public market for a security.

Many institutional investors, including hedge funds, arbitrageurs, small cap equity advisors, distressed securities funds and proprietary accounts for major Wall Street brokerage firms, have been regular sources of capital for issuers in these transactions. In general, these sophisticated investors have broad investment parameters and are seeking high risk-adjusted returns, on a diversified basis, among various alternative asset classes.

Once the reverse merger and financing have been completed, the difficult tasks of creating a fair aftermarket valuation and liquidity in the company's stock begin. A financial public relations program that includes investor meetings and conference calls (and, potentially, independent equity research coverage) is key to raising the profile of the company's stock and thus enhancing its liquidity and, perhaps, its trading price.