ADVANTAGES OF AN IPO vs.

APO
An Initial Public Offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. An Alternative Public Offering (APO) is the combination of a reverse merger with a simultaneous Private Investment of Public Equity (PIPE). In the reverse merger, the private company becomes public by merging with or being acquired by a public shell Company. The shell company is a public company that has little or no assets or liabilities. When the private company and public shell merge together, the combined entity thereafter trades under the previously private companys name rather than the shell companys name as it did before. It allows companies an alternative to the IPO as a means of going public while raising capital. The APO has the major advantage of speed by providing quicker access to the market. A company can close an APO in as little as 30 45 days. However, there are several compelling reasons for considering doing an Initial Public Offering (IPO) versus doing an Alternative Public Offering (APO), if speed is not imperative: Stronger Investor Base Higher Valuation of Stock Better Image Lower Costs

Stronger Investor Base and Stock Liquidity The APO eliminates the IPO registration and review process with the SEC, which can reduce the timing to trading as a public company from the normal 4-6 months of an IPO. However, as a consequence of eliminating the registration process, the investor base is limited for an APO. The typical PIPE investors are institutional investors, primarily hedge funds, but may include Qualified Institutional Buyers (QIBs) and accredited investors, otherwise known as high net worth individuals. This is considered a private placement of restricted shares with sophisticated investors, which is the reason the SEC allows the transaction to occur without prior review. On the other hand, an IPO transaction is a public offering and is sold to the general public because it

has been previously reviewed by the SEC. Because of the exposure to the public, an IPO is done with a higher exchange than the OTCBB which leads to more investors, more market makers trading the shares, and therefore less concentrated shares, which minimizes stock volatility and increases the long-term investor base. Higher Valuation An IPO provides higher valuation for the Company and lower cost of capital. The PIPE in an APO is restricted shares sold to large buyers, which requires valuation at deep discount to true market valuation. These PIPE investors are locked up from selling for 6 months while IPO buyers do not require such discounts since they receive free trading shares. In an APO, the stock starts trading near this discounted price which tends to be lower than the IPO price. Moreover, with an APO, there is overhang on the market over fears that the concentrated stock positions will sell after the restriction is removed from the shares. In general, stocks in public companies that completed an IPO versus APO are much more liquid. Long term, the higher liquidity resulting from an IPO usually is reflected in higher multiples and valuations. With the higher liquidity and valuations, a public company has greater opportunity to sell more shares of stock to investors. Typically, about a third of all IPO issuers return to the public market within 2 years to issue a "seasoned equity offering" (the term secondary is used to denote shares sold by insiders rather than by firms). Those that do return, raise about three times as much capital in their seasoned equity offerings as they raised in their IPO. A secondary offering after an APO is not as likely to be successful due to the limited liquidity in the stock. With the ability to raise additional capital by returning to the public markets for another offering, a public company is better able to finance a cash acquisition. In addition, a public company also has the advantage of using the market's valuation when exchanging stock in an acquisition. Moreover, using stock to acquire another company can be easier and less expensive than other methods and tends to be more acceptable if there is greater liquidity.

Better Image and Publicity Companies that undertake an IPO have higher profiles than those completing an APO. Historically, reverse mergers have had a tainted image having been established by the pump and dump promoter community. Early APOs started as blind pools and were led by small brokerage firms based in poorly regulated jurisdictions such as Vancouver, Las Vegas, Long Island and Boca Raton. Today, only strong companies can undertake an IPO and weaker companies access the public markets through APOs. For companies that depend on their image with the public, such as a clothing brand, an IPO is much more beneficial. Companies undertaking a public offering through an IPO are more likely to receive the attention of major newspapers, magazines and periodicals than those doing the private placement of an APO, with a limited number of sophisticated investors. The formal registration process, exposure to all types of investors and the extensive roadshow process from an IPO can generate prestige, publicity and visibility, which is effective when marketing your company. A company's founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a company that goes public through an IPO. The publicity received from a public offering encourages new business development and strategic alliances. Moreover, the prestige can be very helpful in recruiting key employees and marketing products and services. Often, a company's suppliers and consumers become shareholders, which may encourage continued or increased business. A successful public offering can get your company's story out to the world and the

sharing of ownership with the public spreads your companys reputation and with it business opportunities should increase. Cost Despite the advantages highlighted, an IPO is cheaper than an APO since the major cost is often hidden. An IPO has a total cost of approximately $500,000, without the underwriting fees which are lower than an APO, which is broken down as follows: legal expenses of $200,000 (both company and underwriter counsel), auditor fees of $150,000, stock exchange fees between $50,000 and $100,000 (OTCBB, AMEX or NASDAQ), SEC listing fees of $5,000, printing and engraving costs of $25,000 and another of $50,000 in roadshow expenses. The SEC monitors and caps these underwriting fees in the review process. For an APO, there is no regulatory agency monitoring costs since the reverse merger and PIPE are private transactions with sophisticated investors. In total, APOs tend to cost in excess of $2.0 million for an OTCBB shell APO or over $1.0 million for a Synthetic or PINK Sheet shell APO. APOs costs about $750,000-$1,000,000 to acquire a controlling interest in a trading shell trading on the OTCBB. Additionally, the Company must give up a slug of equity to the shareholders of the shell as well, which usually totals 2%-5%. If there is no cash to be paid, the shell holders generally look for about $2.5-$3.0 million in equity value as part of the merger. Virgin or synthetic shells cost about $200,000 to acquire 100% of the stock, or about $1.0-$1.5 million in equity value if no cash is being paid but the number of owners is limited, there is no liquidity, and often there are listing issues with the exchanges and authorities. In addition, there is an additional expense of $250,000 that includes $75,000 in legal fees, $150,000 in auditing fees, $25,000 in roadshow and miscellaneous expenses. Therefore, an IPO is less expensive than an APO.