In a reverse merger, a company looking to secure funding finds a “shell company”—an overthe- counter (OTC) stock that is publicly traded but no longer conducting business. The public shell company agrees to acquire the private company and relinquish the majority of shares and control of the board to the private company. It allows a private company to go public without the time and money required to go through the IPO process.

Once on the OTC Bulletin Board, the company can trade its shares, grow revenue and eventually qualify for trading on a major stock exchange. Reverse mergers are often combined with Private Investment in Public Equity (PIPE) investments, in which case they are sometimes referred to as “alternative public offerings” or APOs. PIPE money comes in the form of either stock issued at a set price or convertible debt issued to raise capital. In Akeena Solar’s case, for example, the company concurrently raised $3 million in PIPE financing as it traded its stock on the Bulletin Board.

Akeena CEO Cinnamon says he had experience with nearly every type of financing through various startup experiences, but when it came time to source funds for Akeena, he listened to friend and financial advisor Joe Abrams, who “likes to do reverse mergers,” according to Cinnamon. Cinnamon says two things contributed to the reverse merger’s success: an experienced advisor (Abrams oversaw the process for a company called Intermix, which eventually became MySpace), and his company’s ability to meet stated goals.

Akeena raised the money it needed and qualified for the Nasdaq in late 2007. Cinnamon says he thinks a reverse merger could be an appropriate funding model for any cleantech company, but cautions that CEOs need to be aware of the pitfalls of the process, beginning with finding the right advisor to help find the right shell company. “You need partners who really know what they’re doing and you need to really know your business, because you’ll probably need to keep raising money, and the next round goes a lot better if you’ve delivered on your promises to your first investors,” he says.

It’s also important to get and keep investors aware of and interested in your company when you’re on the OTC Bulletin Board, Cinnamon says. “It doesn’t do you any good to be a public company if no one knows about you and no one invests,” he says.

There are also challenges involved in being a very small public company. “You still have to do all the things Wall Street investors expect,” Cinnamon says. “You have to file quarterly, hold earnings calls, send out press releases, ensure that your business dealings are transparent—I had done it before, so it wasn’t new, but it’s not easy managing all that while you’re trying to grow your company.”