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Reverse Mergers
And Other Alternatives to Traditional IPOs, Second Edition
David N. Feldman
with contributions by Steven Dresner
The best book to explain reverse mergers, now updated for a new financial landscape
Format: hardcover
ISBN: 9781576603406
Publisher: Bloomberg Press
Pub. Date: 12/2009
304 pages, 6" x 9"
Retail Price: $79.95
Your Price: $67.96
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In good markets or bad, reverse mergers play a key role for companies that want to avoid the IPO route for going public. Since the successful first edition of Reverse Mergers was published in 2006, the economic and regulatory landscape has changed. Executives, owners, lawyers, accountants, professional investors, regulators, and others need to know what those changes mean for reverse mergers.
Reverse-merger expert David Feldman gives an overview of the most important changes since the previous edition was published: new SEC regulations, the changing nature of SPACs (Special-Purpose Acquisition Company), and the emergence of new instruments called WRASPs (WestPark Alternative Senior Exchange Process). The book includes a new chapter on China, and the “Experts Speak” chapter features all new interviewees.
David Feldman is one of the country’s leading experts on reverse mergers, self-filings, and other alternatives to IPOs. His firm has guided hundreds of companies on going public, advising them on structure and mechanics, financing, due diligence, regulatory issues, and more.
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David N. Feldman, a preeminent securities attorney in the field of reverse mergers, is the founder and managing partner of Feldman Weinstein LLP, whose clientele includes public and private companies, investment banks, venture capital firms, and high-net-worth individuals. He is often quoted in the media and is a frequent public speaker and seminar leader. He received his JD from the University of Pennsylvania. Feldman lives in New York City.
Steven Dresner is general partner of Strategic Alliance Capital, which specializes in investing through reverse mergers and PIPEs. He is the editor of the Bloomberg Press books The Issuer's Guide to PIPEs: New Markets, Deal Structures, and Global Opportunities for Private Investments in Public Equity (December 2009) and PIPEs: A Guide to Private Investments in Public Equity (2006).
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Introduction
1 Why Go Public?
PART ONE THE BUSINESS OF REVERSE MERGERS
2 IPOs Versus Reverse Mergers
3 Shells and Deal Structures
4 Introduction to Rule 419
5 China: Land of the Panda, the Great Wall, and Reverse Mergers
6 Financing
7 Winning Market Support
8 Shady Tactics
PART TWO LEGAL ISSUES AND TRAPS FOR THE UNWARY
9 Deal Mechanics
10 Due Diligence
11 The Regulatory Regime
PART THREE OTHER WAYS TO GO PUBLIC, MANUFACTURING SHELLS, AND CURRENT TRENDS
12 Self-Filings and Other IPO Alternatives
13 Special Purpose Acquisition Companies (SPACs)
14 Form 10 Shells
15 The Experts Speak (Again): A Look Ahead
Glossary
Index
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From Introduction
Over the last decade, Wall Street has discovered that there are more ways to go public than through the traditional initial public offering (IPO), making it easier for more companies to reap the benefits of public status. Public companies find it easier to attract investors than private ones do because investments in public companies are more liquid. Because of this liquidity, public companies can also use their stock more effectively to fund acquisitions and reward executives. Having various options for going public is good news to the vast majority of smaller companies, most of which do not fit the typical profile investment banks use when deciding which companies can successfully accomplish an IPO.
The two most popular alternatives to IPOs are reverse mergers (including mergers with special purpose acquisition companies, or SPACs) and self-filings. The following well-known companies have gone public through reverse mergers:
❑ Texas Instruments Inc.
❑ Jamba Juice, Inc.
❑ Berkshire Hathaway Inc.
❑ Tandy Corporation (Radio Shack Corporation)
❑ Occidental Petroleum Corporation
❑ Muriel Siebert & Co., Inc.
❑ Blockbuster Entertainment
❑ The New York Stock Exchange
Less well-known deals are no less interesting:
❑ In 2006, Cougar Biotechnology merged with a shell company and raised $50 million. In 2009, it was sold for $1 billion. ❑ In February 2005, an investor group led by billionaire Robert F. X. Sillerman, former owner of well-known concert promoter SFX Entertainment, raised $46.5 million contemporaneously with the acquisition of a public shell company called Sports Entertainment Enterprises, Inc. and the acquisition of an 85 percent interest in Elvis Presley’s name, image, and likeness, and the operations of his home at Graceland. Since then the company, now known as CKX, Inc., has completed several more acquisitions including the proprietary rights to the American Idol television show. In April 2006, it paid $50 million for an 80 percent interest in boxer Muhammad Ali’s name, likeness, and image. Recently, Sillerman offered to take the company private, but that transaction was terminated as a result of the financial turmoil in the fall of 2008.
❑ In 2002, RAE Systems went public in a reverse merger at $0.20 a share. As of this writing in early 2009 the stock was trading at around $4.
❑ Global Sources Ltd. reverse merged into The Fairchild Corporation. As of this writing, it has a market capitalization of approximately $430 million.
Alternatives to IPOs have grown in popularity over the last ten years. The number of closed reverse mergers has increased very dramatically since 2000, although activity levels dropped off markedly in late 2008 because of the significant and sudden stock market meltdown. The recession and market uncertainty of late 2008 and early 2009 has hit all sectors of the economy. But many signs indicate that this fast-paced growth will resume and continue in the near future.
There are several reasons for this growth. First, the IPO market effectively closed, seemingly permanently, to all smaller companies in late 2000 following the dot-com bust. Those seeking to go public were forced to find other ways to accomplish their goals. Second, the alternatives to IPOs offer benefits that traditional IPOs do not, especially to companies interested in raising capital in the $5 million to $50 million range. Third, a series of SEC regulations and enforcement policies have turned reverse mergers and self-filings into completely aboveboard, legitimate methods of accessing the capital markets. (There is a history here, which we will cover in Chapter 2. Some of the early practitioners of alternatives to IPOs in the 1970s and 1980s were shady characters.) Fourth, in the past five to six years the number of investors ready and willing to make private investments in public equity (PIPEs) in connection with alternatives to IPOs has increased dramatically. A PIPE is a private placement of equity or equity-linked securities effected for a public company, often with immediate required registration of the equity sold to the investor so that the shares become fully tradable. These days PIPE investors (mostly consisting of hedge funds and institutions), especially those with a longer time horizon with respect to liquidity, are constantly on the lookout for soon-to-be public companies to invest in.
The idea behind the reverse merger is simple yet powerful. To achieve the goal of publicly traded shares, a private company merges into a public one. The public company typically has minimal, if any, day-to-day business operations. For this reason, it is called a “shell.” The public company may be the remnant of a bankrupt or sold organization or specially formed for the purpose of investing in a private company. Either way, the basic maneuver is the same: a private company purchases control of a public one, merges into it, and when the merger is complete becomes a publicly traded company in its own right.
Self-filings, which provide another alternative to an IPO—one that does not utilize a shell—take advantage of the SEC regulation that allows private companies to become public by voluntarily following the same rules (and filing the same documents) that public companies follow. After agreeing to mandatory compliance with the SEC reporting regime, a company earns public status and can then offer securities to the public market or complete a PIPE.
This book is written for seasoned pros and beginners alike. It is—as of this writing—and has been since the publication of the first edition in 2006, the first and only book to explain the business and legal issues specific to reverse mergers and self-filings. My goal was to create a text that would be useful to company CEOs and CFOs as well as the professionals who advise them—lawyers, accountants, consultants, and investment bankers. Please note: I wrote this not just for lawyers. It covers legal issues in plain English.
This book is my best effort to codify what I have learned about alternatives to IPOs over the nineteen years since Feldman LLP, the boutique law firm I founded, and a predecessor firm, began this part of our practice. During that time we have worked with hundreds of clients contemplating reverse mergers and self-filings. Steven Dresner, my friend and contributor to this book, has enriched the text with the wisdom he has gleaned in his capacities as editor of PIPEs: A Guide to Private Investments in Public Equity (Bloomberg Press, 2006), and as the organizer of numerous business conferences on PIPEs and reverse mergers through his company, DealFlow Media.
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