Reverse Mergers + PIPEs:The New Small-Cap IPO Reprinted and updated from PIPEs: Revised and Updated Edition-A Gui de to Private Investments in Public Equi ty (Bloomberg Press, 2005)

Summary

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Why Now?. Basics of Reverse Mergers. Reverse Mergers. 1 "Cleanliness" of the shell. 2 Valuation of the private company merging in. Cash. Cash in the shell increases the shell's value. 4 Shell management. Reverse Triangular Mergers. A Little History. Rule 419. Post-419 Developments and SPACs. Advantages and Disadvantages of Going Public. Advantages of Being Public. 1 Access to capital. 2 Liquidity. 3 Growth through acquisitions or strategic partnerships. 4 Stock options to incentivize. 5 Management is much more answerable to its owners

than in a private company.Advantages of using a Reverse Merger as opposed to an IPO. 1 A reverse merger involves much lower cost. 2 A reverse merger utilizes a much speedier process. 3 A private company is not subject to watching the IPO "window." 4 There is no risk of withdrawal. 5 Management attention to a reverse merger is much less than in an IPO. 6 Reverse mergers experience lower dilution of ownership control. 7 Reverse mergers lack an underwriter. Disadvantages of Being Public. 1 Public companies face much more emphasis on shortterm results. 2 Public disclosure of executive compensation, financial results, related party transactions and the exposition of all the company's dirty laundry. 3 Pressure to report favorable earnings may lead to increased fraud. 4 Being public is expensive, especially after SOX. 5 Being public subjects a company to greater risk of being sued, even in shareholder claims lacking any merit. Disadvantages of using a Reverse Merger as opposed to an IPO. 1 There is less funding obtained in a reverse merger than an IPO. 2 Obtaining market support following a reverse merger is challenging. Due Diligence. 1 How recently did the shell have an operating business?. 2 Does the shell have any pending SEC or regulatory investigations?. 3 Is the shell's management problem-free with regard to their background?. 4 If the shell is reporting, has it completed all SEC filings, and is it indeed a full reporting company?. 5 If the shell is a blank check, has it fully complied with all rules and regulations?.6 What are the shell's trading patterns in and during the transaction?. Sarbanes-Oxley Act of 2002. Major Developments in New SEC Rulemaking. Latest Trends. A Few Other Simple Ways to Go Public. 1 A reverse merger generally is much quicker. 2 Investment bankers who promote shells generally provide a turnkey service. 3 In a number of cases, the shell has a ready shareholder base.

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Reverse Mergers + PIPEs:The New Small-Cap IPO Reprinted and updated from PIPEs: Revised and Updated Edition-A Gui de to Private Investments in Public Equi ty (Bloomberg Press, 2005)

By David N. Feldman 1

Blockbuster Entertainment, Occidental Petroleum, Turner Broadcasting, Tandy Corp. (Radio Shack), Texas Instruments, and Muriel Siebert are just a few wellknown companies that went public through a "reverse merger." To the uninitiated, a reverse merger is a deceptively simple concept. Instead of pursuing a traditional initial public offering ("IPO") utilizing an investment bank serving as underwriter, a company arranges for its stock to be publicly traded following a merger or similar transaction with a publicly held "shell" company. The public shell has no business other than to look for a private company with which to merge. Upon completion of the merger, the private company is publicly held instantly. The process is generally quicker, cheaper, simpler, less dilutive, and less risky than an IPO, but has its own unique risks and challenges. Reverse mergers are typically complex transactions with traps into which even experienced practitioners with limited knowledge of this technique can easily fall. When done right however, these hidden dangers can be avoided, and the transaction can proceed quickly and smoothly.

Why Now?

In the last several years, investors and investment bankers have discovered the reverse merger-with the "pile on" mentality that is common in any Wall Street trend. In this case, however, there are good reasons for reverse mergers and private investments in public equities ("PIPEs") to come together. In particular, investors in PIPE transactions have been extremely active in the reverse merger space. Why have reverse mergers suddenly become so popular and legitimate? The short answer is, it has not been sudden, but rather an evolution that has taken about a dozen years. Most recently, however, a confluence of factors has caused this market to really take off. Since 2001, the initial public offering market has been effectively shut down for all but the largest private companies, making a reverse merger more attractive to middle-market businesses. In addition, the private equity markets for growing private companies have been soft at best, making it tougher to stay private if large amounts of capital are needed for growth. The PIPE market has ...

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