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Merger, Acquisition & Transaction Consultants |
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King & Associates, P.C. |
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Douglas M. King, President |
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REVERSE MERGERS HOME Because we want to be YOUR home for all YOUR reverse mergers
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THE TRADITIONAL IPO APPROACH The other, and more common method of going public, is through an Initial Public Offering (IPO). The process involves attracting and retaining an underwriter, along with securities lawyers, auditors and market makers. A registration statement prepared and filed with federal and state regulators after which the company goes through an extensive review process which can take up to a year. Following the review process, the company goes on a road show and is presented to brokers and investors. The underwriter seeks subscriptions to purchase the company's shares. If the subscriptions are sufficient, the underwriting becomes "firm". The IPO is then closed, the company is public, and the company receives its portion of the offering proceeds. The reason the IPO approach is the more common method of going public is because, generally, your attorneys and certified public accountants want to make as much money from you as possible. Because it takes ten to twenty times longer to compete an IPO, you will have to pay, at least, two, to four, times as much for it in legal and accounting fees. In addition, you have to deal with the frustrations of seemingly endless waiting on the SEC who you have no control over to speed the process faster, if necessary. In addition, often in an IPO, underwriters often work in collusion with their associates, the institutional investors and stock brokers to pre-sale an offering (The current focus of many SEC investigations). The result can be a sharp, and artificial, increase in the share of the price at the launch of the IPO. This rapid increase is, generally, followed by a rapid decline once the sell-off and profit-taking begin. This profit taking can result in a crippling devaluation of the new issue which can place undue stress on a company during a period which should be a positive growth period. Reverse mergers are not at risk to illegal pre-selling because you are working with your market makers and valuation experts and can establish a practical and supportable value for your stock prior to any major fund raising event - a value that is not artificially created by heavy up-front demand and short supply. A conventional IPO is risky for companies to undertake because the deal depends on market conditions over which you have no control. If the market is off, the underwriter may pull the offering. But, with a reverse merger, the deal rests solely on the people who control the public shell and the desire of its owners to be acquired by the private company. Market fluctuations and conditions rarely have anything to do with the success of the merger. A corporation can not file for an IPO registration unless it has been formed and in business for at least three years and has completed audited financial statements for the last fiscal year while a corporation can do a reverse merger while only being formed for as long as it takes to complete an audit. So, if your corporation is less then three years old, the only way to go public is through a reverse merger.
THE REVERSE MERGER APPROACH AND PRIVATE INSTESTMENT IN PUBLIC ENTITIES (PIPEs) The NYSE did, once, try to eliminate reverse mergers, or "back-door listings." On July 6, 1956, the exchange president, Keith Funston, was quoted in The Wall Street Journal as saying reverse mergers "constitute an exploitation of the value of a listing." However, in March of 2006, the NYSE itself reversed merged into Archipelago Holdings, Inc. Talk about a change of heart! Over the last few years, corporate America has become more educated about the existence of reverse mergers and it has doubled the amount of reverse mergers from one-half billion market capitalizations a month to now one-billion dollars a month. There has, also, been a new trend over the last two years toward the issuance of more convertible debt and an increasing acceptance of the market to buy those convertible securities rather then common stock. This is good, because, the more convertible securities you can issue, then common stock, can substantially speed up some large financings. In light of the recent 2008 employment and export figures, it seems very clear the economy will be taking a much predicted soft landing instead of a hard one. While the Dow-Jones Industrial Average of 2006 growth of 21 percent and 10 percent in 2007, it is, at best, unclear what the Dow will be at the end of 2008 despite the inevitable and predictable adjustment to the over-heated real estate market. So, if you want to take your real estate holdings and form a REIT, now is not the time for you. We do not suggest forming any REITs until after the real estate market values have bottomed out. Despite concerns earlier in 2007 about SEC actions that made it harder for small public companies to do private placements, the market for convertible debt Private Placements in Public Entities (PIPE) raising $20 million or less is still robust although, temporarily, down as the market educates itself about the new SEC rules. In 2007, small cap public companies ($20,000,000 in net worth or less) convertible debt issuances raised $1 billion. The figure is based on all non-Rule 144A placements raising from $1 million to $20 million during 2007 and the comparable period in 2006. While these small PIPEs raised about 12% less capital in 2007 than they did in the same period in 2006, in some ways the overall picture brightened for all involved up to the end of 2007. Investors were able to demand higher coupon rates, while public companies were able to cut deals with conversion pricing that tended to involve less discounting than 2006. And, considerably fewer of the deals closed in 2007 featured mandatory registration provisions—77.4% in 2007, as opposed to 87% in 2006. The sub-$20 million convertible debt issuances accounted for 320 of the 400 convertible debt PIPEs in 2007. This number in 2007 was up from 260 deals in 2006 when convertible debt PIPEs of $20 million or less pulled in $641.5 million. While there has been some decline in the number of deals and total dollars raised, the limited extent of the decline suggests that there was ultimately little merit in concerns the SEC’s recent aggressive applications of the two regulations would devastate the convertible debt PIPEs market. One of the regulations, Rule 415, governs shelf offerings. A recent reinterpretation of Rule 415 by the SEC staff is attempting to make it difficult for small companies to register issues representing more than 50% of their market capitalization. Meanwhile, the SEC began a more aggressive enforcement of accounting rule EITF 00-19. This rule can require public companies to account for open-ended liquidated damages provisions of derivative securities as liabilities. That had the potential to delay registration of shares issued in some PIPEs or trigger reviews of past offerings. Both moves by the SEC caused initial confusion in the PIPEs market. And, it was this temporary confusion which is accountable for the, we believe, temporary decline in PIPEs in the first half of 2007. Issuance amounts relative to market capitalization decreased from the first half of 2006, when the average sub-$20 million offering raised 165.7% of the issuer's market cap. In the first half of 2007, the average issuance reflected 108.5% of market capitalization. The 2007 first half average coupon rate was 8.8%, compared with 7.9% in 2006. In both years, the average term was two years. Conversion prices showed less discounting in the 2007 pricing in the first six months averaging out to a 3.4% discount, compared with an 8.5% discount in the first two quarters of 2006. Some 25% of the 2007 first half deals featured variable conversion prices, down from 31.4% in 2006. At the same time, the percentage of deals with hard floor prices decreased from 7.5% in 2006 to 5.8% in 2007. Again, we believe, this is all temporary as the market educates itself about the new SEC rules and the general markets adjust to the current real estate market debacle. However, the fall of the stock markets in general during the first quarter of 2008, price of public shells remain unchanged for the last three years due to continued and sustained demand for U.S. shells from Chinese companies. The reason the current economic conditions in the U.S. is not effecting the number Chinese companies wanting to public in the U.S. because the primary reason for doing so isn’t to raise money in the U.S., but to be listed on an exchange where people and investors believe the accounting reports issued by the company. Nobody believes any reports issued by any company listed on the Beijing Exchange. The SEC has continued to clarify its interpretations of both rules over the course of 2007 and 2008. Meanwhile, deals continue to be made in the $1 million to $20 million issuance range at, so far, stable prices.
OUR INVENTORY OF CLEAN PUBLIC SHELLS We always know of several dozen clean public shells available for purchase. We can go through the list of current public shells available when you are ready. Because the list of available public shells changes weekly, we maintain a spreadsheet we can email to you, at any time, which lists all the public shells available for sale with which your can compare every important attribute of each available public shell for sale side by side. However, if you are already in possession of one our spreadsheets, if it is older then a week, please do not use it because it is probably already out of date. Just let us know, and we will forward you an up-to-date spreadsheet immediately. You can also view the most recent available public shell spreadsheet on this website by clicking on any of the links to it on every page of this website in each menu in the upper-left side of each page or just click here. The purchaser of a public shell will do a reverse merger into a public shell. A merger filing will be made with the SEC and other required disclosure statements. We will then proceed to register the shares of your private investors for resale and when the SEC clears the filing, the whole process of going public closes and our market maker will file a Form 211 to get the surviving company listed and trading on the NASDs OTC Bulletin Board, NASDAQ small-cap, or pink sheets (wherever you qualify). Almost all reverse mergers take advantage of the tax-free stock-for-stock reorganization provisions of the IRS code. Capital gains tax will have to be paid by each individual shareholder when they decide to sell their pubic shares.
SPACs (Special Purpose Acquisition Corporations) A SPAC is similar to a reverse merger. However, unlike reverse mergers, SPACs come with a sparklingly clean public shell company, better economics for the management teams and sponsors, certainty of financing/growth capital in place, a built-in institutional investor base and an experienced management team. SPACs are essentially set up with a clean slate where the management team searches for a target to acquire. This is contrary to pre-existing companies in reverse mergers. SPACs typically raise more money than reverse mergers at the time of their IPO. The average SPAC raises about $115 million through its IPO compared to $5.24 million raised through reverse mergers in the months immediately preceding and following the completion of their IPOs. SPACs also raise money faster than private equity funds. The liquidity of SPACs also attracts more investors as they are offered in the open market.
LEGAL MATTER AND SEC FILINGS We, and our affiliated attorneys and certified public accountants, will, if you desire, complete all necessary SEC filings and help prepare your management for the transition into a public company. No underwriters are required in reverse mergers which also saves you money. We can also assist in training your management on how to run your new public corporation in matters of filings which need to be completed on a timely basis. Our global network of affiliated attorneys, certified public accountants and market makers is available to you to complete any transaction of any size anywhere.
MARKET MAKERS We are in contact with many respectable market makers on all the trading boards such as Joe Poe,Jr. We will introduce your company to a market maker(s) who will file Form 211 for listing on the appropriate trading board and provide equity aftermath support.
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2100 Fort Worth Highway Weatherford, TX 76086 |
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To contact us: |
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Phone: 817-598-1007 Fax: 208-693-3007 E-mail: Doug@ReverseMergersHome.com |
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* This website is not a warranty, contractual offer or contract, by King & Associates, P.C., employees, affiliates, or Douglas M King. |
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