Regulations

16% of the Economy

That’s what health care costs represent. Early in the debate about the dramatic changes being considered, Pres. Obama changed the title from “health care reform” to “health insurance reform.” I guess he didn’t want to suggest that doctors weren’t properly caring for their patients, and thought by villifying the insurance companies America would get behind him.

This has not really happened. Mostly because people cannot support something they just don’t understand. Multiple bills are flying all aroud. The latest one from Sen. Reid, which he hopes to pass including the so-called “public option,” is not even available until the Congressional Budget Office tells us what the cost will be, after which the Senate leaders probably will say the CBO was wrong. Forget that during the Bush Administration they constantly relied on the CBO to bash the then President’s plans.

I don’t know how I feel about all this. But I do know I’d like to have some time to have smart people outside of politics look at the proposed bill and tell us objectively what it contains, and, more importantly, what the implications are of what it contains. Insuring uninsured children is a good idea. Getting coverage regardless of your history is a good idea. Penalties if you refuse to buy health insurance? Not so sure. Obama says, well, we require everyone to have auto insurance, why not this? My response: you can choose not to have a car. And I am very, very concerned about the cost. I am also very, very concerned about the slippery slope it might put us on to full on socialized medicine, which in the past Obama says he supports (the so-called “single payor system”).

But I can’t really say anything until we see the whole enchilada. What do you think?

One Hot Area of Opportunity for Lawyers: Government

Some feel President Obama believes that only “big government” can solve the nation’s problems. Others think he’s only temporarily increasing its size to help the economy, and after all, George W. Bush is the one who sent the deficit above $1 trillion. And everything in between.

When I was in Washington in early February I saw it already. With the economy elsewhere in tatters, a ton of new construction was going on and there was clearly a feeling of economic revival of sorts. This is good for lots of people, but in particular lawyers. According to the ABA Journal online, the government needs to hire 270,000 lawyers. That’s a whole lot! The report also indicates that there are five other “mission critical” areas where a lot of hiring is coming, including the medical, law enforcement and technology fields. It’s not all about the stimulus, in many cases there is simply an aging government worker population and many are beginning to retire.

Even with so many lawyers out of work, the report suggests it may still be difficult for the government to lure lawyers away from much higher-paying private sector jobs. Given the resumes I see from talented attorneys without jobs, I think this may be the best hiring moment for the government in a long time.

It’s Over, But…

Yesterday Fed chair Ben Bernancke said the recession is “very likely over.” Unfortunately, we usually don’t know the start or end dates of a recession until months after it actually occurs. But he warned that we will not feel like we are in recovery for awhile and that the rebound likely will be very slow.

Now some questions for the President: do we still need the rest of the stimulus? Might it be worth considering scaling back the stuff that doesn’t start until next year? Are we still worried about a “double dip” in which another mini-recession comes now before the real recovery? What about the government being in the car and bank business? Maybe Obama should set an outside date by which he intends to exit the government’s ownership, either with new funds raised to buy out the government or transitioning some of the invested money into loans vs. equity investments. How can the government regulate these huge industries and companies when it also owns them? This is going to become a difficult conflict at some point. And the TARP money loaned to so many companies? We should push harder to get more of that repaid, no?

While Washington and the news are busily distracted by Pres. Jimmy Carter suggesting that much of the opposition to Pres. Obama is racially driven, and by the Congress rebuking Rep. Joe Wilson’s inappropriately blurting out “you lie” to the President during his speech to Congress (even though the President had accused his critics, sitting before him, of lying multiple times during his speech), the deficit is ballooning out of control. We should have that discussion about race, but let’s also focus on where we want to be a year or two from now.

The Day I Freaked Out

A year ago tomorrow, Lehman Brothers Holdings, Inc. filed for bankruptcy. That was a very scary day for all of us, but in particular those of us whose livelihoods are connected to Wall Street.

But a few days later, the rumor started. Goldman Sachs may not make it. There was a fear of a run on the brokerage firms. Similar whisperings about Morgan Stanley. Many felt that if this happened a cataclysmic collapse of our entire economic system could follow. I really started wondering if the US would simply cease to be able to function as an economy, and how we could have gotten to that point.

As I watch Pres. Obama on TV speaking right now about the financial system at Federal Hall in downtown Manhattan, I am remembering those few freak out days. Luckily, on September 21, both Goldman and Morgan Stanley agreed to be regulated as banks and this ensured they would not, in fact, collapse. Both have returned to profitability and this is good.

The President seems ready to roll out “reforms” of the financial system regulatory environment. He is not being greeted with great cheers from those sitting steps from Wall Street listening to him. He is giving them a little trip to the woodshed, claiming the free market is good, but the lack of regulation a year ago may well have been a major cause of the meltdown and the naysayers best come aboard with his plans.

Many of the wealthiest Wall Street leaders are Democrats. But they always strongly resist any left-leaning efforts to add more regulation to the financial system. But this time it looks like they are going to have to accept it, in some form. It is a shame that a group of fraudsters causes the entire sector, including the tons of legitimate players, to pay the price.

The Lion Roars No More

It happened late so it didn’t make the papers, so if you don’t have radio, TV or Internet, Sen. Edward M. Kennedy of Massachusetts died early this morning. Known as the “Lion of the Senate,” Teddy, as he was known, was a true larger than life character who championed lots of legislation to help society’s most needy, including the Americans with Disabilities Act, the Voting Rights Act and the Family Leave Act. He also had some personal tragedies which marred him somewhat and are probably the main reason his Presidential ambitions were quashed in 1980.

He is an important figure in our economy and business world. His legislation clearly burdened business. Every new building now needs handicapped access. Businesses are required to give a certain amount of leave if they are above a certain size. And so on.

But here’s the thing. Ted was a pragmatist. He was the rare Democrat who indeed reached across the aisle to seek reasonable compromise on things, accepting Republican contribution to get things done. The Family Leave Act, for example, exempts small businesses, something the right was looking for. Many Republican Senators proudly called him a friend even if they didn’t agree with his politics.

He had some tough times when he was drinking too much, overweight, reports of carousing, etc. He divorced first wife Joan, who suffered from mental illness, in 1982. His second wife Victoria, whom he married in 1992 and who was about 22 years his junior (he met her when she was an intern in his office), seems to have really put him on the straight and narrow the last few decades.

But extraordinary Senator he was. And in Massachusetts he was overwhelmingly beloved. And to anyone being honest, regardless of political stripes, he deserved respect. As noted by former Education Secretary Bill Bennett on CNN this morning, there is probably no one else in the Senate today with his stature and ability to cajole.

With the Democrats now losing their filibuster-proof majority in the Senate, it will be interesting to see what happens. Will Kennedy’s death create a martyr for those seeking dramatic health care reform to redouble their efforts? Or is this the beginning of the erosion of the Obama magic in terms of legislative accomplishments? As always, I leave this for others to figure.

Going Public Without Raising Money?

Reprinted from our sister blog at www.reversemergerblog.com. Visit the site to see an introductory video on reverse mergers and a detailed FAQ.

Leading up to the market crash last year, on average 50% of reverse mergers included a contemporaneous financing, what some in the industry call an APO or alternative public offering. These days that number is much lower. Why do companies go public that are not raising money at the same time?

There are several types. The most common are companies that raised a round of financing just prior to going public from an investor that typically requires that the company go public as its very next step. This approach is good if you have an investor willing to do it. One thing to consider when you do, however, is that the investor typically will request a lower company valuation if they are investing in a company that is not public at the time they invest, even if they go public right after. The reason for this is that it is not certain that the company will complete its going public strategy. But for the company it provides certainty as to the availability of money, as sometimes investment banks and others promising to raise money upon completion of a reverse merger end up not being able to do so (though even then the company’s greatest risk is the expense of the reverse merger, as most companies would not go public unless the financing is completed). Several players have made a business out of providing this “bridge” financing prior to going public.

Other companies that do not raise money when going public are the types that are not really seeking growth capital. Some companies are seeking the other benefits of being public, whether it is to make acquisitions easier, to provide liquidity for investors and entrepreneurs, incentivizing executives with stock options, or seeking the additional public relations benefit of having a publicly trading stock. Some Chinese companies, for example, are very profitable and can finance even growing operations from earnings. But the owners have had no way to “cash out,” even if over time, and the public market provides that.

Last are companies that go public hoping to raise money either in the near future or somewhere down the road. Those seeking money a year or more later presumably have more than enough earnings to bear the costs of being public and to finance their operations. They have a business opportunity or other situation that will need cash later, and they believe (probably correctly) that having been public for awhile makes it easier to raise money a year later than if the company was just going public at that time. Others expect to raise money almost immediately after the reverse merger, believing that it is easier to raise money after being public than contemporaneous with the event. In both cases, the risk, of course, is that they are unable to raise capital for whatever reason when they are ready. In fairness, in a number of situations I have seen companies go public and then raise money as quickly as 4-6 weeks later.

In general I advise companies to try to complete their financing at the time of the reverse merger if possible and if they are able, especially if that is the primary reason for their going public. We also protect the downside where possible by ensuring that the company has no more than 300 shareholders of record (this means people with a physical stock certificate rather than owning stock electronically in an Ameritrade or similar account). If we do that, and the company is unable to raise money and wants to stop being public, a board consent and simple one page filing with the SEC will “de-register” the company’s stock and it will no longer be subject to the SEC reporting requirements. Technically, a market maker could still make a market in the company’s stock on the Pink Sheets in this circumstance, but no more SEC filings or financial statement audits will be required.

So: if you need to raise money down the road, or have many other reasons for being public, then going public without a contemporaneous financing usually makes sense. If you are raising money immediately after, just make sure it is essential to your source of financing that you wait until after you are public to raise the money, and do your best to stay under 300 shareholders of record. In that case, the risk is not substantial. Good luck!

Get Ready for the New Edition of the Book…

Reprinted from our sister blog at www.reversemergerblog.com.

Everything is a go for the 2nd edition of Reverse Mergers, the book I originally wrote in 2006, which was published by Bloomberg Press and which was translated into Chinese about a year later (and which inspired this blog which started in late 2006). I have just about finalized the edits and the plan is for a December 2009 release (great stocking stuffer!). What’s new? Well, I’ll get into a bit more of a sales mode as we get closer, but here are some advance tips:

• A full chapter on China which was not in the first edition.
• An update on all the changes to Rule 144 enacted last year which changed things rather dramatically.
• A detailed review of WestPark Capital’s innovative WRASP structure to go public from a Form 10 shell directly to trading on the NYSE Amex.
• An update on all the changes approved last year to SEC forms and disclosure requirements.
• A significant update on SPACs and what the future might portend.
• More about Form 10 shells and self-filings as viable alternatives.
• A brand new last chapter including thoughts from a number of leading industry players identifying today’s important trends and where they might be headed.

I hope all of you who were so supportive in the publication of the first edition will see the benefit of acquiring this updated edition as the markets begin to thaw and the deal markets start to improve. I’ll bug you all again later this year!

Second Quarter Reverse Mergers Not Great, But Experts Hopeful

Reprinted from our sister blog at www.reversemergerblog.com.

The Reverse Merger Report, in its July issue, noted that the number of reverse mergers continued to slide in the second quarter of 2009, with just 37 deals getting completed. This is a reduction of 12% from the first quarter and 30% from the second quarter of last year. Interestingly, in the quarter the IPO market has improved. While some think this means more competition for reverse mergers, my experience has been that during up markets and strong IPO activity, reverse mergers also remain strong for companies seeking to go public even faster than with a traditional IPO.

Experts quoted in the article point to China as the place that will help the RM business come out of the doldrums. I agree. Things are really bubbling over there and we hope there will be more and more activity from the PRC. Based solely on my firm, those experts could well be most right. And hey, 37 deals is still not that bad. But the financing market also stayed very weak, and that is a bigger problem. PIPE guys, please join China as the Calgon-equivalent of this RM downturn…..

New Financial Regulatory Structure: Are You Systemically Significant?

This is a phrase it appears we will be hearing a lot in the coming months. In the largest proposed overhaul of financial regulation since the 1930s, President Obama and his team have proposed an 88-page restructuring that does not address the financial markets (they’ve decided to leave that to regulatory changes rather than major change in approach) but does address how banks, major financial institutions and hedge funds will be overseen.

It seems to be the feeling of Treasury Sec. Tim Geithner and the Administration that the credit crisis which started in 2007 might have been prevented or the damage restricted if there had been better powers to regulate the large banks and brokerage firms. The proposal, still being reviewed, gives the Federal Reserve much more power to oversee institutions. Given that a number of the governors of the Fed are selected by the very banks being regulated, and the criticism leveled against their preparation for and response to the crisis, one wonders if this is where the new powers should lie, but that is the suggestion.

In addition, according to Marketwatch, an “eight-member, multi-agency financial services oversight council that would seek to identify potential risks with large financial institutions and problematic investment products.” It is not clear if that means they will oversee broker-dealers that are otherwise regulated by the SEC, and whether this means there will still be overlapping regulation that supposedly this process is supposed to streamline. The key is giving the new board power to take action where “systemically significant” companies are failing, similar to the powers currently in the hands of the FDIC with regard to savings and loans.

As more details emerge we can talk more about this. Obama introduced the plan with soaring rhetoric, noting,  “I have always been a strong believer in the power of the free market. I believe that our role is not to disparage wealth, but to expand its reach; not to stifle the market, but to strengthen its ability to unleash the creativity and innovation that still make this nation the envy of the world.” Let’s hope the rhetoric matches the fine print.

Finance Industry Regulatory Reform: Not So Much

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