Reverse Mergers

Off to China…Again!

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

I just arrived in China for my third visit this year. I remain a strong believer in the enormous opportunity for successful, growing Chinese companies to access capital and seek a path to liquidity with a trading stock in the US. Obviously I’m not the only one. Most reverse merger players have either been to China or set up shop there. Some go nearly every month. To show how things have changed, the second edition of my book, coming out in December (you can pre-order on Amazon now- hint hint), has a full chapter on China, whereas the first edition from 2006 only described it somewhat briefly as a relatively new but growing trend.

This trip I am making several speeches and visiting with clients and other contacts. It is definitely worth the grueling trip. I have met some talented, dedicated, goal-oriented entrepreneurs and dealmakers who are truly incredible and I enjoy working and cooperating with them. And the friendships developed are a very nice secondary benefit. It is an amazing and unique place.

I am also hearing some serious talk about other countries beginning to push deals to go public in the US, and I expect that in the coming months we will all see that begin to develop. The world gets smaller and smaller. See you when I’m back - I’ll try to write from there but have a crazy busy schedule! Later guys.

“New Contact Information”

How many emails with this as the subject line have you gotten lately? I seem to be getting about two a day. Everyone is moving around. In a good number of cases it is people who were laid off finally finding new employment. This is a good sign even while the unemployment numbers remain high.

In other cases it is folks who aren’t doing much at their current job and they see the writing on the wall and look for something better, or at least different. Another category are folks that were on their own for a long time and suddenly join or rejoin a larger business. That is either because things were so great they needed more support, or more commonly so horrible they had no choice but to “find a job.”

This is no more true than in the world I live on dominated by PIPEs, reverse mergers and other alternatives to traditional IPOs. Lawyers, hedge fund guys, investment bankers and on moving around like crazy. This shifting of the deck chairs has some interesting consequences, and it has seemed to strengthen those able to hire and put at great risk those that don’t.

For me? I did recently rename my firm and expand its capabilities after a separation with several partners whose successful business created a number of potential conflicts with mine. But I’m still here in the firm I founded in 1996 and business is definitely picking up. What will the future bring? As always I have not the answer. To those moving, congrats and good luck! Sometimes change is good. Hopefully most of the time..

Skilling Gets His Day in (Supreme) Court

The Wall Street Journal just reported that the US Supreme Court has agreed to hear an appeal from Enron Corp.’s former CEO, Jeffrey Skilling. Skilling was convicted of fraud and a bunch of other stuff in 2006 and sentenced to 24 years in prison and fines of $45 million following what  the Journal called the “spectacular collapse” of Enron following the discovery of widespread accounting deception at the huge energy company.

The prosecution based its case on a novel theory that he committed fraud because the company was denied his “honest services.” Skilling points out that at no time did the government suggest that he did anything for personal gain. It appears the Supremes want to rule on whether the “honest services” theory holds up. An appeals court has already confirmed Skilling’s conviction but did say that his sentence was not correct and needed to be recalculated.

The Enron scandal, followed by a similar set of problems at WorldCom, Adelphia and others led to the sweeping securities law reform in the Sarbanes-Oxley Act of 2002. It showed that big frauds can happen in big companies, even when the best auditors in the country are on the job. The Enron scandal even resulted in the collapse of Arthur Andersen, one of the five biggest worldwide accounting firms.

Why do we care what happens to the guy whose apparent misdeeds killed a company and many thousands of jobs now 7 years after the scandal? For quite awhile he was the fall guy, with many feeling sorry for the out of touch “outside man” Chairman Ken Lay, who died of a heart attack waiting for his sentencing awhile back.

Were the “off balance sheet” arrangements arranged with Skilling’s blessing, in which underperforming assets were moved to “hidden” outside entities, truly horrible? Was the failure to disclose these arrangements in fact illegal or fraudulent? Now it would be, as Sarbanes closed the loop and now requires all such arrangements to be disclosed. Was Skilling railroaded into a conviction with a tainted Houston jury and a lynch mob mentality throughout the nation at the time?

Hopefully you know me by now, faithful blogees. I do not have the answers to these questions. Just hope to get you to think about it a little. Skilling must have known that failure to disclose these arrangements was not very nice, but illegal at the time? Just not clear, which probably explains the difficulty the prosecution had in fashioning a proper cause of action against him.

Love This Question: “Do You Have the Capacity?”

One sign for me that things are really turning around in my area of the world – Wall Street and the middle market in particular: more than one client this week essentially asking the same question. “We have a bunch of deals  in the pipeline and want to work with you. Can you handle it?” Now, from those promises to the hoped for avalance  is going to be a little journey.

Luckily, we are already seeing things noticeably pick up. In addition to areas that have stayed strong in my practice throughout the difficult past year, the transactional work that slowed considerably is now picking up considerably. We’re working on acquisitions, reverse mergers, self-filings, private placements, public underwritings and even new partnerships getting started. Honestly, there was virtually none of this stuff in early 2009. So this is good.

Is this a “fool’s rally” in the stock markets as some have said? Is the economy and market about to take a second dip? Is the recovery going to look more like a soup ladle (as I have suggested) or some up and down letter of the alphabet? Yes, again I annoy my faithful blogees with great questions and no answers. But for now, I’m enjoying being busier!

Take Me Out…

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…..

China in 2009…Hot!

I am in Guangzhou, China for business meetings. Summer here is quite hot indeed. A good metaphor, as things in China in general remain hot business wise. While some here decry the reduced growth rate to roughly 7% annually from 12% annually (and no question that has caused some economic hardship and layoffs), the environment is very positive, as I reported during my last visit to China in March.

The swine flu, combined with the difficult economy in the rest of the world, has hurt the local tourist industry for sure. Some hotels are really struggling. We had no problem with the flu issue, although a full plane temperature check took place before we deplaned here. We assume that will change once the flu recedes.

A number of simple things here could be good lessons for us in the US. We did not have to remove shoes to go through airport security. Free wifi throughout Hong Kong airport was very nice. The valet stationed 24/7 on my hotel floor adds a very nice touch. My blackberry world edition popped right on when we got here. I have always felt most welcome here, and their focus on service and attention to detail are indeed extraordinary.

No question the trip is long and the 12-hour time difference a real challenge at times. But I remain bullish on China and its growing business relationship with the US, especially in helping Chinese companies go public in the US through reverse mergers and similar alternatives to traditional IPOs.

Your Humble Blogger Expands Direction

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

I am very pleased to announce that my existing law firm is changing its name and expanding its capabilities as a result of a separation with several partners who are terrific but whose practice representing investors in public companies created too many potential conflicts with the part of my practice of taking companies public and representing them thereafter.  We complete our very amicable parting effective June 1 and will remain in our current space together. Call me if you are interested in learning more! Our joint press release is below. Look forward to hearing from you!

All the best,

David

AVOIDING CONFLICTS MAIN IMPETUS

The partners of New York 21-attorney firm Feldman Weinstein & Smith announced today that a group led by partners Eric Weinstein and Joseph Smith has started a new firm called Weinstein Smith LLP, and that founder David Feldman will continue operating the existing firm, which will be renamed Feldman LLP. The two firms will continue to maintain offices in New York’s Graybar Building, and expect to continue to refer appropriate business to each other. The change will be effective on June 1, 2009.

Said founder David Feldman, “The group starting Weinstein Smith are all fabulous lawyers, and have been great to work with. However, representation of investors and placement agents in PIPE transactions by the practice group led by Joe Smith and Rob Charron created too many potential conflicts with my practice of representing companies in the process of going public and thereafter. This is an extremely amicable separation and I look forward to continuing to see them every day and working together.” In addition to securities partner Scott Miller, litigator David Birdoff, and technology and digital media specialists Dov Scherzer and Larry Langs, associates Melanie Figueroa and Charles Phillips and several others will remain with the firm. Feldman also will retain attorneys specializing in blue sky law, trusts & estates, tax matters and broker-dealer regulation. Feldman is the author of Reverse Mergers: Taking a Company Public Without an IPO (Bloomberg Press, 2006), has many years of experience handling reverse merger transactions and other alternatives to traditional initial public offerings, and is a frequent speaker on the subject. He is also active in mergers & acquisitions and private equity transactions.

Joseph Smith added, “We have enjoyed our years with this firm and wish David and his team all the best; we plan on continuing to work with them. There will be no interruption in our client service.” Also co-founding Weinstein Smith are litigators Eric Weinstein and Yong Hak Kim, Saul Finkelstein (secured financings and mergers and acquisitions), Peter Cohen (employee benefits, executive compensation, ERISA and employment law), and transactional and securities partners, Rob Charron and Mike Nertney, and associates Heather Levenson and Jennifer Hall..

The firms have arranged for their pre-existing Feldman Weinstein & Smith emails to continue to function and forward to their new addresses for some time.

For more information about Feldman LLP, please contact David Feldman at 212-931-8700 or dfeldman@feldmanllp.com. For more information about Weinstein Smith LLP, please contact Joseph Smith at 212-931-8719 or jsmith@weinsteinsmith.com or Eric Weinstein at 212-931-8701 or eweinstein@weinsteinsmith.com.

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