Chokov: "Reverse Mergers & Other IPO Alternatives

eFinance Portal of New Jersey, www.efpnj.com
On Tuesday, March 23, the featured speaker at the regular monthly meeting of the Venture Association New Jersey (www.vanj.com) was David N. Feldman, Esq., Managing Partner of Feldman LLP (www.feldmanllp.com), a New York law firm focusing on corporate and securities matters. His topic was reverse mergers, a technique by which a private company acquires a majority stake in a public one and thereby becomes public itself, avoiding many of the pitfalls of a traditional IPO.
Prior to the main presentation, Randi Altschul, Inventor and Serial Entrepreneur, introduced her newest company, Shout Out Technologies (www.ShoutOutTech.com). The company works closely with the U.S. Army and Marines to develop systems for energy harvesting, short range communications between military vehicles, vehicle health maintenance and trace explosives detection.
Feldman then offered examples of companies formed by reverse mergers, including Berkshire Hathaway, Turner Broadcasting Systems, Texas Instruments, Tandy Corporation, Occidental Petroleum, Blockbuster Entertainment and the New York Stock Exchange. "All went public without an Initial Public Offering (IPO)," he said.
"A number of factors have led to the increasing popularity of reverse mergers," Feldman told the audience. "These include a number of advantages over traditional IPO’s, recent changes in SEC rules, the effect of the current economy on IPO’s, changes in the PIPE (Private Investment in Public Equity) market, increasing investment by Chinese companies and the introduction of WRASP (the WestPark Reverse Alternative Senior Exchange Process) by Westpark Capital, Inc. of Los Angeles."
Advantages over traditional IPO’s include lower costs and shorter timelines, elimination of the risk of unfavorable market conditions at the time of the IPO, less dilution of existing stock and less management attention required. Reverse mergers also eliminate the risk of underwriter withdrawal because there is no underwriter involved in the process.
"New SEC rules effective November, 2005 require substantial and timely disclosure following a reverse merger with a shell company," Feldman noted. "The new rules also refine the definition of a shell company, although intentionally leaving it somewhat vague, and prohibit it from registering securities for offer and sale within 60 days of the merger. The new rules apply to foreign as well as domestic companies and are generally hailed as a positive development leading to more transparent transactions and being troublesome only to unsavory players."
Over 25 percent of the approximately 200 reverse mergers that have occurred in past two years have involved Chinese companies. "This has been due to a number of factors, including new rules and regulations leading to increased due diligence and better auditing procedures," Feldman explained. "The trend is expected to continue, and another PIPEs and Reverse Merger Conference is scheduled to take place in Shanghai in May."
The rapid growth of reverse mergers has also been accelerated by the introduction of WRASP. "Developed by Richard Rappaport of WestPark Capital to take companies public without an IPO, trading shell or self-filing, it consists of a PIPE and reverse merger followed by a small secondary public offering," Feldman explained. "Rapidly rising in popularity, it has been used to complete over a dozen deals since its creation in 2007." Contribution by The Venture Association of NJ
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