David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman published an article in The
New York Enterprise Report in the Sept/Oct
2005 issue on reverse mergers.
Reverse
Mergers: New Laws Pave the Way for the
Good Guys
This
past summer the Securities and Exchange
Commission passed a new set of rules
intended to improve the legitimacy of
so-called reverse mergers by significantly
increasing the amount of required disclosure
following these transactions. These
rules take effect at various times this
fall.
The reverse merger, an alternative to
a traditional IPO, has recently become
more popular for smaller companies,
since the cost of staying compliant
with regulations has made going public
via an IPO virtually prohibitive for
small- and middle- market companies.
In a reverse merger, a private company
merges with a preexisting, publicly
held shell company. The owners of
the private company wind up owning virtually
all of the stock of the shell, thus
instantly becoming public (often a financing
accompanies the reverse merger). Reverse
mergers are simpler, cheaper, quicker
and less dilutive than IPOs, but they
have their risks.
Prior to the passage of the new SEC
rules, a reverse merger could take place
with only minimal disclosure about the
transaction at the time. After the merger,
the principals had up to 71 days to
submit financial information about the
combined companies to the public. But
a number of fraudsters took advantage
of this lag time, issuing rosy press
releases that pumped the stock before
the public could become aware of any
problems, which did not have to be disclosed
until the end of the 71-day period.
By then, the fraudsters had sold their
stock and "dumped."
The new rule closes this loophole and
requires full disclosure about the formerly
private company within four business
days after closing the reverse merger.
The change will most likely bring greater
transparency to reverse mergers and
increase their popularity. A growing
company that could benefit from being
publicly held (seeking to grow by acquisition,
needing substantial capital, seeking
liquidity for investors or founders)
may want to consider the option as a
way to move to the next level of success/
