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 is quoted in Forbes magazine
in an October 14, 2002 article on the
effect of the Sarbanes-Oxley Act on
small public companies.
Who
Needs The Aggravation?
by
Carrie Coolidge
Tough
accounting rules have persuaded some
small firms that being public is not
such a hot idea. Being a tiny publicly
traded company isn't easy. You have
all the disclosure and accounting hassles
of General Electric, with a lot fewer
resources. So last summer's Sarbanes-Oxley
Act, designed to thrust a righteous
sword through the hearts of earnings
finaglers, is making a number of companies
with microcapitalizations (less than
$75 million) reconsider being reporting
companies. Investor discontent in a
bear market already has made life hard
for small outfits with shrinking share
prices. "Some companies were not
so sure that being public was so great
to begin with, and this put the nail
in the coffin," says securities lawyer
David N. Feldman of New York. He has
several small clients looking at exit
strategies.
Sarbanes-Oxley, among other things,
requires chief executives and chief
financial officers to personally certify
the accuracy of financial statements--and
could throw them in the slammer if any
funny stuff goes on. That prospect is
scary enough. Then there's the mounting
cost of compliance. Before the "reform,"
a small public company might have spent
$60,000 for legal work and another $100,000
on its auditors annually. These expenses
are expected to double or triple because
lawyers and accountants now must delve
deeper into their customers' practices.
"Many of them can't afford enough legal
and accounting advice to make sure their
CEO and CFO won't go to jail," says
Joseph Bartlett, an attorney in Manhattan.
It's too early to tell how big the exodus
will be. One reform-related departure,
Global Water Technologies, left the
over-the-counter bulletin board on Aug.
12, crying about high costs.
Companies expected to deregister first
will be those with fewer than 300 shareholders
of record. These companies need only
to file a Form 15 with the SEC to be
relieved of the regulatory obligations
of a public company. A deregistered
company can continue to be traded in
the pink sheets or by an OTC marketmaker
willing to quote it.
This kind of departure costs very little.
But companies with 300 or more shareholders
must pay more to gain their freedom
from federal tyranny--by kicking off
a share buyback, perhaps coupled with
a reverse stock split, to get below
the 300-shareholder floor. If an investor
has less than one share postsplit, he
has no choice but to be cashed out.
That's what Teltone, a bulletin-board-traded
telecommunications software company,
plans to do. On Sept. 11 the $7.7 million
(annual revenues) company announced
a 1-for-900 reverse split. Fractional
shares will be bought out at a presplit
24 cents apiece, a nice price for a
moneylosing company whose shares were
last trading at 10 cents.
