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 quoted in an article from The
Reverse Merger Report about the price
of shells on December 13, 2007
Holiday
Shell Hunger
No Rest This Year for the Buyers and
Sellers of Shells
By:
Reg Crowder
Posted: 12/18/07
At
a time of the year when business usually
takes a nap, reverse merger players
report a sharp rise in demand for both
trading and non-trading shells. Banks
that stockpiled shell companies for
this year's deals are starting to worry
that the deals closing before year-end
will leave them without shells for next
year.
Without exception, reverse merger players-large
and small-describe the U.S. Securities
and Exchange Commission's mid-November
action relaxing rules for reverse mergers
as a "huge" boost for the
industry.
But that's not what's driving the demand
for shells-yet. It's too soon to measure
the full impact of the SEC's recent
changes. And there remains some anxiety
among securities lawyers about what
will happen when the commission "codifies"
a variety of policies and decisions
contained in what is now a morass of
SEC staff letters.
So what's going on?
Industry leaders say the reverse merger
business today is driven by a "push"
and a "pull." The push is
the demand for the investments by cash-heavy
hedge funds that are getting more comfortable
with reverse mergers by the day.
"The hedge finds have adopted the
APO (alternative public offering) model,"
said Tim Halter, CEO of Halter Financial
Group. "We have a three-year track
record. The funds have been doing very
well. The deals are getting bigger.
Success breeds success."
The big "pull" comes from
strong, profitable Chinese companies
eager to raise capital in the U.S.,
said Ralph Amato, CEO of Ventana Capital
Partners. "These Chinese companies
want to raise capital," he said.
"They don't care what time of year
it is. They want to get going."
"And these are good companies,"
Amato said. "There's real value
there."
"Near the
end of the year there are usually two
months when the business is really slow,"
Amato said. "But this month, I'm
getting calls. I have two shells under
contract."
David N. Feldman, managing partner
of the Feldman Weinstein & Smith
law firm, said his firm has created
about 150 shells in the last two years.
But banks and others who put together
reverse mergers and PIPEs are calling
up and asking for more shells, he said.
"These guys are hoarding their
shells," Feldman said. "And
I'm still getting calls for more."
Halter said he didn' think of himself
as hoarding shells. He said his company
has bought enough shells to handle the
deals it has in the works.
But when he started counting the number
of shell deals already closed, and added
the ones that could well be completed
before year-end, Halter concluded those
deals might very well use up his entire
inventory.
"You know, we're going to need
some more vehicles," Halter said.
With one surprising exception, industry
sources pretty much agree that the prices
buyers are willing to pay for both trading
and non-trading shells has been flat
for at least a year.
Clean trading shells are selling for
cash prices in the $350,000 to $400,000
range, plus an equity stake in the resulting
entity. The cost of a virgin shell is
based upon the legal, accounting and
filing fees, the size and complexity
of the deal and who is selling it. There's
nothing new there.
Feldman said some of his fees
for work on shells are "a little
less" than they used to be. "I
now give a volume discount for doing
three or more at a time," he said.
"The cost is about $40,000 to get
a virgin shell public."
But Amato said he has heard from serious
buyers ready to pay $250,000 to $300,000
for shells listed on the Pink Sheets.
The one non-negotiable requirement was
that the companies absolutely must have
clean and complete audited financial
statements for the entire period they
have existed.
Amato said there isn't any reliable
way to know whether any Pink Sheet shells
have, in fact, sold for prices in that
range. Pink Sheet listed companies normally
don't report to the SEC. "There's
no transparency," he said.
Feldman doesn't deal in Pink
Sheets, but he understands exactly what
Amato is talking about.
Feldman said the audited financial statements
would be required for an entity to voluntarily
become a company "regularly reporting"
to the SEC.
"A smart guy who was very smart
about how he did it, could do this and
do very well for himself," Feldman
said. "Now $300,000 is an awful
lot of money for a Pink. But let's say
you bought a Pink for $300,000 and you
could take it to the next stage for
another $100,000. You might be way ahead."
R. Cromwell Coulson, chairman and CEO
of the Pink Sheets LLC, said he wasn't
aware of increased demand-or prices-for
Pink Sheet shells.
" have not heard anything but I
think the latest changes (to SEC rules)
will affect some manufactured Pink Sheet
shells negatively,"Coulson said.
While the SEC's November rule revisions
are being celebrated by most of the
reverse merger and PIPE players, Coulson
sees the commission's actions, taken
as a whole, as bad news for Pink Sheet
shells. Boiled down to its essence,
Coulson said that because of some little-noticed
"tightening" that accompanied
the loosening, a Pink Sheet shell probably
won't ever be able to use Rule 144 to
become publicly trading.
At one time Rule 144 was a popular approach
for small companies wishing to become
publicly traded. Shares could become
freely tradable without registration
as long as they were held for a certain
time. Although not many people noticed
it, Coulson said the SEC effectively
closed that door for "shell builders."
"If I'm Bob The Shell Builder,
my shell can never become trading under
Rule 144 now," he said. "If
I have a defunct company and I want
to make the shares tradable, now I have
to do a registration. Is that the end
of the world? I don't know. But I don't
have Rule 144 anymore."
That isn't the only new problem for
Pink Sheet shells.
The Pink Sheets, along with the OTC
Bulletin Board, may soon face an array
of tough new regulations from the British
Columbia Securities Commission. The
Canadian regulator plans to clamp down
on the mass production of shell companies
in Vancouver, British Columbia.
One consequence of the British Columbia
action could be to cut off the supply
of cheap shells. But these cheap shells
may be more trouble for the reverse
merger industry than they are worth.
Shady Vancouver shells have been a major
source of scandals and negative publicity
that have dogged the reverse merger
industry for years.
The commission is fed up with being
considered a toothless watchdog in a
scammer's paradise. By early next year
the regulator expects to enact a series
of new regulations to deal with fraudsters
who exploit British Columbia's regulatory
exemptions by doing business in Vancouver
while trading their shares in the U.S.
on the OTC Bulletin Board and the Pink
Sheets.
Doug Hyndman, chairman of the British
Columbia Securities Commission, said
the regulator intends to "disrupt
the manufacture and sale of U.S. OTC
shell companies."
"In order to disrupt the manufacture
and sale of shell companies, we will
be doing what we call 'early' investigations
and focused enforcement actions,"
he said. "For dealers, we are going
to propose new conditions of registration
for those who are, or may become, active
in trading in the U.S. OTC market."
The new regulations will apply to any
OTC issuer who has "a significant
connection to British Columbia."
That includes an office in the province
handling management, administration
or investor relations. The regulations
take effect as soon as a company gets
its OTC or Pink Sheets ticker symbol.
Most of British Columbia's "foreign
issuer" exemptions will be eliminated.
Company officials will be required to
provide detailed personal information
and submit to criminal background checks.
Hyndman said about 500 OTC and 200 Pink
Sheet companies have a "BC connection"
that will bring them under the province's
new investor protection requirements.
The agency said in its written explanation
of the new rules that the rules will
impose significant new expenses upon
companies listed on the Pink Sheets
because these companies currently aren't
required to regularly report financial
results or maintain audited financial
statements. It said the financial burden
would be less for OTC companies that
are already required to report results
and maintain audited accounts.
Hyndman admitted he didn't know whether
this new regulatory approach would clean
up Vancouver's shell company mills of
just chase them into another jurisdiction.
"We expect some won't want to bear
the increased cost or to disclose more
information about their companies,"
he said. "They can fold their tents
and move elsewhere to do their unsavory
business."
With demand for shells building and
one source of cheap shells facing possible
extinction, there remains one unanswered
question: Why isn't the price of shells
climbing?
Amato thinks the increased availability
and acceptance of virgin shells "is
keeping a lid on the prices for the
trading shells."
"The lawyers love those virgin
shells," he said. "The due
diligence is just so much easier than
it is for a company with an operating
history."
Halter said the success of reverse mergers
and PIPEs has convinced shell owners
that it is a good idea to take a portion
of their compensation in shares, rather
than demanding more cash. "We have
delivered such strong performance with
our deals that they know they can make
more money by leaving shares in the
deal than they can by taking more cash,"
he said.
Feldman pointed to two new developments
that could be helping to keep down prices
for shells, one very old and one very
new. Possibly the oldest way ever invented
to sell shares in a company is to do
it yourself.
"We've seen an up tick in self-offerings,"
Feldman said. "Now, that's a competitor
to the reverse merger. But if a company
is able to finance its own offering,
that can be a very good option."
The newest development is West-Park
Capital's WRASP financing structure.
This approach combines a reverse merger
with a PIPE, which is nothing new, and
then adds to that a very small IPO.
"The small IPO is done
solely to give you enough public float
to list on the American Stock Exchange,"
Feldman said. "So, if you have
an investor who absolutely has to be
able to mark to market from the first
day, that problem is solved."
In effect, the WRASP introduces a lot
of flexibility into the business of
shopping for the shell.
