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 the PIPEs Report article
about Rule 415 on December 15, 2006.
No
Rule 415 Issues with APOs: SEC Views
RTOs cum PIPEs as 'Class of One'
by
Rich Myer
Alternative
public offerings (APOs) appear to have
been spared the chill that has descended
upon the PIPE market following the SEC's
apparent reinterpretations of Rule 415.
Confusion certainly still reigns, and
nothing is yet absolutely certain. Still,
it looks as if a reverse merger followed
by a PIPE transaction might be acceptable
to the regulators and not likely to
face the registration difficulties currently
affecting many standalone PIPEs.
Since last summer, the SEC has started
to view large private placements large
as a percentage of total float as direct
public offerings. As such, the investors
in APO's, which by their nature invariably
involve large issuances relative to
their nominal or nonexistent floats,
could be deemed underwriters and may
be unable to sell their shares at anything
but a fixed price for one or possibly
two years. The possibility of having
investors stuck with stock has resulted
in a slowing of PIPE transactions.
Those familiar with the market also
know that the problem they are dealing
with has not been precisely defined.
There's no exact cutoff point for the
percentage of shares that can be issued
and still registered. Though 30% has
been used as a general guideline, the
SEC will adjust that level depending
on its overall feeling about the transaction.
Its not even entirely clear what metric
the SEC has settled on to calculate
the percentage figure, whether it is
total outstanding shares, public float,
or some other denominator. Over the
past few months dealmakers and their
attorneys have been testing the waters
to see what the SEC finds acceptable,
and what if flat out rejects.
One of the most interesting points to
have surfaced is the attitude of the
regulators toward APO's. While no definite
conclusions are being offered at this
time, it seems that the SEC is most
comfortable with this type of transaction
and is willing to allow them to proceed.
"In General, the APO market has
not slowed down," says Richard Anslow,
an attorney at Anslow & Jaclin.
The fundamental premise is that the
SEC views APO investors differently
and perhaps more favorably, than those
who invest in a PIPE sans reverse merger.
The former is seen as a more long-term
and stable investor, while the latter
is regarded is regarded as the type
that dumps shares quickly after the
offering to benefit from the PIPE discount
to market price.
"I think it's all going to be
OK," says David Feldman, an attorney
at Feldman Weinstein & Smith. "Reverse
mergers are a bit different. It is more
important in a PIPE that there is near
term liquidity. In reverse mergers,
they have more of a venture capitalist
attitude."
So far, evidence is anecdotal and only
partially supported by statistics. Lawyers
familiar with the APO market say they
have seen the successful registration
of APO shares over the last few weeks
and that these registrations were accomplished
without comment from the SEC. It seems
that the SEC may be looking at APO's
as a class of one, distinct from their
component parts.
According to data from PrivateRaise,
a handful of APO's have filed registration
statements this fall in the months since
the SEC became revisionist in Rule 415.
The most recent registration filing
was in the first week of December.
Of the 12 APOs from the second quarter
that have filed registration statements,
five have been declared effective. Several
issuers which filed in the third quarter
have been successful in that respect.
Some observers argue that the point
is moot. It's not so much a question
of whether transactions can be done,
but how they will be done. They believe
that the market will adjust to the regulatory
conditions. APO investors will get more
used to holding stock for longer periods
of time, and companies will compensate
them for taking on the additional risk.
The market is evolving, they say, not
dying.
"Do I think the reverse merger
or the APO markets are dead? No. They
won't close shop. You have to structure
the deals properly. And some investors
are getting more comfortable with [Rule]
144 stock," says Nimish Patel, a partner
at the law firm Richardson & Patel.
This is particularly the case for APO's.
Since many of the investors are getting
involved in these deals to invest for
the long term, it doesn't take much
arm twisting to get them to agree to
holding the issued stock for a set period
of time. Indeed, the Rule 415 reinterpretation
was a bit of a non-event for practitioners
of the APO trade. Just as the SEC seems
to be ruling in its favor, the APO market
is fine with SEC's new found attitude.
"My guess is that deals will be
structured around the rules," says Tim
Halter, president of Halter Financial
Group. "In the absolute worse case,
they will just hold the stock for 12
months."
The possibility of no registration is
in many cases no big deal, says Feldman.
Anslow says he'll know more in a few
weeks. In mid-November Applied Spectrum
completed a reverse merger with privately
held Benda Pharmaceuticals and issued
a $12 million PIPE financing. Some time
early next year, the company will seek
registration. Anslow, who advised the
firm in the APO, has heard that all
50 investors in the transaction, all
of them independent of the company,
may be constructed by the SEC as a single
investor.
In that case, it may mean that the APO
will be getting the same treatment under
Rule 415 as a large issuance PIPE. The
investors would probably then be viewed
as underwriters and would most likely
be required to hold on to their stock
for at least 12 months. If they are
truly investing for the long term, they'll
barely notice. If not, they'll find
the lack of registration troubling and
future APO deals could suffer.
