Rule 415 Update - Positive News

In recent days, there have been several positive pieces of news on the Rule 415 front (see posting below for more info on this issue).

First, a law firm which represents many issuers has circulated a memo resulting from their meeting with several senior SEC staffers. The memo suggests that it does appear that the "33-1/3% of the float (ie nonaffiliate stock)" standard setting the ceiling as to what portion of the company's stock can be registered at one time will remain.

However, the staff seems to be much more willing than in recent months to forego that limitation if ameliorating factors exist. These factors could include if (i) affiliates have held their stock for a longer rather than shorter period, (ii) no one investor seeking to register holds more than 10% of the company's stock, (iii) PIPE investments are structured with more common stock rather than derivative securities such as convertible preferred stock or convertible debt and (iv) the PIPE does not include so-called "death-spiral" features. The staff basically admitted they probably went a little too far in their reinterpretation.

In addition, in the past the staff seemed to suggest that anyone whose stock is registered in the 33% has to wait six months to do a subsequent registration of any additional stock. The staff apparently backed off on this in their meeting with the law firm, acknowledging the benefit of an additional registration prior to the one year Rule 144 period. Thus, a second registration now apparently can happen in less than six months, also a positive development.

The law firm briefly discussed reverse mergers with the staff. They indicated that these transactions likely will be treated as a separate category, and the 33% limitation may not apply at all in reverse mergers. We are currently seeking more information on this, but this sounds like good news. In general, the staffers told the law firm that they very much do not wish to quell small companies' interest in and benefit from PIPEs and reverse mergers.

Second, in my own conversations with "those in the know," I am being told that final decisions on these matters are expected before the end of the year. The new guidelines may come only in the form of internal direction, in which case we will learn of them indirectly through the staff's response to registrations filed hereafter.

In the meantime, we are still seeing anecdotal evidence in both directions while the examiners await their internal advice. Some companies are still receiving the "415 comment" even, in one case, with as little as 29% of the float being registered. Other companies' registrations are sailing through without comment on the issue, in one case with over 50% of the outstanding being registered.

Overall, the positive news is outweighing the negative, and hopefully in a matter of weeks we will remember this as an annoying speed bump that ultimately did not impact the long term growth of the reverse merger or "alternative public offering" business.

Your humble blogger is off to warmer climes for a few days, but I'll continue to monitor things and let you know if any newsworthy information is passed to me. Happy holidays and a happy, healthy and safe New Year to all!

Advantages of a Reverse Merger Versus an IPO

As I discuss in my new book REVERSE MERGERS, utilizing a reverse merger to become publicly traded provides seven major advantages over a traditional IPO:

• Lower Cost – Reverse mergers usually cost significantly less than an IPO. Total costs can be much less than $1 million, depending on the cost of the shell and whether or not the private company has already completed proper audits of its financial statements. In fact, it is not unusual for a reverse merger to cost less than $200,000. An IPO, on the other hand, is much more expensive, costing at least several million dollars before factoring in underwriting commissions to those raising IPO capital.
  
  
• Speedier Process – Prior to the SEC’s new reverse merger rules enacted in June 2005, most reverse mergers involving legitimate players completing proper due diligence and negotiation of documents were taking two to three months from start to finish, and it is estimated that the new rules should only add about one month to most transactions. Since passing the rule, however, some deals in my shop have been completed in as fast as six weeks (though this is not the norm). In contrast, a typical IPO takes 9 mos. to a year to complete, and can easily take longer.
  
  
• No IPO Window Necessary – Sometimes there is no market for IPOs, and during these times the IPO “window” is said to be “closed.” That window slammed shut following the tech crash in 2000, and has only re-opened slightly, and mostly for larger companies.
  
  
• Much Less Management Attention Required – Most senior executives do not realize what they’re getting into when they pursue a traditional IPO. Endless domestic and international travel, due diligence meetings and late nights at the printer are the norm, and a year away from building the business while pursuing an IPO can damage a company’s ability to execute its business plan. Reverse mergers need significantly less attention by management than IPOs, though, because the transaction is quicker and less complex, and most of the work can be handled by a capable CFO working with counsel and auditors.
  
  
• No Underwriter - An underwriter's main goal is to make a company look just right to for an IPO to potential financers, which can be different from management's vision. Underwriters are unnecessary in the reverse merger process.
  
  
• No Risk of Underwriter’s Withdrawal – One of the riskier aspects of an IPO is that an underwriter can decide to terminate the deal or significantly change the share price of the offering at the last minute, meaning that much of the success of an IPO depends upon the state of the market during the week that the stock begins to trade. No underwriter means reverse mergers are not market-sensitive.
  
  
• Less Dilution – Because an underwriter is paid based on how much capital is raised, too often in an IPO the underwriter essentially forces the company to take more money than it could possibly need. Because less money is raised in funding a reverse merger (and there’s no underwriter driving the financing), there is less dilution, allowing a private company’s management, founders and prior investors to retain a greater percentage of ownership of their company.