Tip of the Week- Watch Your Trading Patterns
If a private company is seeking to complete a reverse merger with a shell whose stock is trading, there are three different periods of time where questionable trading can occur. One hopes, as in most deals these days, that normal trading patterns develop and there is no reason for concern. But vigilance as the deal progresses is important, and you should watch the stock all throughout the process. The three time periods are as follows:
Before the Announcement. If a stock's volume picks up noticeably in the days and weeks before announcing even a letter of intent, be cautious and ask questions. Anyone trading on material nonpublic information is committing a crime. And don't always assume the person trading is connected with the shell, it could be someone on the private company side looking to cash in a bit. If the illegal trader is a control person of the shell, it may not be just their problem. The company could be held liable on an "alter ego" theory, and the private company inherits that liability upon the merger.
After Announcing an LOI or Agreement. If a stock's volume picks up dramatically immediately after announcing a deal (but before completing the deal), it may be a sign that the shell's control people and friends were teeing up their trades to hit the minute the announcement came. That could be illegal, because the shell's affiliates know much more about the possible deal than is typically included in a press release to announce a letter of intent or signed agreement. In most deals, because analysts do not cover shell stocks and broker-dealers do not follow them, it takes awhile for word to get out, and the stock picks up, if at all, over a period of a week or two after the deal, not the same day as the announcement. Truth is in most deals I'm involved in the stock barely moves on the announcement, which is a sign that insiders are appropriately not trading and keeping mum.
After Closing the Merger. If a pre-revenue biotechnology company is trading at a $300 million market cap after closing a revese merger, be cautious. It may indeed be worth that and not a concern, but rapid rises in stock following a merger to stratospheric levels may be a sign that someone is over-hyping the stock, possibly through questionable investor relations tactics. Why do we care? If the person orchestrating this activity is connected to the company, the company is responsible. Second, these meteroric rises almost always lead to SEC or NASD investigations, and who needs that?
Best Case Scenario. Ideally, the shell's stock does almost nothing before and after the announcement, and begins to move slowly after the deal is consummated. It can take a number of months after closing a reverse merger to put in place strong, legitimate investor relations and begin to have an impact on the trading market. Patience is a virtue in these situations, and when a stock rises too rapidly, well as Newton found out, everything that goes up...well you know the rest.
Here's to our Presidents and enjoy the holiday weekend!
Before the Announcement. If a stock's volume picks up noticeably in the days and weeks before announcing even a letter of intent, be cautious and ask questions. Anyone trading on material nonpublic information is committing a crime. And don't always assume the person trading is connected with the shell, it could be someone on the private company side looking to cash in a bit. If the illegal trader is a control person of the shell, it may not be just their problem. The company could be held liable on an "alter ego" theory, and the private company inherits that liability upon the merger.
After Announcing an LOI or Agreement. If a stock's volume picks up dramatically immediately after announcing a deal (but before completing the deal), it may be a sign that the shell's control people and friends were teeing up their trades to hit the minute the announcement came. That could be illegal, because the shell's affiliates know much more about the possible deal than is typically included in a press release to announce a letter of intent or signed agreement. In most deals, because analysts do not cover shell stocks and broker-dealers do not follow them, it takes awhile for word to get out, and the stock picks up, if at all, over a period of a week or two after the deal, not the same day as the announcement. Truth is in most deals I'm involved in the stock barely moves on the announcement, which is a sign that insiders are appropriately not trading and keeping mum.
After Closing the Merger. If a pre-revenue biotechnology company is trading at a $300 million market cap after closing a revese merger, be cautious. It may indeed be worth that and not a concern, but rapid rises in stock following a merger to stratospheric levels may be a sign that someone is over-hyping the stock, possibly through questionable investor relations tactics. Why do we care? If the person orchestrating this activity is connected to the company, the company is responsible. Second, these meteroric rises almost always lead to SEC or NASD investigations, and who needs that?
Best Case Scenario. Ideally, the shell's stock does almost nothing before and after the announcement, and begins to move slowly after the deal is consummated. It can take a number of months after closing a reverse merger to put in place strong, legitimate investor relations and begin to have an impact on the trading market. Patience is a virtue in these situations, and when a stock rises too rapidly, well as Newton found out, everything that goes up...well you know the rest.
Here's to our Presidents and enjoy the holiday weekend!
Labels: Tip of the Week
posted by David N. Feldman at
2/17/2007 07:33:00 AM
4 Comments:
Why would an operating company seeking to go public have any use for a non-reporting, so-called "virgin shell?" If the operating company has to have 2 years of SEC audits anyway, and has to go out and raise its own money in a private placement, what advantages do the virgin shells provide? Why wouldn't that hypothetical company be better off doing a self filing through an SB-2? The time it would take getting an SB-2 effective would roughly equal the amount of time getting a post-merger registration effective. Given that, what value do these things provide the OPERATING COMPANY? I can see how the insiders of the 10-SB make alot of money. I can also see the value of a trading shell, your protestations notwithstanding. Unless the 10-SB shell is the creation of an investment bank or is affiliated with one that can provide money raising and/or market-making services, I just don't see the value in Virgin Shells. Enlighten me. What did these Cougar Biotech guys see in your 10-SB that was attractive to them?
There are definitely situations where a self-filing makes sense, but here's the key. If you are in need of a larger PIPE sooner, merging with a virgin shell can be completed, with financing, much more quickly than going through the SEC with a self-filing, which takes easily 5-8 months and can take over a year depending on the SEC's attitude. Yes you have to do a registration after a virgin shell merger, but you will have completed the financing and the company has the money it needs. Trading shells also have value, no question, and there is a place for all three of these techniques depending on the deal. I do not mean to ever suggest there is no place for trading shells. One just has to be more cautious about issues like trading patterns.
Thanks for the feedback. That Cougar deal is an interesting case-study. If I'm reading the filings correctly, the 10-SB shell owners sold the thing for $200,000 and no stock ownership. I'm assuming they were involved in the PIPE? It looks like the PIPE was closed just prior to the closing of the merger into the shell. It looks like the SB-2 resale registration was filed about a month after the merger closed, and went effective close to 10 months later, is that correct? What were the main issues/comments that the SEC had in those 10 months? Mostly operational or did they have to do with the merger/shell side? Very interesting and thanks again for your work on this blog. Great resource.
Well, I have been involved as an attorney in that transaction and therefore cannot provide any specific comments. In general though, there were many dozens of registrations that had been held up for many months while the Rule 415 mess was being dealt with. Thanks for the nice words about the blog, I'm enjoying it!
David
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