Which came first? Going public or financing?
Many companies seek to go public in order to obtain needed capital for the growth of their business. Some companies, seeking that capital, meet a potential source who suggests that going public will make it easier for them to raise this particular round of financing, even though they may not have been considering going public. And of course in many cases the companies comply in order to get the funding they need. This is particularly true in stages of development where venture capital money is no longer available, but the company also may not be ready for later stage private equity.
One way to tell if a company really should be public is asking which came first? If a company, otherwise not interested in going public, does so at the request of a financing source, careful analysis should be undertaken. If a company has worked with its advisors to determine that it can benefit long-term from being publicly held, and can bear the costs of doing so, then seeks to raise money as part of that process, it has a much greater likelihood of succeeding in its plan to aid its growth through a publicly-traded stock. Too often companies go public simply to raise one round of financing, and find that there are no other advantages to being public, yet significant additional costs end up burdening them.
That said, if you have done the right analysis, are clear that going public makes sense, and are seeking financing, what are some of the trends in the marketplace for raising that money? Good news: the trends mostly favor companies going public. Here are some highlights..
1. Everyone's doing it. Investment banking firms from Goldman Sachs, Lehman Brothers and all the way down are involved in financings related to or closely following reverse mergers. It now appears that throughout Wall Street, any old "taint" associated with RM's shady past has been eliminated.
2. PIPE funds are proliferating and focusing on RM. More and more PIPE investors, forced in the last few years to change some of their questionable, but very profitable, practices, have looked to the greater risk but much greater potential upside of APOs and the like to enhance their returns. More and more funds are being created in the industry that did $36 billion in investments last year and going at a pace to well exceed $40 billion this year.
3. The regulatory environment is about to improve significantly. The SEC is expected in the next few months to pass the proposals announced back in May to implement some of the key recommendations of an SEC advisory committee on smaller public companies. Most importantly, (a) the holding period for unregistered securities (such as PIPE securities) is being reduced in most cases to six months and (b) shell shareholders, previously prohibited from selling under the exemption from registration in Rule 144, now will be able to sell under 144, probably six months after completion of a reverse merger and release of information. This will help companies to argue for improving the cost of obtaining financing, because investors have a quicker path to liquidity than in the past. It will also cause more and more investors to be interested in this space. It will also draw more players to create shells, knowing that they will have a path to liquidity even without registration following a merger.
4. It's happening more and more. About 50% of reverse merger deals include a contemporaneous financing. It has not always been thus. In my shop, frankly, more like 90% of the deals we work on are financing-driven. Why do an IPO when you can complete an "APO" (alternative public offering) characterized by a simultaneous reverse merger and PIPE.
5. More financings come with a shell. Many PIPE investors and investment banks have created "virgin shells" through Form 10-SB for use in their own deals. As a result, finding a shell becomes a non-issue when choosing the right financing source. These totally clean, fully SEC reporting, inexpensive but non-trading shells are becoming more and more popular as problems with trading shells have persisted.
6. More self-filings are possible. The main disadvantage of doing a self-filing to go public rather than complete a reverse merger is the time it takes to complete, delaying the needed financing. However, more and more PIPE investors are willing to invest directly into the private company, so along as the next thing it does is a self-filing to go public. This avoids the dilution of leaving an interest behind for the shell. A number of other conditions should be present for a self-filing to make sense, as outlined in my book.
7. The "yuan rush" continues. More and more Chinese deals seem to be heading to our shores, and more and more include contemporaneous financings. The valuations continue to rise, many deals are indeed high quality, but we can only hope values remain realistic so as to avoid this bubble getting too close to bursting. The recent scare caused by China's foreign exchange regulator, SAFE, issuing its circular 106, has led many to find legitimate ways to go forward with deals efficiently while still complying with 106.
8. New structures are bringing new creativity. Rodman & Renshaw has the CAP structure, Westpark Capital the WRAPPS approach. In both cases they are innovative approaches to raise money and go public at the same time through a reverse merger. As with SPACs five years ago, some or all of these may begin to really take off.
9. With experience comes confidence. Several years ago a number of PIPEs players began to finance reverse merger deals. In some cases there was early frustration with deals that take months (PIPEs usually take a few weeks), problems with shells and the like. But as the players have completed more deals, their savvy has improved. Some have brought in outside experts to oversee the deals. Others have set up inhouse teams to pursue the area. Thus the desire to do more and more deals has grown.
10. Bottom line: good stuff. Some have begun describing this as the "heyday" of reverse mergers and APOs. We have never been busier for sure, and it is indeed, for the moment, the perfect storm for the attractiveness of these efficient and straightforward methods to help a company achieve greater liquidity, have greater ease of capital formation and provide growth to some of the world's great entrepreneurial ventures.
By the way, this is a message from my 5-year old son, whom I blogged about last week and who typed this: we want for THOUSANDS! of people to read the reverse merger blog. The End. And make sure you read the PANDA POOP! part. and the part when like SEAWEED! is a problem and be careful with KEIKIS! when you are in your car! [referring to my entry on August 1]
One way to tell if a company really should be public is asking which came first? If a company, otherwise not interested in going public, does so at the request of a financing source, careful analysis should be undertaken. If a company has worked with its advisors to determine that it can benefit long-term from being publicly held, and can bear the costs of doing so, then seeks to raise money as part of that process, it has a much greater likelihood of succeeding in its plan to aid its growth through a publicly-traded stock. Too often companies go public simply to raise one round of financing, and find that there are no other advantages to being public, yet significant additional costs end up burdening them.
That said, if you have done the right analysis, are clear that going public makes sense, and are seeking financing, what are some of the trends in the marketplace for raising that money? Good news: the trends mostly favor companies going public. Here are some highlights..
1. Everyone's doing it. Investment banking firms from Goldman Sachs, Lehman Brothers and all the way down are involved in financings related to or closely following reverse mergers. It now appears that throughout Wall Street, any old "taint" associated with RM's shady past has been eliminated.
2. PIPE funds are proliferating and focusing on RM. More and more PIPE investors, forced in the last few years to change some of their questionable, but very profitable, practices, have looked to the greater risk but much greater potential upside of APOs and the like to enhance their returns. More and more funds are being created in the industry that did $36 billion in investments last year and going at a pace to well exceed $40 billion this year.
3. The regulatory environment is about to improve significantly. The SEC is expected in the next few months to pass the proposals announced back in May to implement some of the key recommendations of an SEC advisory committee on smaller public companies. Most importantly, (a) the holding period for unregistered securities (such as PIPE securities) is being reduced in most cases to six months and (b) shell shareholders, previously prohibited from selling under the exemption from registration in Rule 144, now will be able to sell under 144, probably six months after completion of a reverse merger and release of information. This will help companies to argue for improving the cost of obtaining financing, because investors have a quicker path to liquidity than in the past. It will also cause more and more investors to be interested in this space. It will also draw more players to create shells, knowing that they will have a path to liquidity even without registration following a merger.
4. It's happening more and more. About 50% of reverse merger deals include a contemporaneous financing. It has not always been thus. In my shop, frankly, more like 90% of the deals we work on are financing-driven. Why do an IPO when you can complete an "APO" (alternative public offering) characterized by a simultaneous reverse merger and PIPE.
5. More financings come with a shell. Many PIPE investors and investment banks have created "virgin shells" through Form 10-SB for use in their own deals. As a result, finding a shell becomes a non-issue when choosing the right financing source. These totally clean, fully SEC reporting, inexpensive but non-trading shells are becoming more and more popular as problems with trading shells have persisted.
6. More self-filings are possible. The main disadvantage of doing a self-filing to go public rather than complete a reverse merger is the time it takes to complete, delaying the needed financing. However, more and more PIPE investors are willing to invest directly into the private company, so along as the next thing it does is a self-filing to go public. This avoids the dilution of leaving an interest behind for the shell. A number of other conditions should be present for a self-filing to make sense, as outlined in my book.
7. The "yuan rush" continues. More and more Chinese deals seem to be heading to our shores, and more and more include contemporaneous financings. The valuations continue to rise, many deals are indeed high quality, but we can only hope values remain realistic so as to avoid this bubble getting too close to bursting. The recent scare caused by China's foreign exchange regulator, SAFE, issuing its circular 106, has led many to find legitimate ways to go forward with deals efficiently while still complying with 106.
8. New structures are bringing new creativity. Rodman & Renshaw has the CAP structure, Westpark Capital the WRAPPS approach. In both cases they are innovative approaches to raise money and go public at the same time through a reverse merger. As with SPACs five years ago, some or all of these may begin to really take off.
9. With experience comes confidence. Several years ago a number of PIPEs players began to finance reverse merger deals. In some cases there was early frustration with deals that take months (PIPEs usually take a few weeks), problems with shells and the like. But as the players have completed more deals, their savvy has improved. Some have brought in outside experts to oversee the deals. Others have set up inhouse teams to pursue the area. Thus the desire to do more and more deals has grown.
10. Bottom line: good stuff. Some have begun describing this as the "heyday" of reverse mergers and APOs. We have never been busier for sure, and it is indeed, for the moment, the perfect storm for the attractiveness of these efficient and straightforward methods to help a company achieve greater liquidity, have greater ease of capital formation and provide growth to some of the world's great entrepreneurial ventures.
By the way, this is a message from my 5-year old son, whom I blogged about last week and who typed this: we want for THOUSANDS! of people to read the reverse merger blog. The End. And make sure you read the PANDA POOP! part. and the part when like SEAWEED! is a problem and be careful with KEIKIS! when you are in your car! [referring to my entry on August 1]
Labels: Financing
posted by David N. Feldman at
10/26/2007 08:39:00 PM
0 Comments:
Post a Comment
Links to this post:
Create a Link
<< Home