Presenting...the Chinese edition of the book!

We had so much demand for a Chinese version of my book, Reverse Mergers: Taking a Company Public Without an IPO (Bloomberg Press, 2006), the publisher arranged for translation and publication in Chinese. Given that about 20% of all reverse mergers last year involved a Chinese company, this certainly makes sense!

I am very excited to announce that the Chinese version of the book is now available at Amazon at the following link: http://www.amazon.cn/detail/product.asp?prodid=zjbk588520. But you have to read Chinese to order there (I don't)!

If you do not read Chinese but wish to order books for some Chinese friends, simply email me at dfeldman@feldmanweinstein.com, and I will put you directly in touch with the publisher to arrange.

I continue to be humbled by the outpouring of praise and support the book has received since its publication last year. Now in its second printing in English, I hope the availability of a comprehensive text on this subject has helped bring greater legitimacy and popularity to our RM world.

And yet more comments...

As the dog days of August sadly wind down, someone had to rain on the party. A law professor and former SEC staffer has suggested that the Rule 144 holding periods should not be reduced as per the SEC proposal. He believes investors will be less protected even though capital formation will be enhanced. Of course we disagree. If you also disagree, let's make sure the weight of comment letters is in favor of this dramatic and positive change!

The Small Business Administration also has weighed in on the Form S-3 proposals. They believe there should be a further extension in time before smaller companies have to comply with the onerous Section 404 "internal financial control" requirements of Sarbanes-Oxley. I think, however, this is not likely to happen.

In addition, as with our letter, the SBA suggests that the proposal to limit the use of Form S-3 to 20% of the public float should be increased, and that the form should be allowed to be used for certain secondary offerings as well. Both the Rule 404 suggestion and the use of Form S-3 for secondary offerings for OTCBB companies were recommendations of the SEC's Advisory Committee on Smaller Public Companies.

Deadlines are hitting starting today for comment letters (September 4 is the deadline on the Rule 144 proposal), so get yours in!

Interesting New Comment to SEC Proposals: Reduce the Regulation S Holding Period

I noticed that a lawyer has posted a comment to the SEC proposal to change the holding periods for Rule 144 suggesting that Regulation S also be amended to reduce the holding periods there to six months from one year.

As many of you know, Regulation S was passed originally to ease the process of capital formation when the money is being raised outside the US and in other circumstances. It became controversial when a poorly drafted section was interpreted to allow public resale in the US just 41 days after issuing stock. In fact, some say the modern PIPE market was born in Reg S deals at this time. The SEC dealt with the problem (after awhile) by changing the period to one year; at the time suggesting it should be parallel with the holding periods under Rule 144.

Thus, says the commenter, Regulation S should continue to be parallel, so if you are changing Rule 144, Reg S also should have a reduced holding period. Makes sense to me. Anything that eases the regulatory burden without encouraging bad guys is probably a good thing. We'll see if the SEC Staff responds on this point.

Tip of the Week - Which Lawyer Do You Need When?

I find that many actual and prospective law clients have different views of when and how lawyers should get involved in possible reverse merger and self-filing transactions, whether on behalf of a company going public or the public shell company. Allow me to humbly offer my thoughts following the near completion of 21 years of law practice:

A. Representing a Private Company

1. The "do the closing" mentality: Some private companies think they can structure a transaction, complete a term sheet or letter of intent with a shell and source of financing, then when the first drafts of the deal documents show up, ask the lawyer to come in then and "do the closing." They think completing a reverse merger is like buying a house, where you negotiate the price and leave the lawyers out of it until contract time.

Of course nothing could be further from the truth. These transactions are complex and sophisticated, and we can provide significant value add right from the moment you are even considering when to go public. In fact, often the best advice I provide in a deal is right at the beginning. Helping a company analyze whether to be public, and if so which is the right way to do so (self-filing, merger with a trading shell, merger with a virgin shell, etc.) involves quite a bit of self-analysis of a company's goals, stage of development and cost-benefit review.

2. Do you need a "local" attorney? Many CEOs think they need a lawyer admitted in their state of incorporation or state of their headquarters, that lawyers cannot give advice on the laws of other states. This is not true. In some states, a locally admitted lawyer is required for real estate transactions or estate work, but no state that I'm aware of requires you to be admitted locally in order to advise on corporate law. The very fact that virtually every corporate lawyer I know is willing to not only give advice, but give a legal opinion, on issues of Delaware law, even though almost none of us is admitted there, proves the point. The key ethical analysis for the lawyer is this: if you feel you have enough knowledge about the state law in question, you can give advice concerning it. Thus, because of our heavy involvement in reverse mergers, for example, for good or bad we have become knowledgeable about many aspects of the corporate law of Colorado and Nevada.

Depending on what is required in the deal, however, sometimes your "non-local" attorney can bring in a local lawyer to deal with very narrow aspects of a transaction. But we have represented clients based throughout the US and the world.

All that said, however, if work involves a foreign company, then you almost always do need local counsel in the foreign country to complement the work of your US counsel.

3. How many specialists and why? Some law firms (especially larger ones) replete with various experts in environmental law, labor law, tax and the like, feel it is essential for these various experts to weigh in on the various aspects of every transaction. Of course this helps them charge higher fees. Almost every reverse merger or self-filing has very limited tax issues which can generally be dealt with by the parties' capable accountants and auditors. If a company is in the software business, chances are its environmental liability risks do not need to be looked at. However, we do generally recommend that issues of stock option plans and executive compensation be reviewed by an expert (this is not only because we happen to have a great such expert in our firm!). And of course there are situations, particularly with technology companies, where review of a company's intellectual property (patents, trademarks and the like) is appropriate.

4. A reverse merger is no different than any other M&A transaction, right? Many private companies use their existing corporate or securities counsel to go forward with a reverse merger or self-filing. If that counsel has not done these transactions, or has only done a few, as I point out many times in my book, there are many tricks and traps to fall into. If you are happy with your current counsel and want to keep them going forward and keep them involved with the going public process, the best way to go is to find a firm expert in these transactions and willing to step in solely to complete the transaction then leave.

My colleagues in the legal profession are aware that my firm, for example, for various reasons is not interested in retaining the company as a client once it is public. Thus they are comfortable recommending us to come in as special counsel while they remain as general counsel, then after the deal they remain and represent the now public company going forward.

B. Representing a Shell

1. The "do the closing" mentality. Same issue as before but a little different. Here chances are the shell founders or promoters are experienced deal professionals who may have even done a number of reverse mergers. Thus they may, even appropriately, feel they have the expertise to structure the deal and get to the point of drafting documents before bringing in counsel. They hate spending money on lawyers to look at letters of intent that end up not happening, then paying the lawyers thousands of dollars for a deal that didn't even get signed up.

Here, where a shell founder feels this way, I still recommend having counsel review the LOI or term sheet right before it is finalized or signed, and make clear through the process that everything is subject to final review by counsel. Not always, but often we can make some suggestions that are easier to implement at this stage than in the document stage.

2. Do you need a "local" attorney? Again, same issue as above but with a twist. Some shell founders or promoters believe that they can rely on work done by a placement agent's lawyer or, believe it or not, the lawyer for the private company, whether for due diligence, local law in a foreign country or the like. As in all things, it's simply determining the risk of not having the proper counsel as against the things that can happen if counsel is not on board. If you are a shell and this is a Chinese deal, we always recommend having your own Chinese counsel.

3. Do you really need to do due diligence? Clients do come to me suggesting they rely on the due diligence of an unaffiliated placement agent, or the brief review of documents by an experienced shell promoter who is not an attorney, as sufficient due diligence review of a private company. Here it may depend on what type of shell you have. In a publicly trading shell with hundreds or thousands of shareholders, the officers and directors of that shell have fiduciary duties to those holders. If something significant and bad could have been found out with customary due diligence procedures and is not, these affiliates could be personally liable for negligence or the like. If, however, the shell is a virgin shell with one shareholder, and that shareholder chooses not to do due diligence, the potential liability is somewhat less. However, even there, future shareholders may have the right to come after the original shell promoter who missed something.

4. Who pays shell counsel? This does vary, but in many cases the private company pays the shell's lawyer. This is especially true where the shell's founder is also involved with raising money for a PIPE, or where a much larger company (maybe $75 million in value or more) is taking over a shell. Usually shells are maintained with minimal cash, but lawyers may run up meaningful fees in a complex deal. Others take it indirectly as placement agent in "non-accountable" expense allowances or large reverse merger transaction fees. But in deal involving no cash to the shell and its affiliates, it is very common for the private company to cover these costs.

Remember my constant refrain. This is not legal advice, do not rely on it, consult with your attorney or advisor in all such matters!!

Market's Down; RM Blog's Up!

Thanks, thanks, thanks! August 6, 2007 was the second highest one-day total number of visits to this blog since we started back in November. That's in the middle of the summer and there have certainly been more important weeks for the RM world than this one.

Of course we are all worried about the direction of the US and world stock markets and the psychology that is taking a relatively narrow series of issues and causing them to impact on many unrelated aspects of investing mentality.

But let's all keep in mind as we look at deals that today's market conditions are not what really matters when a company pursues a reverse merger. Since it can take a number of months after a deal before "real" trading begins, we end up prognosticating as to how the markets will be in the future, not today. Let's also remember that over any ten-year period, investing in equities always beats out any other type of investing. So if a you take a long term approach, and a broad view of investing in a variety of transactions over a period of time, ultimately you will balance out market conditions to have minimal impact from down markets.

Hang in there everyone, it's still deals-a-plenty from our limited perspective. Thanks again for your continuing, and growing, support for the RMB!

Sorry about the downtime!

To faithful blogees (several of whom emailed me): Unfortunately the blog was "frozen" by the operator temporarily due to technical issues, which have obviously been resolved. As my long-time office administrator constantly reminds me, we are maybe a little too dependent on all the technology in our lives, which is great until it stops working! In any event, my apologies for the downtime and looks like we are back, so keep checking in!

Marty Dunn Departing the SEC

It does seem I'm covering a lot of action at the SEC these days, hopefully we'll get back to talking about the reverse merger business once the new proposals are passed.

In any event, the SEC announced on August 6 that Deputy Director of Corporation Finance Martin Dunn is stepping down to join a law firm. Generally well regarded and perceived as extraordinarily talented and dedicated, Marty is also known for his wry wit, especially breaking up otherwise drone PLI lectures to securities lawyers. John White was technically his boss, but Marty's many years working the bureaucracy at the SEC led most to believe he essentially ran Corporation Finance.

I had talked with Marty a number of times, in particular concerning the Rule 415 issue. He is a patient man who listened to all who were interested in expressing their opinions (even if he didn't always agree). With the assistance of Carol McGee and Dave Lynn at the SEC, Marty essentially designed the 30% of public float standard which can be registered for resale without a 415 analysis being triggered. Many in the PIPE and RM world thought this would cause the end of many deals and changes to many others. In fact that result has occurred, as has been written many times in this space.

Since the announcement, Marty has also been instrumental in putting together the six new proposals that will indeed help smaller public companies and make the 415 issue less of a concern in many situations. I believe Marty felt strongly that those in the extreme cases seeking to register 2-3 times a company's float were indirectly conducting a direct public offering. How that translated into no more than 30% of the float is still a bit of a mystery to me. Initially the SEC internally guided its staff to issue a 415 comment when more than 50% of a company's outstanding stock was seeking to be registered. That seems like a more logical standard, if there has to be one.

As we noted in our comment letter to the SEC proposals, we hope the Commission will take another look at this issue. Congress has asked Chairman Cox about it and his response to their concerns that the 415 issue will stifle capital formation is not to worry, these new proposals will take care of everything. I respectfully disagree, and am hopeful that Marty's replacement will have more of the spirit of the proposals in mind and recommend an adjustment to the 415 thresholds.

In any event, I respect Marty Dunn and wish him all the best in his new position back with us in the private sector.

No Summer Vacation at the SEC

Dear blogees: Unlike the Supreme Court, Congress and the Iraqi Assembly, the Securities and Exchange Commission is in full mode this summer. On August 3, the SEC at last released the final installment of its six proposal response to the recommendations of their Advisory Committee on Smaller Public Companies. Release 33-8828, entitled "Revisions of Limited Offering Exemptions in Regulation D," is now available on the SEC website. We are reviewing it, but the primary purpose is to create a new type of "super-accredited" investor, and allow companies to engage in limited tombstone-like advertising and solicitation solely to these individuals or entities with greater income or investment assets.

Separately, more comments are arriving to the Rule 144 proposal. Former top SEC lawyer Dave Lynn's new boss Jesse Brill at The Corporate Counsel has weighed in, along with another law firm (or as Johnny Carson used to say, "on another network"). I assume as the dog days of August drag on, there will be many more thoughts posted.

Based on a completely unscientific poll (i.e. judging by activity in our law office), many in the deal community have moved forward assuming the proposals will likely be adopted essentially as written, which in my opinion is probably a safe assumption. Reverse merger and APO deals are picking up and moving forward, this despite the stock market woes of recent days, reinforcing my long-held belief that RM deals are not generally market-sensitive. We'll see more reliable data when The Reverse Merger Report provides its third quarter numbers in a few months.

Life Outside RM

As I sit overlooking a magnificent beach enjoying breakfast, I thought I would bring you the latest from the Maui News:

1. Seaweed is beginning to be a problem.
2. Cars are driving too fast.
3. In a report from China, products (non-odorous) are being made from panda poop.

Every once in awhile it's important to put our world in perspective. I hope you are all enjoying summer and the respite it can provide and have a chance to appreciate the joys of life.

See you all soon!