Bigger, Bigger, Bigger, Better?

Holy big deal Batman! Several incredible milestones were reached in recent weeks as the PIPE and SPAC markets continue their explosive growth.

First, what appears to be the largest PIPE ever was announced on November 28. According to DealFlow Media's PIPE Wire, the $7.5 billion investment into Citigroup by Abu Dhabi Investment Group was structured as a PIPE, with trust-preferred securities and common stock purchase contracts. Presumably mortgage crisis-beleaguered Citi was attracted by the speed of the transaction. This transaction would seem to lay to rest most, if not all, of the remaining questions about the legitimacy and efficiency of PIPEs.

The second major development is the largest SPAC ever, set up by investor Nelson Peltz. They announced that they are going to raise $750 million for a troubled company. This dwarfs the $550 million raised in September by a SPAC led by Tom Hicks. Considering that the earliest SPACS back in 2003 raised an average of $25 million, this is simply huge.

Related to this is the fact that, according to DealFlow's new SPAC Wire, the 200th SPAC, BPW Acquisition, was filed this past week. SPAC pioneers David Nussbaum of EarlyBird Capital, David Miller of Graubard Miller and Ira Greenspan of HCFP Securities should be mighty proud of what they have wrought.

Not to forget the humble reverse merger. Recent deals financed by the likes of Goldman Sachs and Lehman Brothers took companies public through shell mergers. It was difficult to imagine 10 years ago that any bulge bracket firm would get comfortable with an APO-type structure, but this day also has arrived.

But what does this all mean? Will General Motors do a PIPE? Will Deutsche Bank raise a $30 billion SPAC? What impact does this have on those who choose to remain in the small and microcap space with PIPEs, APOs, SPACs and the like?

My view: it's all good. To the extent that some looked upon these methods of smallcap finance with skepticism, everyone benefits from the entrance of major players to "borrow" these techniques and adapt them to work with larger companies. This assumes that we continue to utilize these approaches to help smaller public companies as well as large ones.

I hope there will always be SPAC players who keep their fundraising under $75 million. I hope that more innovative techniques like WestPark Capital's WRASP structure (more about this in a future entry I am working on) will allow more companies to go public in a clean and straightforward fashion and move immediately to a major exchange. And here's possibly the hardest part: I hope the PIPE investment community, as it sees the chance to be involved in larger and larger deals, remembers the opportunity and dramatic upside possible by continuing to also work with smaller deals into smaller companies. I hope that a segment of the PIPE world will continue to provide "public venture capital" to exciting growing entrepreneurial companies, knowing that greater risk can lead to greater reward. And all while, yes, the larger and larger deals bring greater and greater credibility, legitimacy and transparency to everything we do.

SEC Approves Reduction in Rule 144 Holding Period

At an open hearing yesterday, the Securities and Exchange Commission approved three of the six proposals relating to improving the regulatory environment for smaller public companies. The remaining three proposals are expected to be addressed (and presumably approved) in the near future. The changes were touted by SEC Chairman Cox as showing the Commission’s “focus on removing obstacles of growth” for smaller companies, and in the words of SEC Division of Corporation Finance John White, their desire to “promote the growth and vitality of smaller public companies.” These changes are the SEC’s response to recommendations of its Advisory Committee on Smaller Public Companies.

Here is a brief summary of the two most important changes, based on the staff presentations at the SEC hearing. The final adopting releases are not yet available.

Rule 144 Goes to Six Months- No Tolling for Hedging

The SEC approved a significant change in the holding period under Rule 144, reducing the various existing holding periods to six months. Affiliates can sell after holding six months but will be subject to volume limitations as currently. Non-affiliates can sell without volume limitations after holding six months, but the company will need to remain current in its SEC filings for the next six months, and after one year non-affiliates can sell without limits regardless of whether the SEC filings are current. Holding periods for non-reporting companies will remain at one year.

In a significant change from the Commission’s proposal announced in May, they will not require holders to toll or stop the holding period for any period in which the holder is engaged in certain hedging activities.

In addition, Form 144 was eliminated for non-affiliates, and the threshold for affiliates has been raised to being required only if the sale is for at least 5,000 shares or $50,000.

The staff mentioned codifying certain staff interpretations, presumably including the so-called Worm/Wulff letters, but unfortunately the details were not discussed at the hearing – we will need to wait for the final adopting release itself, which may take a number of days or even weeks.

The staff also did not mention whether or not the new rules will be retroactive, but we are hopeful that they will be.

John White indicated the staff believes that the reduced Rule 144 holding period will lead to a significant reduction in the discount on the sale of restricted securities in transactions such as PIPEs.

Regulation S-B to be Scrapped; Scaled Disclosure Available to More

As proposed in May, the SEC has approved migrating all small business filers to the larger Regulation S-K system, eliminating the SB forms including Forms 10-QSB, 10-KSB, SB-2 and 10-SB. However, the scaled disclosure currently available will remain and be codified in Regulation S-K. Finally, all filers with a public float of under $75 million will be eligible for scaled disclosure, increasing by thousands the number of companies that will be eligible.

The proposal suggested that the $75 million public float number be indexed for inflation, but based on comments they have decided not to index the amount.

For the transition, companies will be able to keep using the existing SB forms for the next year, or migrate back to Regulation S-K sooner. They have prepared a “plain English” booklet to help the 3500 companies currently reporting under Regulation S-B understand and ease the transition.

Listen in Thursday Morning

As mentioned, the SEC will hold an open hearing on Thursday at 10 am to approve a number of the new smaller public company proposals, including the big changes to Rule 144. Instead of going to Washington, you can listen in on the webcast. Just go to www.sec.gov and you should see a box directing you to the webcast that morning.

SEC Will Approve Rule 144 and Other Changes on November 15

Last night the SEC posted a notice that there will be a meeting of the Commission on November 15. That meeting, among other things, will be to consider (a) adoption of the new Rule 144 changes, (b) eliminating Regulation S-B and migrating the scaled disclosure requirements from that regulation back to Regulation S-K and eliminating all the SB forms and (c) allowing private companies to avoid becoming public involuntarily merely because they have many shareholders as a result of employee stock options and the like.

In addition, interestingly for all involved with foreign private issuers, the SEC seems ready to approve a rule accepting financial statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board without reconciliation to generally accepted accounting principles as used in the United States when contained in the filings of foreign private issuers with the Commission.

In the notice regarding Rule 144 they say they are also going to codify certain staff interpretations, which we assume means they are going to adopt the changes to Worm/Wulff which we have all been hoping for. I am hopeful the staff adopts in its final release that which is substantially the same as the proposal, namely that all shareholders in a shell would have the availability of Rule 144 resale after 6 months have passed since a reverse merger and release of full information on the merged company. Given the increased disclosure requirements imposed by the SEC since 2005, and the much greater transparency of transactions as a result, it would seem allowing sale six months later is very reasonable.

Stay tuned! Everything's about to change for the better....

And speaking of the power of technology...

Thanks to all! Yesterday was a new one-day record for number of visits to our humble little corner of cyberspace known as the Reverse Merger Blog. As we expand the scope of the blog to cover mostly all things small and microcap, I'm thrilled to see that a blog that never even once mentions Britney Spears still manages to attract people.

I am still watching the SEC to find out when we will hear about the new small business proposals. An important event this week is the PLI Securities Regulation Institute, where key SEC folks, including Division of Corporation Finance Director John White, will be speaking. Hopefully they will give some indication of when we hope to finally obtain the relief on 144, S-3 and the like that we've been very patiently awaiting.

Is LA the "Digital Canyon" to rival Silicon Valley?

As most of you know my lifelong home is in New York and my law firm is based in Manhattan. I just spent a few days on the left coast in Los Angeles, as I do a number of times each year. In addition to giving a talk to a very high powered networking group of senior technology executives and entrepreneurs, I visited with clients and friends.

I confirmed this week what I have known for awhile: LA hosts a rapidly burgeoning technology sector, particularly in digital media and entertainment-related developments. Yet these companies sometimes struggle for lack of venture capital and other sources of financing, especially in the early stage.

There are quite a number of hedge funds in LA, but relatively few investment banks, venture capital firms, private equity firms, and service providers (lawyers, accountants) to assist them. As a result, we are pretty active helping take LA-based companies public through reverse mergers and other alternatives to traditional IPOs, because these transactions are driven by the hedge funds.

If the major venture and private equity firms want to find some very exciting and undernoticed opportunities, they may want to consider spending some time in Los Angeles. And hey, the weather isn't bad either.

As an aside, being from New York we truly appreciated all the love and support that came to us from around the country after 9/11. So we really felt for the people of Los Angeles, San Diego, Malibu, etc. who suffered through the horrific fires these past weeks. This week there was still a smell in the air as people were beginning to get back to normal. Our thoughts are with those who lost their homes and hopefully they will rebuild bigger and better.