The WRASP: The Smartest Ideas are the Simplest

Congratulations to my client Rick Rappaport and his team at WestPark Capital in LA. They have pioneered a new structure to take companies public without an IPO, without a trading shell, without a self-filing and moving from being private directly to trading on the American Stock Exchange.

Dubbed a "WRASP," the structure is very straightforward. First Rick sets up a Form 10 "virgin" shell. He then finds a private company that would qualify for listing on the AMEX but for not having a trading stock and at least 400 shareholders with at least 100 tradable shares each.

The next step is to complete a routine reverse merger with the virgin shell along with a contemporaneous PIPE financing, a traditional APO or alternative public offering. Then three things happen at once. First, a registration statement is filed with the SEC to register PIPE investors' shares for resale, again a typical step. Second, a registration is filed for the post-merger company to effect a secondary public offering, which is underwritten by WestPark. Third, the application to the AMEX is filed and begun to be processed while the two registrations are pending.

At the end of the process, the first trades for the post-merger company take place on the AMEX among the new purchasers of the secondary public offering and the PIPE investor whose shares are also registered. For those who would prefer to bypass trading on the OTC Bulletin Board, this is a major advantage indeed. All this starting with the humble virgin shell.

It took Rick and his team two years get the process cleared through the regulators and it took eight months to get the first one through the AMEX, and now they have done several. It works. But this is very much a "don't try this at home" thing. As with some complex reverse mergers, this is not for the uninitiated. There are a number of tricks and traps that Rick's team has learned along the way. Plus it is not clear that AMEX is ready to have other players simply come in and try to copy Rick.

Thus, what to do? Rick has made clear he welcomes new entrants to the WRASP world. Even his investment banking competitors. He will happily partner on deals with others the first time around, even though he knows that may lead them to pursue it on their own thereafter. Disclaimer: My firm set up Rick's shells for him that he is using for these transactions.

Some players complain that virgin shells do not have enough shareholders, and that only a trading shell with a history can be used when that is important. In most deals, however, the number of shareholders present at the time of the merger is not that important. As I discussed in my book, the shareholder base can be built over time with the help of capable investor relations and other advisers. Thus, many players have seen the benefits of virgins over trading shells in many situations.

The WRASP takes these benefits to the next level. Most agree that trading in a trading shell is not that important in the first few months after a merger. But many still feel that the shareholder base offered by a trading shell can be valuable, especially where a company has a near term plan to move to a higher exchange. In that situation, however, the WRASP provides a cleaner solution. The new shareholders in the secondary public offering are investing in the company in question, not left over shareholders from some other company. You start with a clean virgin shell instead of a shell with a history that needs to be scrubbed over weeks of due diligence. The cost of acquiring the shell is significantly less than the $600-800,000 charged for a controlling interest in a trading shell. The AMEX has made clear that a major attraction for them to accept the WRASP is by starting with a virgin shell.

The deals Rick has started with are Chinese, debunking another myth that Chinese companies strongly prefer a shell that is already trading. Just as in the mid-1990s SPACs started as a straightforward way to create a clean trading shell with cash, the WRASP may indeed provide another innovative, clean and legitimate alternative to a traditional IPO for a company ready to trade on a major exchange.

I hope Rick's next stop is the Nasdaq! Hey anything is possible since the New York Stock Exchange has announced that they are proposing to change their rules to permit SPACs to list there.