Tip of the Week: Building Post-Merger Support

You’ve done it all—found a shell, completed the long and daunting due diligence process, closed the deal—now what? The following tips, as described in my book, will guide you through the next step, gaining market support. Going public was just the beginning, it’s what you do next that counts!


Get a new attitude.

Going public is the 1st step of the process to becoming a public company. The first day trading is not important; the big picture lies in the trading activity 1 year to 18 months after the reverse merger.
Look at the long-term benefits of being a public company; raising money, using the stock as currency for acquisitions, and having stock options to provide incentives to management.
Big picture: the company should focus on long-term goals.

The importance of investor relations.

Investor relations (IR) firms attract attention from Wall Street firms and research analysts to improve trading and stock price. The better IR firms take a long-term approach to building market support. There are many shady IR firms that promise quick results. Even if their practices are not technically illegal they generally conduct bad business. They will often create temporary fixes and then disappear leaving the company with a mess.
Big picture: A strong, reliable, and legitimate investor relations firm can make all the difference.

Earn your support.

Support is earned when a company achieves the things it promises to achieve, and when it does the things that investors and Wall Street want or expect from it. Focusing on running the business to generate profit and long-term value to shareholders will achieve the best results.
Big picture: Support from Wall Street should be built the old-fashioned way – by earning it.

Movin’ on up.

Smaller companies start out on the OTC Bulletin Board or Pink Sheets, hoping to move up to Nasdaq, the American Stock Exchange, or the New York Stock Exchange. The move up will generate attention that will result in higher stock prices and market capitalization, easier financing, more acquisitions available, and even attracting senior executives.
In order to move up the company needs to qualify for the higher exchanges. Each exchange has qualitative and quantitative criteria it uses to allow a company to list its securities.
Big picture: All the benefits of being public come into focus on the larger exchanges.

Winter Contrasts- and a New Idea?

This winter is a study in contrast more than many. During the last week I have been in balmy Los Angeles, chilly Las Vegas, barely freezing New York and then Vermont where the thermometer barely stayed above zero (finally back to New York). The US Presidential race, with no clear front-runner in either party, seems more and more like each candidate declaring themselves to be the opposite of the others. XM and Sirius Satellite Radio both compete with each other and are trying to merge. My 17-year old daughter, now accepted to college (Brandeis), has one foot out the door just as my 5-year old son gets used to a new school and life in kindergarten. These days my music tastes run just as much to John Mayer as John Mellencamp (still John Cougar to me).

In our RM world (you were wondering when I would get there), similarly, we have this dramatic moment when the 8-year old shell-restrictive Worm/Wulff letters are effectively lifted. At the same time the SEC pulled back on allowing shell owners and others the right to sell without registration in six months and now require up to a year. Yes better than before the change, but not as good a deal as some got in the Rule 144 changes. So is the SEC for or against shells and reverse mergers?

Apparently, the answer is yes. There is a strong and growing "glass mostly full" group who believe there is great promise in allowing the growing number of legitimate players to be protected and encouraged in helping companies achieve their goals with a public trading stock.


However, there are some, particularly those who have been around the Commission since the troubled 1980s, who look at the handful of shady players remaining and the enforcement actions against them and do not believe there can ever be a time where APOs and other IPO alternatives can become as legitimate as, say, the IPO itself. Of course they disregard the billions of dollars in fines paid for problems relating to IPOs of the 1990s.

Unfortunately, as indicated in a previous post, a little foonote in the new Rule 144 ruling likely will have the effect of further encouraging the creation of fraudulent shells. My hope is that the SEC pursues a "carrot and stick" approach in this $9 billion a year business. More enforcement dollars should be focused on those creating shells without real businesses or with real intentions masked. Insider trading in shells should be pursued more vigorously. Shell owners who "forget" to disclose their ownership should face consequences.

BUT, at the same time there should be more effort focused on rewarding those who do things the right way. I hope the SEC soon will take another look at the new one-year hold for shell owners and those who invest at the time of a reverse merger. There really is and has been no reasonable explanation for the distinction between these and other PIPE investors who can now sell in six months.

And here's a new suggestion. Maybe, as a counter to the footnote that encourages fraud, we can begin to discuss a "new" Rule 419 to encourage shell creation legitimately. Currently, Rule 419, passed in 1992, requires shares and money from an IPO of a shell to be in escrow pending a merger, and for shareholders to have the right to approve the deal or "opt out" and get their money back. But once approved and closed, the shares originally issued in the shell's IPO can immediately trade. The main problem, of course, is the delay in getting the SEC to approve a proxy statement needed to seek shareholder approval of the transaction.


As a next step, now with 16 years more experience and many more protections in the marketplace, maybe we can consider eliminating the shareholder approval requirement in Rule 419. Instead, one could posit a shareholder "notification" through a super 8-K type document which is filed and mailed to the shell's IPO investors, but not reviewed by the SEC. The holders then could have 10 days after mailing of the notification to opt out if they choose and receive virtually all their original investment back. A shell could still have to find and close a deal in 18 months as currently required. The money and shares can be in escrow, and the deal size could still be required to be at least 80% of the funds in escrow.


This simple, relatively minor change (though a formal SEC rulemaking would seem to be required), which would still protect shareholders, could help bring the end of footnote 32, 172 and their ilk. Rule 419 and the problems it created sent many to Form 10 or "virgin" shells, which were created by the hundreds. The shareholders in those shells have no ability to opt out, no right to vote on a deal, etc. Of course we defend them as protecting the public trading market as no public trading exists until a "super" 8-K is filed and either a subsequent registration is approved, or one year has passed under the new Rule 144 requirements. But again, the Rule 419 protections are not there. It is therefore possible now to get to trading with a virgin shell without ever filing a registration statement- but in all events with a full disclosure super 8-K. In the meantime, since no one is creating Rule 419 shells, their significant protections help no one.


By ensuring the right to "vote with their feet" and opt out of a deal, every investor in a "new 419" shell could have the right to choose not to participate in a merger. But by avoiding the need for a time-consuming, SEC reviewed proxy statement as currently required (and not required in a merger with a virgin shell), the technique will be much more attractive and draw more legitimate players to the possibility of a stock that can trade immediately upon a merger. To repeat: the main advantage is that stock can begin trade following the merger and full disclosure, instead of waiting for a subsequent registration or Rule 144 holding period in a virgin shell merger. I posit there is no real substantive investor protection difference in the two, yet a huge difference to shell founders who do not have to explain the delay in trading as they do in a virgin shell merger.


Do I think the SEC would consider such a thing? Well, after the 2005 rulemaking requiring much more disclosure and the super Form 8-K, I felt it was time to reconsider the Worm/Wulff letters. As reported in my book, I submitted a "no action letter" which I ultimately withdrew with a promise from the staff to address the issue in another way. While most assumed there was no shot, and it did take another two years, that change finally has now been incorporated into the Rule 144 changes. Thus, if the case is made and investors can remain protected in a manner that reduces impediments to capital formation, the SEC will indeed often listen.






Virtually no one pursues Rule 419 shells anymore. The SEC provided too many roadblocks both to taking the shell public in the first place and approving the proxy for the deal once found. Thus, in effect Rule 419 has been a failure unless its goal was to stamp out shell creation (I do not believe that was their goal, and in any event Form 10 shells have proliferated anyway). Removing the shareholder approval requirement in Rule 419, but protecting investors with an opt out feature following full disclosure, would be a reasonable counter-step to foonote 172 of the Rule 144 ruling which will further encourage bad players.

Let's all start a conversation about this.

SPACs are Truly Proliferating

A five minute piece last week on the Fox Business News channel, entitled "Blank Check IPOs." An article on the New York Times online last month called "Wall Street’s New Status Symbol: the SPAC." The article reminds us that Nelson Peltz, Thomas Hicks and now Ronald Perelman have put together SPACs. And it covered the fact that the largest SPAC ever, Liberty Acquisition, went public raising $900 million in December.

There are lots of statistics, and DealFlow Media now publishes a regular SPAC Report that anyone interested in this topic should subscribe to (go to http://www.dealflowmedia.com/). Suffice to say there are over 200 SPACs public or in registration, and the dollar amounts raised keep going up.

For the uninitiated, what is a SPAC? The acronym stands for "special purpose acquisition company." It is, quite simply, a public shell company. Because it raises more than $5 million, it is exempt from SEC restrictions on shells trying to do public offerings. The shells complete an IPO, raising tens or hundreds of millions of dollars. Almost all the money sits in an escrow account while the SPAC's management team looks for a reverse merger to complete with a private company (typically) seeking to be public and utilize the funds that were raised. The management team is generally required to invest and put real money at risk prior to the IPO, but at a significant discount to the IPO stock price. Management usually ends up with about 20% of the stock after the IPO.

Most SPACs have an industry focus and bring in management experienced in that industry to help find a deal. Some are opportunistic and have the ability to pick a company in any industry. Investors in the shell's IPO are given a chance to vote on the proposed transaction, as well as to "opt out" and get virtually all their money back if they prefer not to participate in the deal. In the meantime, while waiting for a deal the stock of the SPAC trades. SPACs generally have to sign up a deal within 18 months and get it closed within 2 years or all the money left in the escrow goes back to investors and the SPAC liquidates.

Companies like Jamba Juice and the third largest hedge fund in Europe have successfully merged with SPACs. These mergers generally take less time than a traditional IPO, and the transaction involves a bit less SEC scrutiny prior to closing (although a thorough proxy statement must be delivered to investors concerning the company to merge in prior to the investor vote on the deal).

As I laid out in my book, SPACs have a number of advantages over a merger with a trading shell without cash, a merger with a virgin shell or a self-filing. But these other options have certain other advantages over a SPAC transaction. The most important asset offered by the SPAC, of course, is the cash. You know it is there, you don't have to wait and see if an underwriter or placement agent can in fact raise the money they say they can raise.

A good friend of mine who is a partner at a major New York law firm said to me a few weeks ago, "SPACs must be acceptable now - we're doing one!" Then again, below the Times online article mentioned above, one commenter noted that SPACS have "about as much prestige and class as having a wife named Bubba." Heck, there are people that feel this way about just about any area of Wall Street if you ask (including, especially, reverse mergers), but so be it.

It is frustrating to see that there is still some negative press on this, and it is getting better for sure. The big negative argument seems to be that it is a "trust me" game where the investor is depending on the talent and skill of the management team to find a deal.

I have several answers to that. First, one could make the same argument about every private equity and venture capital firm. An investor puts money into the fund hoping the fund's partners have good investing skills. No different. In fact in some ways it is worse, as there is zero liquidity in a fund. In a SPAC, the stock and warrants you receive are publicly tradeable, so there is an exit if you choose.

Second, the investors' downside is protected virtually 100%. After expenses and commissions the money is put in a trust (often as much as 93-96% of the original investment). It earns interest. At the end of two years if there is no deal, the investor gets back the 93-96% plus two years' interest, which at 3% per year puts the investor at virtually his original investment. If a deal is presented and the investor opts out, again that same return of funds. Yes one can argue that the investor, typically a fund or institution, loses the opportunity cost of having redeployed that capital somewhere else. Some investors sell the warrants and keep the stock, some do the opposite.

SPAC players have created their own sub-cottage industry within the RM world. There are now separate SPAC conferences, newsletters and the like. There are a small handful of law firms, accounting firms and investment banks that focus heavily on this space. That said there are a number of larger such law firms, accounting firms and investment banks (such as Citigroup, Deutsche Bank and others) who have entered the space successfully.

Of course, whenever someone on Wall Street says some plan or trend could last forever, that's when I typically run for the hills (remember Internet? structured finance? shall I go on?). I don't think I've heard anyone yet say that SPACs could last forever. I will say this surge is lasting much longer than just about anyone expected. And the growth in the legitimacy and acceptability of SPACs, as well as the rapidly growing size of the average deal, have indeed stunned many, including your humble blogger. Finally, the quality of players now entering has put the icing on the cake for those who have spent years working on and perfecting this technique.

As SPACs become more accepted, the rest of the RM world can benefit in its reflected glow. Go SPACs!

More Effective Dates

The SEC's website has indicated that:

a) The release providing increased availability of Form S-3 and Form F-3 "short form registration" for any full reporting company regardless of public float (but with certain limitations and excluding stock trading on the Pink Sheets or Bulletin Board) will be effective January 28.

b) The release entitled "Smaller Reporting Company Regulatory Relief and Simplification" which eliminates the "SB" forms and migrates all reporting companies back to the disclosure system under Regulation S-K, but retaining scaled disclosure for a now larger group of so-called "smaller public companies" will be effective February 4. Check with counsel as there are various transition provisions which do not require full adjustment immediately.

c) Remember: as previously posted, the changes to Rule 144 are retroactive and will be effective February 15.