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.

Yes We Have a New Name

What's in a name? Well according to my web advisors, a whole bunch of clicks, hits, whatever they call people having more exposure to our humble blog. But in changing our name to the "Reverse Merger & SPAC Blog" there is more than just traffic building in mind.

As you may have discerned from several recent blog entries or know from direct experience, the SPAC market has simply exploded. Hundreds of SPACs done in the last 3-4 years. Every major Wall Street player now doing it. Why is this important? Because SPACs are part of the RM world. A SPAC is nothing but a public shell company that has a lot of cash in it. Because they raise over $5 million, they bypass SEC restrictions on IPOs of blank check companies. Thus, their stock can trade while they are awaiting a merger.

Technically, we know that SPACs are effectively a sub-industry of reverse mergers, since virtually every SPAC combination is indeed a reverse merger. In the past, there would be a panel on SPACs at reverse merger conferences. Now there are full conferences just on SPACs. So more and more people have referred to the industry as a whole as the "reverse merger and SPAC" space. So, again, even though it implies one is different from the other, we know it is not.

But we also know that names tend to stick- let's have a little fun with a few industry terms. The term "alternative public offering," adopted by most industry practitioners to refer to a reverse merger and contemporaneous PIPE, I believe respectfully is a misnomer. It implies there is some sort of public offering, which there is not. It might be called an alternative to a public offering, but alas the industry has overruled my preference for logic and I use the term as well.

Here's another one: "virgin shell." My good friends at DealFlow Media coined this term to describe the Form 10 shells that have proliferated in recent years. Everyone immediately adopted the term, including me. Dictionary.com has many definitions of virgin, and I assume DealFlow meant this one: "pure; unsullied; undefiled." That is an excellent description of the benefits of virgin shells, that they do not have the challenges of "scrubbing" the past one faces with a trading shell that was once an operating business. But definitions of virgin also include "an unfertilized insect." And of course the most common is the well-known sexual reference. My slight beef is that this last reference could be seen to some as implying inexperienced, unsophisticated, and so on, which is not a good connotation obviously.

So names do matter, as I discussed in my book. I'm obviously not in love with the terms "blank check," "blind pool" and even "shell company" (I was not pleased when the papers were describing ex-New York governor Elliot Spitzer's moving money around in shell companies to hide how he was paying for prostitutes). We've eliminated "shell promoter" and refer to "shell management" or "shell founders." Part of the process that we have mostly successfully undertaken to bring our industry out of its long ago past shadows and cement its legitimacy and transparency includes having the right lingo.

So in deference to the tremendous growth of SPACs and the tendency of the industry to refer to them both together, we have changed the name of the blog as you see above. In fact, we also can now be reached at www.SPACblog.com in addition to www.ReverseMergerBlog.com. I will continue to write on all aspects of our growing industry, including shell mergers, virgin shells, SPACs, and other aspects of the small and microcap markets as before. I hope to continue to make you proud of the time you spend here.

Thanks again to all for your incredible support and repeat visits.

Break out the Champagne! Goldman is doing a SPAC

Stick a fork in any remaining taint associated with shells and reverse mergers on Wall Street - it's done. The leading firm on the Street, Goldman Sachs Group, has decided to underwrite a $350 million SPAC, and make some major changes to the typical SPAC structure.

As discussed in the Wall Street Journal today, the big change is with respect to SPAC management. Most SPACs require management to put up as much as 2-4% of the total money to be raised, and then get 20% ownership of the SPAC. Goldman's deal, called Liberty Lane Acquisition Corp., has management putting up less, about 1% of the total raise, and they are getting a much smaller percentage ownership in the SPAC- about 7.5%.

In addition, Goldman is taking a 6% commission rather than the typical 7%. Finally, instead of an offering unit of a share of common stock and a warrant, which are traded separately, Goldman's units will include a share of common stock and a half a warrant.

Two of the criticisms that have at times been made of SPACs include the large management stake and the dilutive effect of the warrant overhang. Goldman clearly has studied this market carefully and determined to address both, all to the benefit of SPAC investors. It will be very interesting to see if this affects how future SPACs underwritten by other firms are structured or whether this will just become "the way Goldman does it."

As I have blogged on recently, the proliferation of SPACs is a win-win for all in the RM space. The fact that what most consider to be the most venerable player in finance is ready to enter the reverse merger world is both astonishing and a very significant milestone.

Video Intro to Reverse Mergers

I was interviewed several months back for Europe-based Money TV International, an Internet TV network. I decided to post the video here on the blog (see link on the right or click here) because, when I took a look at it, I felt it provided a helpful overview and introduction to reverse mergers.

For those who may just be getting started in this area, or those who are experienced but wouldn't mind a refresher as to the basics, as well as a discussion of why these techniques are more popular than ever, take a look. It even promoted the humble blog!

Hope you enjoy this short (8 minute) interview.

Tip of the Week: When does a self-filing make sense?

The following definition is taken from my book: a self-filing is the process by which a private company may seek a public trading market for its securities without an IPO or a reverse merger, by completing its own filings with the SEC either to resell securities held by shareholders or to voluntarily become a reporting company. The company assumes the obligation of filing quarterly and annual reports and becomes subject to proxy and other rules.

Self-filings can be attractive because they do not require a shell or need to wait on the IPO market; there are no problems associated with due diligence; and the company does not give up any of the company’s equity. When deciding to do a self-filing take a look at the following 3 questions.

1. Does the private company already have a large shareholder base?

• A company with a strong shareholder base reduces the need of a shell that already has shareholders and can be a good candidate for a self-filing.
• Self-filings can be easier than reverse mergers when the company has more than 35 shareholders who do not meet the “accredited investors” test.
  

2. Can the private company take care of its own financial needs during the lengthy self-filing process?

• Self-filings make sense for companies that can defer new financing until the process is complete. This could take anywhere from 5 to 8 months or in some cases even longer. This compared to an average of 3 months to complete a reverse merger with a shell.
  
• Whatever amount of time one thinks it will take to complete a self-filing, multiply that by 150 percent.

3. Does the private company have on tap a capable investment bank or Wall Street advisor to help “build” a public company from the private one?

• Members of senior management should have significant Wall Street experience, or the company should engage a capable investment bank or financial consultant to walk it through the process because of the “do-it-yourself” nature of self-filings.
  

No company should attempt a self-filing without a group on board that can build a team that is competent and works well together.

Go Denver!

I spent this week visiting clients and contacts in Los Angeles and Denver. I have written before about the burgeoning technology and media sector in LA being underserved by a paucity of capital sources in the City of Angels.

Having made my very first visit to Denver, other than the really cold winters (not my thing), I can totally understand why most of the people I met with are transplanted East Coast folks. Besides being spectacularly beautiful, the cost of living here is dramatically lower than our crazy life in New York, and quality of life better for sure. Class A space at $24 a square foot (in NY top space is well over $100 a foot now). Homes are more affordable. John Elway has opened up several truly fabulous steakhouses.

I said to one of my hosts, "Is there ever any traffic in this city?" The answer: of course, but the traffic always moves at the speed limit, except if you're headed to the Broncos game.

That said, there is some serious business going on. Given that some of the questionable and shady characters in RM's past resided in Colorado, I don't know what I expected coming here. What I found was a beautiful, clean city and a talented, serious group of finance professionals who have made Denver a true financial center. Some major companies like Remax have moved in. I am very impressed with the intensity these professionals bring to their work while still managing to have balance in their lives.

I think LA can only wish they had the number of investment banks and capital sources that Denver boasts of. Kudos to the Mile High City and thanks to all my clients and friends for their wonderful hospitality. I will be back!

Tip of the Week: Paperwork When Flipping a Shell

A number of our clients have given up control of their shells to third parties. Sometimes it happens when the creator of a Form 10 "virgin" shell is approached to simply transfer ownership for a price. Other times it happens in connection with a relationship with a third party with whom the shell controller wants to eventually partner with on a deal.

A number of our clients also are purchasers of shells. While I could have spent a lot of time in my book talking about many issues related to acquiring a controlling interest in a shell, I am aware that the SEC is not too fond of there being a "market in shells." Thus, I did not go into depth in the book. That said, many people, including my clients, are active in these markets and the actions are totally lawful, so here's a few tips on putting together the paperwork to change control of a shell.

One thing that is very often overlooked in changing control of a shell (including by several players who create shells for the purpose of flipping them for cash and charge very little) is the requirement that a full "super" Form 8-K is required upon any change in control of a shell. When the SEC passed new rules in 2005 implementing this new 8-K requirement when a shell ceases to be a shell, the rule also included requiring this filing upon any change in control of a shell.

In addition, if the shell owner is resigning from the board and a majority of its members are changing as part of the change in control, a Schedule 14F-1 (this looks much like a proxy statement for an annual meeting of a public company) is required to be prepared, mailed to the shell shareholders and filed with the SEC.

Of course you also need board minutes to approve the deal, any blue sky or state securities review that's necessary, the purchase agreement itself, and "insider" filings by both the buyer coming in and the seller going out. Last, you need to structure the deal to comply with the Worm/Wulff letters. Yes, the SEC's position is that the new Rule 144 changes did not completely eliminate every aspect of these letters. In particular, a direct transfer of shares from a shareholder of a shell in a private sale is viewed as not permitted by the SEC. So the structure (I can't give away all secrets!) must take this into account.

Most important, if you are buying a shell make sure you complete a very thorough due diligence review of the shell's history. If it is a virgin shell, that review should be very brief indeed. If the shell is trading and was once an operating business, that review should be complete and go back in certain instances to the very beginning of the life of the company.