03 Apr Reverse Merger Seasoning: Time for a New Flavor
I’m reposting and updating the below, which first appeared here nearly a year ago.
I remain determined in my quest for the major stock exchanges to consider some alterations to the reverse merger “seasoning” requirements instituted in November 2011. As we know, these restrictions were added primarily in response to allegations of fraud in a number of Chinese companies that went public through reverse mergers.
The rules added a speed bump, requiring companies merging with reporting shell companies to trade in the over the counter markets for at least one full fiscal year. You can bypass the restriction with a $40 million public offering. This placed a giant skewer through a large number of deals in which a company merged with a shell, completed a PIPE, then moved immediately to a public offering of $15 or $20 million and trading on the Nasdaq or NYSE MKT (formerly the NYSE Amex). Very few reverse merging companies can attract a $40 million public offering, though in fairness a small handful have done so.
In the two plus years plus since the rules passed, many fewer reverse mergers. Companies that are on the over-the-counter markets struggle in a decimated PIPE market and no ability to sell shares through short form registration. Underwriters are not thrilled to do a public offering that doesn’t “uplist” the company to a major exchange. So these companies have had tremendous difficulty raising money. And this in a frothy market that has continued to hit new highs.
I suggest that the exchanges consider lowering the threshold on the MKT and Nasdaq to $10 or maybe $15 million. The investor protections are the same in both types of offerings. The exchanges retain substantial discretion if they feel a shell or its promoters seem in any way shady. In all other listing requirements the standards for the exchanges below the NYSE “big board” are lower except here. This change makes sense and retains all the protections of a larger public offering.
Seasoning is supposed to make things taste better. There is no evidence (or, frankly logic) that forcing companies to trade in an environment with less governance and oversight helps eliminate fraud. Let’s pick a new way to improve the taste of all alternatives to traditional IPOs.
Gene Massey
Posted at 11:13h, 03 AprilHi David
When Regulation A+ passes, if it passes in its current form, I can’t think of anyone who will want to do a small reverse merger. Even if they do, they will still need to file an S-1 to raise any capital, so what’s the point? Reg A+ will be SO much easier.
P.S. Enjoyed your last webinar on Reg A+: https://www.brighttalk.com/webcast/9407/103933
David Feldman
Posted at 13:28h, 04 AprilGene – good question! I’m excited that Regulation A+ holds the promise to provide another alternative to a traditional IPO for smaller companies and indeed many companies considering reverse mergers will opt for a Regulation A+ offering. But I expect that reverse mergers will remain the speediest method to get public. Thus, for companies that need to raise money sooner rather than later (say the next 1-3 months) and the source of financing requires the company to be public to provide funding, a reverse merger still might be preferable, since the timing involves no regulatory involvement prior to closing, whereas the Regulation A+ offering will have the uncertainty of the extent and timing of SEC review.