Small-Cap Reverse Mergers Poised for a Comeback
The good news about reaching bottom is that the only place to go from there is up. As I have blogged about recently, since 2009, the small cap and reverse merger market has diminished greatly. According to industry statistics, 2011 was the slowest year for reverse mergers since 2004.
To reiterate my previous blogs, I can identify at least seven main reasons for the downfall of the reverse merger market. Briefly, those reasons are: (1) the general state of the economy, plainly stated, it’s not good; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese company’s following reverse mergers; (3) the 2008 Rule 144 amendments including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems clearing penny stock with broker dealers and FINRA enforcement of broker dealer due diligence on penny stocks; (5) DTC scrutiny and difficulty in obtaining clearance following a reverse merger or other corporate restructuring; (6) increasing costs of reporting requirements, including the new XBRL requirements; and (7) the new listing requirements imposed by NYSE, AMEX and NASDAQ and prohibition against immediate listing following a reverse merger.
However, despite these issues and the chill in the reverse merger market, the fact is that going public is and remains the best way to access capital markets. Public companies will always be able to attract a PIPE investor. For cash poor companies, the use of a trading valuable stock is the only alternative for short term growth and acquisitions. At least in the USA, the stock market, day traders, public market activity and the interest in capital markets will never go away; it will just evolve to meet ever changing demand and regulations.
That very evolution has created new opportunities, including the opportunity for a revived, better, reverse merger market. Certainly there are alternatives to a reverse merger, for instance a company can go public directly either through a private placement followed by S-1 registration statement; a direct public offering (DPO) or especially for those in the internet or tech business, trading on a private company market place (PCMP).
However, each of these alternatives can be difficult and time consuming. Many companies abandon DPO’s or private offerings prior to completion. Raising money for a trading public company is difficult, for a non-trading pre-public company, it can be impossible. Unscrupulous unregistered companies and individuals prey on these entities, taking their time and money and leaving a mess that can take years and more money to clean up.
A reverse merger remains the quickest and cleanest way for a company to go public. The increased difficulties in general and scrutiny by regulators may be just what the industry needed to weed out the unscrupulous players and invigorate this business model. Shell companies will necessarily require greater due diligence up front, if for no other reason than to ensure DTC eligibility and broker dealer tradability. Increased due diligence will result in fewer post merger issues.
The over the counter market should regain credibility and support higher stock prices, since exchanges are forcing companies to trade there for a longer period of time before becoming eligible to move up. Rule 419 SPAC’s may increase providing clean new entities to complete reverse mergers. Resale registration statements, and thus disclosure, may increase to combat the Rule 144 prohibitions. We have already seen greater disclosure by non-reporting entities trading on otcmarkets.com.
In summary, we believe that the issues and setbacks of the reverse merger market since 2008 have primed the pump and created the perfect conditions for a revitalized, better reverse merger market beginning in mid to late 2012.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.
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