Saturday, June 18, 2011

Reverse Mergers Are Not The Problem

David N. Feldman is a Partner in Richardson & Patel LLP. His practice focuses on corporate and securities matters and general representation of public and private companies, investment banks, private equity firms and high net worth individuals.

David is considered one of the country's leading experts on reverse mergers, in which a private company becomes publicly traded through a merger with a publicly held "shell" company. His book on the subject, Reverse Mergers and Other Alternatives to Traditional IPOs, Second Edition (Bloomberg Press, 2009) was originally published in 2006.

The Giant Panda in the Room
by David Feldman

Yes I used that phrase when speaking at this past week’s Reverse Merger Conference in LA.

I also likened the Chinese reverse merger situation to US Rep. Anthony Weiner (yes some bad stuff happened but there is a real risk of overreaction). I wanted to pass on a few thoughts about the conference, which has now been widely covered by Reuters and the like.

1. It was easy to get a seat. The much lower than usual attendance shows that our sector is in a challenging time. Granted, the hardy souls who remain active in this space, in many cases, are the “real” players who have worked hard to maintain the quality of their work and integrity of the transactions with which they are involved. Some of those present during the standing room only days of RM conferences were looky-loos, hangers-on, wanna-bees and I’m sure a few other hyphenated monikers we can posit. But we’ve lost some good players too, no question.

2. I remain optimistic, as I said on my panel, that the shakeout that will come with Chinese reverse mergers will ultimately be good for the RM world. We do not hear the SEC or PCAOB complaining about US reverse mergers being fraudulent. The focus has been on China, and when that has played itself out things should improve for all.

3. RM remains one of the few legitimate alternatives for a company that can benefit from a public trading stock but for whatever reason is not able to (or does not wish to) pursue a traditional IPO. The issue is not the technique which took companies public but rather the players involved. We are busier than ever with reverse mergers. The vast majority of the deals I’m working on (7 currently) are US based. The industry as a whole remains active and strong despite the negative attention from both press and regulators which, when one digs down, is all about China, and not really reverse mergers.

4. China short sellers? Well, much like the US class action plaintiff securities bar, they are uncovering some real fraudulent situations, but some really do appear to be simply slapping mud everywhere to see what sticks, even if there is no initial real evidence of a problem. I loved how the Reuters piece pointed out that one of the short sellers who spoke on the panel was smoking a cigarette afterward.

5. The more transparent our deals the better. Most of the deals facing problems now had completed fully underwritten, SEC reviewed and approved public offerings after their reverse mergers. Thus, the public investors had the same protections as those in a traditional IPO. The fact that several post-IPO companies, including one taken public by Goldman Sachs and Deloitte & Touche, are also ensnared in this mess, proves that an IPO doesn’t necessarily provide any additional protection.

For this and more articles read his blog:

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