Don’t Trash Our Sector…Please

Don’t Trash Our Sector…Please

Several recent statements by prominent regulators, as well as scathing press articles, primarily talking about the problem with Chinese reverse mergers, have decided to declare that because of the challenges in China, reverse mergers in general are bad. I"m not enjoying this time travel back to the mid-1990s when no major investment bank would raise money for a company that went public through a reverse merger and too many at the SEC believed the only legitimate way to get public is with a traditional IPO.

Those who are resuscitating those concerns are not watching the market. In the past 3-4 years, many reverse mergers, including dozens of Chinese deals, have been completed with what some are now calling a "re-IPO" transaction (also called a WRASP by WestPark Capital, which developed the idea).

Simply put, there is a reverse merger with a Form 10 shell and large PIPE. Then there is no trading while a fully underwritten, properly due diligenced, public offering is undertaken. Only when that is done, with major underwriters on board, does a single share trade, and in most cases on a major exchange.

This is equally as investor-protective as a regular IPO and has the advantage of raising money for the company in the form of the PIPE much quicker than such money is typically raised in an IPO.

Are some reverse mergers done without these protections? Yes. Is it hard for these stocks to gain any traction unless a solid placement agent or underwriter has helped raise money and done their due diligence? Yes. Do we tend to see more problems with smaller public companies than larger ones? Yes.

China is its own discussion and it will take some time to really sort out, as I've written about below, who's who and who did what that might be bad. But it's not reverse mergers that caused the problem. We still want companies to know that, working with the right professionals, you can safely and cleanly go public without an IPO where it is unavailable or unattractive.

Let's not go back to those bad old days. Please.

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

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