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
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?
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
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 &
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