I have finally had the chance to actually sit and read
the SEC's vaunted "Investor Bulletin" on reverse mergers that came out last
month. In recent years these bulletins have been seen more often. One warning
folks about the retail foreign exchange market. Another on life settlements. A
third explaining how say-on-pay works. Yet another on target date funds,
and one on after hours trading. The headlines blared that the SEC was
warning investors that reverse mergers are risky. One of my lawyer
competitors says on his website that it confirms his long standing advice
on reverse mergers.
Well, when you actually read the thing, it's
a more balanced look at our little RM world than I expected, and
points out some things that one would think should have been obvious to most
investors. First they explain reverse mergers and why people do it, pointing
out the advantages of cost and time saving, access to capital, liquidity
and greater value as an acquisition target. They make clear that while an 8-K
is filed, there is no registration as with an IPO. They explain trading on
the OTCBB and OTC Markets. The bulletin then describes some risks. Many of
these companies fail. There has been fraud in some of these companies. Perform
thorough research, they say, before you invest. They also point out
that there can be enhanced risk when a foreign company goes public here and
uses a small US auditing firm that may not have the resources to do everything
necessary to protect investors. They then list some scary risk factors that we
sometimes put in SEC filings for these companies, and list six recent
enforcement actions concerning reverse merged companies.
In the end, the big advice: do your research before
buying a stock, be wary of companies that are not reporting with the SEC,
and don't rely on blogs and social networking sites to get your information.
All good advice that is hard to disagree with.
What do they not point out?
So I would have preferred if some of these points were
made, but overall it is hard to argue with the SEC's advice that probably could
be given in any small and microcap situation regardless of how the company went
public. For some reason this "niche hunt" (ooo good new catch phrase, feel free
to use it) has focused on the humble RM. I remain as always hopeful that
whatever actions the SEC may take in this area remain focused on both investor
protection and minimizing impediments to capital formation for companies any
one of which could be the next Microsoft or cancer cure.
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
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