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Reverse Mergers Shrug Off Summer Hiatus to Outpace Traditional IPOs

Aggregate Market Cap Generated by Reverse Mergers Doubled From Last Quarter

PETALUMA, CA -- (MARKET WIRE) -- November 16, 2006 -- More private companies are becoming public through reverse mergers with shells, yet the third quarter saw a 4.3% decrease in completions from the previous quarter and a 12% drop from last year, according to The Reverse Merger Report, a quarterly publication by DealFlow Media that tracks the market for alternative public offerings.

During the third quarter, 44 companies completed reverse mergers with public shells, a drop from the 50 deals completed in last year's third quarter. However, despite this decline, reverse mergers generated the highest aggregate market cap value of any quarter on record, doubling in size. Reverse mergers generated a total market cap value of $3.4 billion, a 103% increase from last quarter's $1.67 billion and 160% larger than the $1.3 billion market cap from last year's third quarter.

The number of reverse mergers continues to eclipse IPOs. There have been 139 reverse mergers compared to 120 IPOs through the end of the quarter, and there were 13 more reverse mergers than IPOs in the third quarter alone. IPOs are also sharply down from the second quarter.

An increase in non-U.S.-based companies continued to use the reverse merger as a means of accessing the U.S. equity markets in the third quarter. Roughly 34% of reverse mergers this quarter involved a non-U.S.-based company. Chinese companies dominated non-U.S. reverse mergers, comprising 80% of the deals.

There were only five specified purpose acquisition corporations (SPACs) public offerings finalized in the third quarter, compared to 13 IPOs in the second quarter. New SPAC offerings raised $1.68 billion in the third quarter, 22% less than the previous quarter, but the average amount raised at IPO during the quarter more than doubled.

Though completions were down, there were 17 new IPO filings by SPACs, making it the fourth most active quarter for new filings since 2003. SPAC IPO filings only decreased slightly from last quarter's 18 filings but plummeted 41% from the year earlier quarter, which had a record 31 filings.
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Contact:
Meghan Leerskov
707-763-4752
Email Contact

SOURCE: DealFlow Media

Story link

Reverse Mergers: They're Back!

By Theodore F. di Stefano
E-Commerce Times
01/05/07 5:00 AM PT

Going public is not for everyone. There are regulatory filings that must be made. There is scrutiny of your company in the public domain. There are also some very rewarding upsides. Mainly, your company will most likely be worth a great deal more if its stock is publicly traded.

About three years ago, it seemed as though reverse mergers were falling out of favor with the SEC. The agency sanctioned some of the companies that were created by this process and some were actually suspended from trading.

Now it seems that reverse mergers are once again regaining their popularity. The SEC seems to have learned to live with this somewhat novel way of going public by the "back door."

What Is a Reverse Merger?
A reverse merger usually occurs when an operating company is "acquired" by a publicly traded company that has no operations and no income -- a shell. The shareholders of the operating company end up with a majority ownership in the shell.

This occurs because, as part of the merger transaction, the shell corporation issues a large amount of shares to the shareholders of the operating company, thus leaving the shell stockholders with a minority position (not infrequently about 10 percent).

A typical reverse merger transaction occurs when a profitable company -- the operating company -- wants to go public but doesn't want to spend the time and money for a full-blown, underwritten IPO (initial public offering). To achieve the goal of having its stock publicly traded, the operating company agrees to be "acquired" by a shell company that is publicly traded.

The shell company is usually a company that was once quite active as an operating company but encountered some difficulties, such as bankruptcy, lack of sales , or its products become obsolete.

What it has going for it is a stockholder base, a trading symbol, and the fact that it already has gone through the hoops of a public offering.

Therefore, when an active operating company wants the quick route to being publicly traded, it is not uncommon for it to "be acquired" by a shell corporation, but then emerge as the dominant shareholder of the shell corporation after the acquisition.

How Common Is a Reverse Merger?
Actually, reverse mergers have become quite common and they no longer carry the stigma that they once did. Not too many years ago, a company that went public through a reverse merger was regarded as being somewhat "tainted." Some investors would keep away from buying the stock of a company that became public through a reverse merger.

One of the reasons for this is that the stock of the newly merged, public company was commonly traded for less than US$1. Therefore, it garnered the reputation as just another penny stock.

Today, however, some very reputable operating companies have become public in this fashion and their stock is traded in a quite respectable range -- certainly well over $1. Therefore, I think that we will see more of this type of transaction and the resulting entity.

What to Be Cautious About
I always tell our clients who are considering a reverse merger that their main concern should be that the shell they intend to use to create a publicly traded vehicle for their operating company is "clean."

There should be a thorough investigation about any contingent liabilities and left over regulatory issues that the shell might have. The only way to do this is by a thorough due diligence process of the prospective shell corporation.

This process should focus on the existence of hidden liabilities that the shell may have. It should also look at contingent liabilities, such as possible lawsuits or unsettled claims.

Another focus should be whether or not any actual or contingent regulatory problems exist. For example, are there any outstanding actions by the SEC or other regulatory agency against the shell corporation?

These concerns can best be handled by a competent CPA firm and a competent law firm.

What to Expect
Going public is not for everyone. There are regulatory filings that must be made. There is scrutiny of your company in the public domain.

There are also some very rewarding upsides. Mainly, your company will most likely be worth a great deal more if its stock is publicly traded. Also, your ownership interest will now be liquid in that, given certain regulatory restrictions, you can much more readily sell some or all of your ownership interest -- thus giving you, your family, and your estate far more liquidity than you would otherwise have as a privately held corporation.

For a more detailed description of this process, please see my articles "Is Your Company IPO Material," and "Is Going Public the Right Move for Your Company?"

Becoming Popular Again
The recent reverse merger that our firm was involved in made me aware that this type of transaction no longer has the stigma that it once had. Regulators, though expecting a company to meet all of its requirements, no longer look askance at this method of going public.

So, if you are considering such an option, realize that it has become quite common and might just be the quickest way to bring your company public.

Good luck!


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Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com.
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http://www.ecommercetimes.com/story/86nEmTYZ86LdwK/Reverse-Mergers-Theyre-Back.xhtml

UNCONVENTIONAL WAY TO GO PUBLIC
Shells fill in the blanks for deals

By James P. Miller
Tribune staff reporter
Published January 21, 2007

Great Lakes Dredge & Dock Corp. went public not through a conventional initial public offering but by the increasingly popular alternative of combining with a "blank check" company.

Also known as special purpose acquisition companies, or SPACs, blank-check concerns are essentially publicly traded shells. It is an ownership format that requires investors to buy into an acquisition vehicle, rather than a business they can see or measure, and essentially bet on management's ability to find a good deal in the future.

As the Great Lakes deal shows, a SPAC investment can yield very solid profit.

Historically, newly formed companies have been owned by their founders and by private venture-capital investors that provide early-stage seed money. After the company matures, it raises additional capital by selling shares to the public.

That's the standard model. SPACs essentially reverse the process: They sell shares to the public first, then later become a functional company that actually produces goods or services.

Confused? Consider what happened with Great Lakes.

First, a New York private-equity firm created a company, naming it Aldabra Acquisition Corp. Aldabra was essentially a shell, without any operations or meaningful capital. Early in 2005, however, it went public through an initial offering.

Investors knew what they were getting into. "We are a blank-check company," Aldabra said in its IPO documents, "formed to effect a merger, capital stock exchange, asset acquisition or other similar business combination."

Aldabra sold 9.2 million "units" to investors at $6 apiece, raising total proceeds of $55.2 million. Each unit provided the buyer with one share of common stock and two warrants to buy shares at a future date.

In a conventional IPO, companies generally use proceeds from the offering to pay down debt or to expand by buying new equipment and hiring more workers. But Aldabra put almost all of the money into a trust account.

After the IPO, Aldabra shares began trading publicly on the bulletin board over-the-counter market, also known as the "pink sheets," a kind of minor-league equities market where shares of the smallest companies trade.



Searching for a partner

According to regulatory filings related to the merger, Aldabra executives looked at more than 150 potential acquisition candidates and conducted detailed due diligence reviews of 35 of those businesses. It liked two prospects, but neither proposed combination panned out.

Then in April, an Aldabra official contacted Madison Dearborn Partners to see whether the Chicago private-equity giant had any business in its portfolio that it would like to merge with Aldabra.

Madison Dearborn did, and in June the companies announced that the Aldabra shell would merge with Madison's Great Lakes subsidiary.

The combination closed Dec. 27. Great Lakes became a publicly traded company, without ever going through an IPO. As a much bigger company, its shares trade on the Nasdaq stock market instead of the pink sheets.

Madison Dearborn holds 67 percent of the post-merger Great Lakes, and Aldabra investors 28 percent. Great Lakes management, which had owned a 15 percent stake in the Madison Dearborn subsidiary, own 5 percent of the new combination.

Madison Dearborn contributed a company that generates more than $400 million in annual revenue and is modestly profitable on an operating basis. Aldabra brought to the deal roughly $50 million it raised in its 2005 IPO and its status as a public company. That is valuable: Madison, which controls Great Lakes' board, now is free to sell its more than 26 million Great Lakes shares, and Great Lakes can use stock instead of cash to make future acquisitions.

Profit for investors

With Great Lakes shares currently trading at $6.87, Aldabra investors have more than recovered the $6 a share at which they bought in. They can sell the shares or hold them in hopes that Great Lakes' stock rises in coming years.

But they also have an additional profit source, one that helps explain the appeal of the SPAC format to hedge-fund investors that don't mind a risk.

The two warrants investors received with their $6-a-share buy-in were worthless until Aldabra consummated a deal. But those warrants, which allow holders to buy Great Lakes shares at $5 apiece, now have been activated and trade publicly on Nasdaq.

The warrants are trading at $1.76, or roughly the price of the stock minus the $5 exercise cost, but could become much more valuable if Great Lakes shares climb in the future.

As of Friday Aldabra investors who put in $6 could sell their shares and warrants for $10.39. That's a 73 percent return over the span of about 18 months.

Such outsize returns aren't a sure thing, of course. If an SPAC fails to find a good merger candidate over a specified period of time, it is obliged by law to liquidate and return the money to investors in its IPO.

But deals are getting done. Acquicor Technology Inc., a California blank-check company, raised $172 million in its IPO and is nearing completion of a merger with closely held Jazz Semiconductor Inc. And investors in the SPAC that acquired Jamba Juice producer Jamba Inc. have seen the value of their investment rise sharply.

http://www.chicagotribune.com/business/chi-0701210125jan21,0,2949970.story?coll=chi-business-hed

A New Shell

Tying the Knot
Merging with a specified purpose acquisition company, or SPAC, can be a smart way to go public without the uncertainty of a traditional IPO. But not all SPAC partnerships are made in heaven. Here is the scoop on three recent deals.

By: Max Chafkin

A shady strategy gets a makeover.

Shell companies, along with junk bonds, penny stocks, and shoulder pads, are usually dismissed as an unfortunate trend of the 1980s. Back then, shells--that is, companies with ticker symbols but no operations--became synonymous with so-called pump-and-dump schemes in which stockbrokers artificially inflated share prices after a shell merged with a private company, without making financial statements on the acquisition available to investors.

Now shells are making a comeback in the form of specified purpose acquisition companies, or SPACs. Unlike the 1980s vintage, these shells are created by experienced management teams that hope to acquire a private company and take it public using a process called a reverse merger. The strategy, which gives shells two years from formation to sign a merger agreement, has become increasingly popular thanks to the tepid IPO market, which is prompting companies to look for creative financing alternatives. Meanwhile, investors, including many hedge funds, see a potential for big returns. In the first half of 2006, 23 SPACs raised money in public markets, compared with 27 in all of 2005 and none in 2002, according to The Reverse Merger Report. "There's been a sea change in the perception of SPACs," says David Feldman, a New York City attorney who specializes in small-business finance.

For private companies, SPACs offer a key advantage over IPOs: more certainty. Companies have no way of knowing exactly how much cash they will raise in an initial public offering. By merging with a SPAC, on the other hand, businesses are guaranteed a specific sum from the SPAC's investors.

That appealed to John Cline, founder of eTrials Worldwide (NASDAQ:ETWC), a company in Morrisville, North Carolina, that sells software used by pharmaceutical companies to manage clinical trials. Founded in 1999, the business grew quickly, landing a spot on the 2005 Inc. 500 list with $12.7 million in sales. But eTrials had only $1 million in the bank, which made it difficult to convince customers such as Pfizer (NYSE:PFE) and Merck (NASDAQ:MRK) that it could handle more work. What eTrials needed, Cline decided, was the credibility--and cash--that come with a public listing.

Several investment bankers informed Cline that eTrials was far too small for an IPO. Then one of Cline's board members--a venture capitalist who also ran a SPAC--told him about CEA Acquisition, a public shell company based in Tampa that was trading on the OTC Bulletin Board. CEA had no operations and no full-time employees. But it did have $21 million to invest.

In July 2005, after a reassuring meeting with CEA's four-person management team, including chairman and CEO J. Patrick Michaels, Cline began negotiating a deal. To determine an asking price, he looked at revenue multiples of other companies in the medical services industry and researched the terms of similar SPAC deals in Securities and Exchange Commission filings. Cline spent the next couple of weeks in heated negotiations with CEA, a process he compares to an arm wrestling match. The two parties came to a compromise that August. If the deal were approved by CEA's shareholders, mostly hedge funds and institutional investors, Cline and eTrials' other original shareholders would receive a 56 percent stake in a new public company valued at approximately $76 million. CEA's shareholders would receive 44 percent of the company, with about 9 percent going to the firm's management team.

Merger agreement in hand (and the money in escrow), Cline spent the next five months on the road trying to win over CEA's investors, who were looking for a growth company that was well-positioned to go public, preferably with a strong management team and a few years of audited financials. Unless 80 percent of the shareholders gave a thumbs up to eTrials, the deal would be called off and the SPAC would be liquidated. "I was going from train to plane to automobile nonstop to get these yes votes," he recalls. "It was nerve-racking." He also racked up hundreds of thousands of dollars in accounting and legal fees related to the deal, including submissions to the SEC.

The deal was approved last February and eTrials began trading on the Nasdaq exchange under the ticker symbol ETWC. The company now has close to $20 million in cash and could reap another $61 million if outstanding warrants are exercised by shareholders. Cline expects the improved balance sheet to help eTrials land new contracts and generate $20 million in revenue in 2007. That, he hopes, will help lift the company's stock, which traded recently at $3.70 per share. Over the next few years, Cline plans to use some of the cash and stock to acquire software companies that will allow eTrials to oversee the entire clinical trial process. Merging with a SPAC, he says, "was a hand-in-glove fit."

Despite the new image, shells still draw criticism from some financial advisers who argue that the deals are overly generous to investment banks and SPAC management teams, which typically walk away with a 10 percent stake in the newly merged company, along with bonuses and board seats. In 2005, the SEC adopted new rules designed to prevent pump-and-dump schemes by requiring shells to release financial records of acquired companies immediately after a merger. Before, shells had 75 days to provide records to investors. Meanwhile, the NASD, which regulates brokers, has begun investigating the marketing practices of a number of underwriters.

What's more, there are signs that the SPAC market could be slowing. The heated activity over the past two years has created a glut of shells searching for acquisitions. "A number of them are beginning to run out of time," Feldman says. This has caused some share prices to drop amid fears that some SPACs may not reach a merger agreement before their two-year deadlines. In addition, several SPAC deals have been voted down recently by shareholders. Deborah Quazzo, president of Think Equity Partners, a New York City investment bank that underwrites SPACs, chalks up the pullback to normal supply-and-demand cycles.

That notion offers little solace to Mike Traina, founder of ClearPoint Business Resources, an HR outsourcing company in Chalfont, Pennsylvania, that posted $84 million in sales in 2005. Last summer, Traina signed a merger agreement with Terra Nova Acquisition, a Canadian SPAC. He saw the deal as a relatively painless way to raise money for acquisitions and offer stock options to his employees. It has been anything but easy. The SPAC was trading slightly below its offering price when Traina signed the merger agreement, which has made it difficult for him to round up enough yes votes from Terra Nova shareholders, who may be better off voting down the deal and getting back their original investments in the SPAC.

Despite the hassles, Traina says that he will still be happy with his decision to pursue a SPAC, as long as the merger wins approval during a proxy vote slated to take place early this year. "There are no pure solutions," he says. "If the deal goes through, we'll still be a profitable company, except with $40 million in the bank. I try to keep that in context."

http://www.inc.com/magazine/20070201/finance-strategies.html

Going `reverse' forward

The book discusses the many advantages of reverse mergers — such as lower cost, speedier process and less dilution.

There are more ways to go public than through the traditional IPO (initial public offering). "The two most popular alternatives to IPOs are reverse mergers and self-filings," write David N. Feldman and Steven Dresner in Reverse Mergers, from Bloomberg (www.bloomberg.com).

Reverse merger examples that the book's dust jacket speaks of include Berkshire Hathaway, Turner Broadcasting System, Texas Instruments, and New York Stock Exchange.

Closer home, we have the prominent example of ICICI that reverse merged with ICICI Bank in 2002 to set a trend for the conversion of all-India financial institutions into universal banks.

Purchasing Control

What happens in a reverse merger? "A private company merges into a public one," explains the intro. "The private company purchases control of a public one, merges into it, and when the merger is complete becomes a publicly traded company in its own right." Where the public company has minimal operations, it is called a shell.

"The public company may be the remnant of a bankrupt or sold organisation or specially formed for the purpose of investing in a private company."

Reverse mergers have a chequered past, note the authors. "In the early days of the practice — the 1970s and 1980s — a number of unsavoury players used the technique fraudulently... Some shady dealers would form new public shells, raise money from investors, and then take that money in the form of `fees', salaries, and perks in exchange for `running' the shell. In many cases, these shells were simply milked for the cash they had until it was gone." Another malpractice was to manipulate stock prices by leaking false information into the marketplace.

The book discusses the many advantages of reverse mergers — such as lower cost, speedier process, less dilution, and doing away with underwriting.

"Most reverse mergers can be completed for under $1 million (this includes the cost of acquiring the public shell). Total costs can be much less than $1 million, depending on the cost of the shell and whether or not the private company has already completed proper audits of its financial statements."

Underground Economy

A shell is a company that exists in name only and which has ceased to trade, defines www.finance-glossary.com. "Shell companies are at their most interesting when they are listed on a stock exchange, because they provide a cheap way for another company to acquire a listing by `reversing' into the shell.

Rumours perpetually surround listed shells, and their share prices can be quite volatile as investors get excited at the prospect of a reversal." Take care, therefore.

According to the US Securities and Exchange Commission (SEC) shell company is one with `no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents.' Shell corporations are not in themselves illegal, and they may have legitimate business purposes, clarifies Wikipedia.

"However, they are a main component of underground economy, especially those based in tax havens. They may also be known as International Business Corporations (IBCs), Personal Investment Companies (PICs), front companies, or `mailbox' companies."

A chapter in the book, on `shells and deal structures', discusses `reverse triangular merger' and `reverse stock splits'. In the former, the public shell creates `an empty, wholly owned subsidiary', which then merges into the private company. And the latter becomes necessary when in the process of completing a reverse merger, a public shell finds itself with `too many issued and outstanding shares and not enough authorised shares'.

The last three to five years have seen growth in reverse mergers, say the authors. Companies outside the US see reverse mergers as an opportunity to access US capital markets.

"Deals continue to come to the US from Israel, Hungary, the UK, Korea, Germany and other countries... " A book that takes your knowledge of `reverse' forward.

http://www.thehindubusinessline.com/iw/2007/02/25/stories/2007022501221200.htm

Big-ticket IPOs in New York and Hong Kong for Chinese banks and insurance companies make headlines. But in recent years another class of Chinese company has been quietly tapping the international capital markets.

Enterprises that don't have the heft or profits for a splashy initial public offering are finding they can get a coveted overseas listing through a reverse merger.

Here's how it works. The Chinese business is typically acquired by a U.S. shell company that is worthless, except for one thing: It's publicly traded. The American board then resigns, the Chinese board takes over, changes the company's name, and issues new stock to hedge funds and other new investors, raising millions of dollars in fresh capital.

One example: Sinovac Biotech Ltd., a respected Beijing-based maker of vaccines, executed a reverse merger in 2003 and subsequently raised $12 million.

For more and more Chinese companies, a reverse merger is faster and less onerous than an IPO. Sometimes the process takes as little as a few months, says Peter D. Zhou, managing director of American Union Securities Inc., a New York firm that has helped broker 10 such deals since 2005 and is currently working on another nine.

One is the pending takeover by Carson City (Nev.)-based Ticketcart Inc., a defunct online retailer of printer cartridges, of Tieli Xiaoxinganlin Frog Breeding Co., which markets nutritional supplements made from Chinese forest frogs.

All told, some 150 Chinese companies have taken the reverse-merger route since 2005. "The Chinese are realizing that there's a lot of money here," says Zhou.

Many in the financial world aren't happy about the popularity of these takeovers. Something few Chinese executives consider is that Americans generally shun such shells, as they typically trade over the counter, says Neil A. Torpey, a Hong Kong-based partner with law firm Paul, Hastings, Janofsky & Walker. "Nobody follows them, there's no market in the shares," he says. "So after having gone through a lot of time and expense and effort, the underlying purposes aren't realized."

So why do Chinese companies bother? One reason is simple: They have few other options. Small companies in the country's rust belt or in industries that aren't sexy are unlikely to draw the interest of the venture capital and private equity investors swarming over China. Plus there's a two-year wait for a listing on the booming Shanghai or Shenzhen stock exchanges.

"If a U.S. financier says I can get you public in two months,' that's a pretty good pitch," says one American hedge-fund manager who wants to remain anonymous because he has invested in a Chinese company that executed a reverse merger.

Another reason Chinese companies favor these deals is that there's less interference from investors. Reverse mergers are usually followed up with a private placement. The hedge funds that typically buy these shares are content to allow management to continue operating unfettered, whereas private-equity outfits would typically demand a greater say in decision making, along with board seats.

Some Chinese companies involved in such deals have, however, found themselves in legal trouble. Fertilizer maker Bodisen Biotech Inc. and now-defunct China Energy Savings Technology Inc. face shareholder class actions alleging improper disclosure.

Still, investors argue there's nothing fundamentally disreputable about reverse mergers. Some well-known Chinese companies, such as Sinovac and Shenzhen-based battery maker China BAK Battery Inc, have graduated from the OTC market to the American Stock Exchange or NASDAQ.

"As we see more of them grow to multimillion market caps, there is more research, more liquidity in the stocks," says Mark Fleishhauer, Hong Kong-based portfolio manager at Jayhawk Capital Management, a hedge fund that invested in 11 reverse mergers in 2005, including BAK Battery.

But even fans of the reverse-merger option recognize its shortcomings. With estimated annual revenues of $15.4 million in 2006, Sinovac would probably not need to take the reverse-merger route today. Says Helen G. Yang, Sinovac's international business manager: "If we wanted to list now, an IPO would be a better choice."

http://inhome.rediff.com/money/2007/mar/15bw.htm

Tricks of the Trade
IPOs have gotten tougher, but entrepreneurs have some alternatives up their sleeves.
By David Worrell
Entrepreneur Magazine - December 2006

There’s a deafening silence in the public markets lately. Why? Because small and midsize businesses are looking elsewhere for capital.“There have been incremental changes that, when you stack them up on each other, have altered the IPO scene and the IPO as an option for small businesses,” says Dennis Sullivan, who works in Palo Alto, California, as the co-chair of the capital markets practice at securities law firm DLA Piper.

Take, for instance, the emergence of viable foreign markets. “Because of technology and the maturity and number of foreign markets, U.S. investors are more comfortable making investments abroad,” says Sullivan. Not far behind are growing U.S. companies following the money trail to places like The London Stock Exchange’s AIM market. “Smaller deals can get done [on the AIM], they’re cheaper, and there [are fewer] liquidity requirements,” Sullivan says. “The deals I’ve seen there could not have gotten done here.” (For more on the IM, see “London Calling.”)

Of course, competition comes not only from across the pond, but also from right here at home. As interest rates rise, investors put their money into safer investments, such as CDs and bonds. “The IPO market is always, in part, a reflection of what’s going on in all the other markets,” says Sullivan. Some of the blame, however, clearly lies with the market’s own regulatory bodies, according to Gregory Sichenzia, founding partner at Sichenzia Ross Friedman Ference LLP, a securities law and corporate finance firm in New York City. “If I’m a small company with $20 million in sales, I’d love to do an IPO, but there’s no one there to do it,” he says.

During the dotcom boom, there were more than 100 small investment banks that would underwrite small IPOs, but the National Association of Securities Dealers, the governing body for stock brokers and dealers, clamped down and put most of them out of business. “Where there were a hundred, now there are five,” Sichenzia says. Selling stock to the public may be nearly impossible now, but Sichenzia says there are viable alternatives. In the first nine months of 2006, his firm represented 50 publicly traded companies that chose to raise funds through a Private Investment in Public Equities, or PIPE, rather than a traditional public offering. These PIPEs averaged just over $4 million each.

In an ironic twist, doing these “private” transactions still requires that a company have publicly registered stock. PIPE deals selling large blocks of stock to private institutional investors have largely replaced smaller IPOs, which involve selling shares directly to the public on the open market. As a result, in a deal known as a reverse merger, businesses are purchasing so-called shell companies as a way to become publicly listed. “What you’re buying is the investor base,” says Sichenzia. “Shells are the fastest way to go public and the fastest way to access the PIPE market.”

Once considered fringe, merging into a shell is now entering the mainstream. “I’d say 90 percent of the small companies that were doing $5 million to $20 million IPOs in the past are now [going public] through a reverse merger process,” says Sichenzia. Darryl Jackson, founder and CEO of Automotive Management Services in Charlotte, North Carolina, has firsthand experience with almost every aspect of the public markets. Last year, he tried to take his 14-year-old automotive finance company to the public markets but found only a few takers. “With only $5 million in revenue [in 2005], we knew it was going to be a hard undertaking,” says Jackson, 46.

Eventually, Jackson got several offers, including a reverse merger with a capital group waiting to invest through a PIPE transaction. But he walked away. “We found that private equity can be the most expensive kind of financing,” he says. “We just weren’t able to put together the kind of deal that would be favorable to the company.” For now, Jackson has decided to stick with debt. A commercial lender was able to structure a relatively inexpensive $5 million line of credit backed by the company’s receivables. “I believe I’ll be able to get back into the equity markets,” he says, “but I’ll have to grow my revenue a little more. Then I’ll have more leverage.”

At ROO Group, a multimillion-dollar online video broadcasting company in New York City, CEO Robert Petty made the opposite decision. ROO completed a reverse merger in December 2003. Petty says publicly listed stock offers two benefits: “First, it allowed us to raise smaller chunks of money, and we could do it every few months. Second, it gives you a currency for acquisitions, which was part of our strategy.” Lately, he’s parlayed his currency into much larger PIPE transactions, including a $5.5 million private equity investment that was completed in late August. Petty, 42, says the transition “from private business to public company” was not easy, and he warns other entrepreneurs that the transaction can change their lives. “From a CEO’s point of view, 50 percent to 60 percent of your time will be spent running the company and not the business. “A CEO needs to be exceptionally tough, tenacious and determined,” Petty advises. “If you haven’t done it before, it will be the single hardest thing you do in your business life.”

http://www.entrepreneur.com/magazine/entrepreneur/2006/december/170414.html