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REVERSE TAKEOVERS
Grand Avenue Capital Partners LLC
Member FINRA SIPC
Pasadena California
1
REVERSE MERGERS
Reasons for increased activity in reverse mergers:
 Alternative strategy for going public
 Greater access to capital
 Greater valuations in raising capital
 Sarbanes-Oxley
 Chinese Companies
2
GREATER ACCESS TO CAPITAL
GREATER VALUATION IN RAISING CAPITAL
Premium for publicly-traded companies
Generally 50% to 100%
For early stage/emerging growth companies can be much higher
3
GREATER ACCESS TO CAPITAL
Capital Markets Today
Fewer deals and lower valuations in venture
capital, private equity, M + A transactions
M & A activity
 Turmoil in credit markets
4
FUNDING GAP SOLUTION FOR
EMERGING GROWTH COMPANIES
For Companies
 Revenues from $0 to $100 million
 Limited history of earnings
 High growth potential
 Not satisfied with valuations in private equity and M & A
markets.
 Need less than $80 million in an IPO.
 Chinese companies seeking to raise capital in the US.
5
PRIVATE INVESTMENTS IN PUBLIC ENTITY
MAJOR CAPITAL SOURCE FOR
SMALL PUBLIC COMPANIES
PIPEs
Private placement/commitment to register shares
Faster, easier than IPO or secondary
6
MAJOR CAPITAL SOURCE FOR
SMALL PUBLIC COMPANIES
Highly flexible
Negotiate protections for investors
Can be dangerous for issuers if not structured properly
 Resets
 Floating Convertibles
 Toxic Convertibles
 “Death Spirals”
7
ADVANTAGES OF
REVERSE TAKEOVERS
Liquidity for prior investors
Equity incentives for key employees
Use of equity in making acquisitions
Industry roll-ups and consolidations
Arbitrage between cost of acquiring private companies
and valuation of raising capital for public company
Faster than IPO or direct registration
8
HISTORY OF THE SHELL RTO
Post - 1960’s
Operating companies
Blank check public offerings
1992 – SEC Rule 419
 Reduced supply of shells
 Started to clean-up the shell game
The Private Shell Strategy
9
HISTORY OF THE SHELL RTO
1999
 Bulletin Board requires SEC reporting
 NASD imposes unwritten requirements for Bulletin Board trading
 Wulf and Worm letters
 NASD Notice to Members 00-49
 NASD investigates some Bulletin Board applicants
Today non-BB shells have risks of not getting on BB without SB-2
10
SHELL MARKET TODAY
Large demand for Shells
Much smaller supply of good shells, higher prices
Many private companies taking risks with non-Bulletin Board or “unclean”
shells
11
WHERE DO SHELLS COME FROM?
Previous operating companies
419 shells
“Manufactured shells”
 Formed as a “blank check” and obtained shareholders
through public offering, private offering or “gifting” shares
12
HOW TO FIND A SHELL
Shell websites
Shell brokers
Shell owners
13
PURCHASING A SHELL
“Purchasing” a shell v. doing a reverse merger
 Most owners of clean Bulletin Board shells are “deal driven”
 They are not “selling” a shell
Non-trading shells and “stalking horse” shells are sometimes for
sale
Non-clean shells are for sale
14
REVERSE MERGER
BASIC TERMS
Cash and Equity
Amount of cash and equity depends on perceived value of private company
 Selling the value of the private company is important
Amount of cash also goes up if private company wants more equity
High percentage and low percentage deals
How much equity
How much float
15
ACTION PLAN FOR RTO
Determine whether Reverse Takeover is best course
 Consider disadvantages of going public
 Consider alternatives to RTO
 Initial public trading through SB-2
 4 to 6 months
 Can the private company do a RTO
 Too many shareholders
 Is private company prepared to go public
16
ACTION PLAN FOR RTO
Prepare Private Company


Enhance value
Prepare “pitch sheet” and business plan

Get prepared to go public

Complete management team

Retain attorneys

Retain auditors

Retain advisors for RTO going public
17
ACTION PLAN FOR RTO
Corporate clean-up
 Disclosures
 Contracts
 Disputes
 Capital Structure
 Balance Sheet
Retain IR (investor relations) firm
18
ACTION PLAN FOR RTO
Determine type of RTO terms private company wants
 High percentage
 Low percentage
 Cash v. equity
Be prepared to move fast
 Letter of Intent
 Deposit
 Due diligence team in place
Be prepared to be public within weeks
19
NEGOTIATING THE RTO
Initial contacts
Initial due diligence
Letter of intent
Deposit
Definitive agreement
20
NEGOTIATING THE RTO
Complete due diligence
Close
Change Board of Directors
Change Name
New CUSIP/Symbol
File 8-K
Complete audit of private company
File 8-K/A with audited financial statements
21
INITIAL CONTACTS WITH SHELL
OWNER/BROKER AND INITIAL DUE DILIGENCE
Do they control this shell
What terms do they want
 Cash/equity/deposits
Background of shell owners/brokers
What are their time requirements
22
INITIAL CONTACTS WITH SHELL
OWNER/BROKER AND INITIAL DUE DILIGENCE
Initial due diligence
 Due diligence package from shell
 Review SEC filings
 Trading status





BB
Pink sheets
Non-trading
NASDAQ
AMEX
23
INITIAL CONTACTS WITH SHELL
OWNER/BROKER AND INITIAL DUE DILIGENCE
SEC reporting status
 Reporting/non-reporting
 Late or delinquent filings
 12(g) or 15(d)
Percent of stock/float available
24
INITIAL CONTACTS WITH SHELL
OWNER/BROKER AND INITIAL DUE DILIGENCE
Regulatory Background
 How long trading
 How long reporting
 How start trading




Public offering
Manufactured
Stalking horse
Bankruptcy
25
INITIAL DUE DILIGENCE
Liabilities from past
 How long dormant
 Nature of operations
 Possible SEC, NASD problems
26
INITIAL DUE DILIGENCE
Capital Structure
 Number of shares outstanding
 Warrants, options, convertibles
 Number of shares authorized
 Number of shares in float
 Number of shareholders
 Number of shareholders in float
27
INITIAL DUE DILIGENCE
Ownership/Control History
 Multiple prior owners/control persons
 Background of prior owners/control persons
 Prior RTOs
28
TERMS OF RTO
Merger
Reverse triangular merger
Exchange offer
Cash for control
Cash for float
29
TERMS OF RTO
Equity exchange ratio
Hold back, scheduling agreements
Assets/liabilities
Representation and warranties
Investment capital at closing of RTO
30
SEC REPORTING REQUIREMENTS
Current rules
Form 8-K within 4 business days
 Terms of RTO agreement
 Brief description of company
 ID of new control persons
Amended 8-K within 71 days after 8-K
 Audited financial statements
31
SEC REPORTING REQUIREMENTS
Proposed Rules
 Form 8-K within 4 business days with Form 10 level of disclosures including
audited financial statements
Minimum requirements
More extensive disclosures recommended
32
DISCLOSURE AND MARKETING PLAN
Investor Relations (IR) Firms
Budget for IR
Importance of credibility, meeting expectations
33
MAJOR REASONS FOR FAILURE
Failure to protect against illegal and abusive practices after the reverse
merger
Failure to adequately conduct due diligence
Poor structuring of finished public company
Failure to adequately prepare to be publicly traded
34
MAJOR REASONS FOR FAILURE
Failure to prepare and execute plan for managing the market
Failure to prepare and execute disclosure program
Poor selection of professionals and advisors
35
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