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TOPIC: News Stories on Shell Stocks and Reverse Mergers

News Stories on Shell Stocks and Reverse Mergers 6 years 11 months ago #1608

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Uncertainty Clouds 2012 IPO Market Outlook

Hampered by an avalanche of negative publicity and regulatory scrutiny, reverse merger activity has plunged to its lowest level in seven years, and the outlook for 2012 is dismal, say industry analysts.

“2011 is likely to record the lowest number of reverse mergers since 2004,” says Brett Goetschius, editor of The Reverse Merger Report.

A reverse merger was once a popular way for private firms, especially foreign-based, to gain a listing on the U.S. exchanges by merging with an existing public company, while by-passing a more costly and rigorous initial public offering process.

Only 166 reverse mergers closed so far this year compared to 258 in 2010—a 36 percent decline. Investment in reverse mergers stands at $149.6 million to date versus $343 million last year.

Goetschius calls the overall outlook going forward “poor”. “Investment in new reverse merger companies is likely to remain at 10-year lows, and merger activity well below the 5-year average of 225 deals a year,” he says.

The practice this year came under a firestorm of regulatory scrutiny after a slew of firms, primarily China-based, were involved in accounting scandals and saw their trading suspended or halted.

Federal regulators even issued a warning about the risks of investing in reverse merger companies, including potential for fraud and sub-standard accounting. In November, the SEC also toughened listing requirements for reverse merger companies seeking to trade on major U.S. exchanges.

These developments put a damper on the reverse merger activity, which has already been severely restricted as a result of the 2008 financial crisis.

“After 2008, Chinese reverse mergers remained the only sector of the market where investors felt strong returns were still possible,” says Goetschius. “The accounting fraud scandals that swept through the Chinese market this year destroyed investors’ confidence in that thesis.”

Only thirty-eight of this year’s reverse mergers involved Chinese companies compared to eighty-one in 2010, according to the Reverse Merger Report. The amount of money raised by Chinese reverse mergers plunged 95 percent to $13.45 million compared to $259.3 million last year.

“The accounting risk overhang on Chinese reverse merger companies will likely persist into the first half of 2012, making it virtually impossible for Chinese companies to raise capital subsequent to a reverse merger for the foreseeable future,” adds Goetschius.

But industry insiders believe that despite the headwinds, this is not the end of reverse mergers.

Nanette Heide, partner at law firm Duane Morris, says for smaller companies reverse mergers may prove to be the only way to raise capital given that venture capitalists have been moving towards later stage companies.

“The IPO market is substantially for the larger capital raises—in excess of $100 million—due in part to the consolidation of underwriter firms resulting from the recent economic downturns and the disappearance of the smaller firms that specialized in the small IPOs," adds Heide.

”Reverse mergers will continue to be a very credible and predictable alternative to an IPO for properly sponsored and organized companies to access the public markets,” believes John Borer, senior managing director at Rodman & Renshaw. “The current scrutiny on many levels will improve the quality of the transactions coming to the market.”
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News Stories on Shell Stocks and Reverse Mergers 7 years 4 months ago #1565

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SEC Weighs Curbs on Backdoor Stock Listing


WASHINGTON—Securities and Exchange Commission Chairman Mary Schapiro said the agency is considering several options to address its concerns about so-called reverse-merger companies that use legal but backdoor methods to list shares of their stocks in North America.

Though she declined to provide details, she said the SEC is weighing "a menu of ideas" but they aren't "ready for prime time, yet."

Ms. Schapiro, at The Wall Street Journal's CFO Network forum in Washington on Tuesday, said backdoor listings are in the agency's sights.

SEC officials have said they are increasingly concerned about the proliferation of small private companies, primarily from China, that elect to merge with public shell companies in lieu of more rigorous methods of becoming public, such as a traditional initial public offering. Last week, the SEC warned investors to be careful about investing in stocks of such companies.

Ms. Schapiro, speaking at The Wall Street Journal's CFO Network forum here, cited as one an example a proposal floated by Nasdaq OMX Group Inc. that would require a certain amount of trading before a company could list on its exchange.

Since January 2007, there have been 600 backdoor registrations, with more than 150 from in and around China, SEC officials have said. The SEC has warned of systemic concerns with the quality of the auditing of these firms' financial reporting as well as the limitations on the ability of regulators to enforce the securities laws and for investors to recover losses tied to fraudulent disclosures.

Ms. Schapiro said Tuesday that the SEC is working with Chinese regulators to address these concerns. A key issue is an inability of the Public Company Accounting Oversight Board to inspect these firms in China, she added.

In an April speech, SEC member Luis Aguilar acknowledged that the agency is probing some of these firms. "While the vast majority of these companies may be legitimate businesses, a growing number of them have accounting deficiencies or are outright vessels of fraud," Mr. Aguilar said.
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News Stories on Shell Stocks and Reverse Mergers 7 years 5 months ago #1562

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The SEC posted an Investor Bulletin about Reverse Mergers resulting from the recent issues with Chinese Reverse Merger companies.
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News Stories on Shell Stocks and Reverse Mergers 7 years 7 months ago #1551

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As reported by By Ronald D. Orol,

WASHINGTON (MarketWatch) — A top U.S. securities commissioner on Monday said he was concerned about a recent wave in which private companies merge with shell companies as means of going public.

“This is a disturbing trend in capital formation and investor protection,” said Securities and Exchange Commissioner Luis Aguilar at an event hosted by the Council of Institutional Investors.

He noted that since 2007, there have been hundreds of such registrations in the U.S., including more than 150 by companies from China and in the China region. The Nasdaq has recently suspended trading in some of these companies.

China Sky One Medical (CSKI 3.26, -0.20, -5.78%) and China Green Agriculture (CGA 7.04, +0.03, +0.43%) are among the shell companies that have had stock market slumps in recent months.

“We are seeing increasing problems with shell companies. While the vast majority can be legitimate businesses, a growing number have proven to have significant accounting issues,” Aguilar said.

He added that the SEC has set up an internal task force to look at fraud in overseas companies listed on U.S. exchanges including companies engaged in back-door registrations.

“The task force had yielded and will continue to yield results,” he said.

Aguilar added that Chinese companies employing a back-door approach to listing on U.S. stock exchanges have raised particular issues that bear scrutiny.

”There appear to be systematic concerns with quality of auditing and financial reporting,” he said. “Even though these companies are registered in the U.S., we have limitations when it comes to enforcing U.S. securities laws with them.”

To illustrate his concern, Aguilar said the SEC and private companies may have a more difficult time enforcing remedies and recovering investor losses when it comes to back-door listings.

“The persons to punish and assets that may satisfy a judgment may be located outside the U.S. and be harder to get to,” he said. “Remedies obtained in the U.S. may not be enforceable in other countries where the bulk of the assets are located.”

Aguilar also said there should be more of an emphasis on traditional capital-raising systems, insisting that the traditional system of iInitial public offering in the U.S. “remains the gold standard.”

“The SEC and public receives robust disclosures along with the time to review the material,” he said. Read about back-door listings

Ronald D. Orol is a MarketWatch reporter, based in Washington
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News Stories on Shell Stocks and Reverse Mergers 10 years 4 months ago #1396

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[Re: News Stories on Shell Stocks and Reverse Mergers]

FOCUS: Dealmaking
Reverse mergers are hotter than Szechuan
Backing into a shell is a faster, cheaper way to go public in the U.S. than a traditional IPO. Chinese companies especially love it.

By Tim Catts
July 14, 2008

Joseph Meuse, the managing member of Belmont Partners in Washington, Va., describes his firm as “the CarMax of shell corporations.” In other words, he runs a giant depot of what are essentially the ghost ships of business: public companies that no longer have any operations of their own, or maybe never did, but remained current in their Securities and Exchange Commission filings and now sit idle, ready to provide a relatively quick and inexpensive route to U.S. capital markets for privately held enterprises that don't want to, or can't, carry out a traditional initial public offering.

Mr. Meuse and his company are part of a small but thriving ecosystem of investment bankers, attorneys and shell corporation brokers who see great opportunity in transactions called reverse mergers, reverse takeovers or “alternative public offerings.” In these deals, a private company merges with a public one solely to take advantage of the public entity's listing on a U.S. exchange.

From Chinese medical equipment manufacturers to fledgling U.S. biotech firms, companies looking to raise relatively small amounts of capital have turned away from traditional IPOs to this alternative path to the market. They are going public in reverse mergers and often raising capital from institutional investors when the deal closes. In many ways, the deals are mirror images of those involving special purpose acquisition companies, or SPACs, in which a publicly traded shell corporation is set up by investors to acquire privately held companies and bring them to market.

According to data compiled by the Reverse Merger Report, a trade publication that covers the field, 94 companies went public in these deals in the first half of this year, compared with 100 over the same period last year and 99 in the first six months of 2006. But the share of these deals involving obscure Chinese companies has exploded, from 19% two years ago to 32% so far this year.

“The rate of growth in these transactions is really high,” said Maj Soueidan, president of Market's Edge, an investment firm that tracks the deals and invests in Chinese companies that have participated in them.

And with only 22 companies floating IPOs in the first quarter of 2008, compared with 53 in the same period last year, this could be the rare year that reverse mergers are the more popular route to going public, said David Feldman, a founding partner of Feldman Weinstein & Smith, a New York law firm specializing in the deals. “Even if you're looking for $200 million or $300 million, there are no IPOs for anyone right now.”

Meanwhile, companies pursuing reverse mergers are typically looking for less money. Indeed, all companies raising capital via private placement concurrent with a reverse merger attracted a total of $187 million so far this year, according to figures from the Reverse Merger Report. “Many people are referring to this as the heyday of reverse merger transactions,” Mr. Feldman said.

Reverse mergers have taken off, while traditional IPOs have slowed significantly due to the turmoil in the credit markets. Much more stringent SEC disclosure requirements and an influx of Chinese companies looking to reverse mergers as a faster route to U.S. capital markets have also contributed to the surge in the number and value of deals. Recently, bigger and more profitable Chinese companies have undertaken reverse mergers, further helping the deals shake off an unsavory past as the province of boiler-room scams and pump-and-dump artists.

“It's the quality and the size of the companies going public through the reverse takeover method that's helped legitimize it,” said Matthew Hayden of HC International, a San Diego company that handles investor relations for some 30 Chinese companies that have gone public here via reverse merger.

The basic reverse merger works like this: A privately held company will spend anywhere from a few hundred thousand dollars to a few million dollars to buy the lion's share of stock in a publicly traded “shell” company, so called because it no longer has any real business of its own but has stayed current with its SEC filings in order to keep its shares listed. Shell companies typically trade over the counter via the OTC Bulletin Board quotation system. Some boutique investment companies and advisory firms specializing in reverse mergers keep a stable of shells available for sale and try to clean up some of their problems, which can include liens, court judgments and disgruntled shareholders. Others take steps to create “virgin” shells that offer a blank slate.

This process alone does not introduce any new capital into the company. To address that situation, many companies bring in institutional investors through private placements as soon as the reverse merger closes. The average value of an IPO last year was $229 million, according to data compiled by Renaissance Capital. In contrast, it isn't uncommon for companies going public in a reverse merger to raise $10 million or less.

Chinese companies are increasingly taking advantage of reverse mergers because they're relatively quick and inexpensive. “It's not that they're enthralled with the U.S. markets,” Mr. Hayden said. “They want access to growth capital, and this is the avenue that works.” Recent typical examples of Chinese companies using a backdoor into the U.S. capital markets include Shanghai Medical Technology, which merged into Aamaxan Transport Group in May and raised $12.5 million in a concurrent PIPE, and Yongye Biotechnology International, which raised $10 million through a PIPE concurrent with its merger with Golden Tan in April.

At least half of Chinese companies going public through reverse mergers have at least one manager who speaks English, and nearly all participate in some kind of “road show” to familiarize U.S. PIPE (private investments in public equity) investors with their businesses, Mr. Hayden said.

Chinese officials plan to open a Nasdaq-style exchange for small companies and start-ups in the near future, but “our belief is that listing in the U.S. will still be favored by many companies for at least the next two years,” Mr. Hayden wrote in a note to clients in April.

Chinese firms may be the hottest part of the reverse-merger market, but that's not to say U.S. companies aren't using the deals as well. A number of small biotech firms have used reverse mergers paired with private placements to access the capital they need to fund trials of experimental drugs instead of partnering with, or selling themselves to, big pharmaceutical companies, said attorney John Paris of Richmond, Va.-based law firm Williams Mullen.

Nonetheless, many of the boutique investment banks, investor relations shops and law firms springing up to help companies with these transactions focus on far-flung regions of the world. Certainly, China is immensely popular. But other firms, such as Southern Trust Securities, a Miami-based investment bank, specialize in areas such as South America and the Caribbean. Kevin Fitzgerald, the firm's president, said Southern Trust has helped companies from Argentina and Mexico as well as China undertake reverse mergers in the past 15 months, and has deals pending with companies from Spain, Iceland and South Korea.

“You have some really profitable businesses overseas that really can't go public without these kinds of transactions,” Mr. Fitzgerald said, because they're too small for a traditional IPO in the U.S. or are blocked from accessing capital markets in their home countries.

Reverse mergers have begun to shake off a reputation for being the province of boiler-room operators in the three years since the SEC changed the rule governing financial disclosure for companies that go public in those deals. Pump-and-dump scammers long exploited the lack of transparency in reverse-merger transactions to bring questionable companies into the capital markets, inflate their stock prices through high-pressure sales tactics, and then sell their stakes, leaving unsuspecting investors with massive losses.

In 2005, the SEC amended the laws governing the sale of shares in companies that have undergone reverse mergers to require more disclosure of financial information. That hasn't stopped reverse-merger scams, but it has made it easier to identify legitimate companies. The requirements are now comparable to those faced by companies going public through a traditional IPO, according to Mr. Paris. “You'd have the obligation that Google had,” he said. Mr. Feldman agreed: “It's an industry that's shaken its semi-shady past very effectively.”

The rising popularity of PIPEs among institutional investors has also made reverse mergers a more attractive option for small companies. In particular, hedge funds are eagerly providing capital in private placements with companies using reverse mergers to go public, observers said. The SEC requires these investors to hold their shares for up to a year before selling them, but that period can vary.

Most deals also include “make good” provisions, which require company managers to place a portion of their stock in escrow and set net income targets that, if missed, give investors the right to claim the shares. That gives an added element of security to institutional investors providing capital to companies going public through reverse mergers, Mr. Hayden said.

In practice, Mr. Feldman said, most institutional investors realize private placements with companies involved in reverse mergers require some patience. “Most PIPE investors know they're looking at one to two years before they see any liquidity,” he said.

Hedge funds aren't the only big players investing in reverse-merger companies. Lawyers and bankers specializing in the practice say some Wall Street heavy hitters are happy to fund them as well. “They're starting to see the upside,” Mr. Meuse said.

Mr. Meuse has big plans for Belmont Partners. “Like any new young market, you have a lot of people in this space, and no one has a huge share,” he said. Working with Chinese companies—and companies in other fast-growing emerging markets, such as Brazil—is the way forward, he said. “On a macro level, we want to be an Asian investment bank with American owners and an American presence.”

While some players like Mr. Meuse see immense opportunity ahead in the reverse-merger business, others, like Mr. Keating, believe the market may have already passed its peak.

In fact, the amount of capital raised in private placements accompanying reverse merger transactions through June has fallen 60%, from $469 million in the first six months of last year, according to the Reverse Merger Report. To support his contention, Mr. Keating cites SEC rules changes enacted in February that require investors in companies that have gone public through reverse mergers to hold their shares longer than those who've put their money in companies that haven't. That puts investors in reverse-merger PIPEs at an unfair disadvantage, Mr. Keating said.

Other rule changes may also keep investors away from the deals, including one that blocks some investors from selling shares in a reverse-merger company if it -doesn't stay current in its SEC filings and another that loosens the protocols governing the formation of shell corporations, opening the door for scammers to market flawed shells as pristine. That's not to say all recent regulatory developments have been negative: The same round of rule changes created liquidity in other ways—for example, by eliminating volume restrictions for investors looking to sell their shares, Mr. Feldman said.

Ask Mr. Keating if this is the heyday of reverse mergers, and he says it has already passed. “I would have said yes, it was, until very recently,” he said. He is guiding clients toward another IPO-less route to public trading that doesn't involve shell corporations: “Self-filing” instead requires the company to file with the SEC to resell stock held by existing shareholders and voluntarily assume the responsibilities of reporting financial results.

Mr. Meuse, meanwhile, is encouraged by the arrival of bigger institutional investors—including funds run by Wall Street heavyweights—seeking to invest in reverse-merger companies. “Is it still growing? Absolutely,” he said. “It has the look and feel of a market that's going to stay strong for a while.
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News Stories on Shell Stocks and Reverse Mergers 10 years 6 months ago #1361

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[Alternative Investment Firms Represent 40% of YTD M&A Activity]
NEW YORK, May 07, 2008 (BUSINESS WIRE) -- Sales of alternative investment firms account for a record 40% of deals in the global investment management business thus far in 2008, according to Jefferies Putnam Lovell, a leading adviser on alternative investment transactions and the division of Jefferies Group, Inc. (JEF:JEF 18.87, -1.49, -7.3%) focused on the asset management and financial technology industries.

Through April 2008, 29 of the 73 transactions announced involve alternative investment firms, according to New York-based Jefferies Putnam Lovell. The total includes 20 transactions of hedge fund and fund of hedge fund (FoHF) managers. Deal flow in 2007 involving alternative investment firms represented 32% of the 241 total transactions in the global asset management industry.

''We expect record demand for alternative asset managers to continue throughout 2008, motivated by buyers' search for absolute returns and innovative products in challenging capital markets,'' said Aaron H. Dorr, a New York-based Managing Director at Jefferies Putnam Lovell.

Jefferies Putnam Lovell has been involved as financial adviser in several of this year's most significant transactions involving firms in the alternatives sector, including:

-- This week's announced sale of an interest in Stamford, CT-based Aladdin Capital Management, which focuses on non-traditional fixed income strategies, to Japan's Mitsubishi Corp.

-- The announced reverse merger between global multi-strategy investment firm Halcyon Asset Management and Alternative Asset Management Acquisition Corp., a publicly traded SPAC (AMV:March 2008.

-- The sale of an interest in Hong Kong-based alternative investment specialist Vision Investment Management to Turin-based investment company IFIL. February 2008.

-- The sale of Carlsbad, CA-based hedge fund administrator HedgeWorks to Deutsche Bank. January 2008.
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