Reverse Mergers - “back-door” listings
Dear Friends and Clients,
For many months now, we have been advocating to our clients that S-1 IPO registration has been a far better and cleaner way of going public than “reverse mergers.” Not that there’s anything inherently wrong with a reverse merger done cleanly.
The problem, however, has been of a few rotten apples spoiling the whole barrel.
Ever since the passage of Sarbanes-Oxley, our sense has been that the SEC does not favor reverse mergers for several reasons, including an increased difficulty in identifying the parties involved, increase difficulty in accurate accounting – especially foreign entities, the true history of the private company being folded into the public shell, and various other reasons.
Up until now, we have not noticed the SEC take any official or unofficial position, but we had seen and sensed what we perceived to be an increase in investigations and a tightening of the regulatory screws on companies who have come public via the “reverse merger” process.
Today, however, news comes through MarketWatch that one of the SEC Commissioners, Democrat Luis Aguilar, has taken a public shot at the reverse merger process, which he calls “back-door” listings.
Attacking problems with “accounting issues” with “shell companies,” Aguilar, at an event hosted by the Council of Institutional Investors in Washington, has indicated that the SEC has set up an internal task force to investigate “fraud” in cases where foreign companies, particularly Chinese Companies, have merged with US shell companies. Per the MarketWatch article of April 4, 2011, Aguilar concludes that the traditional system of initial public offering in the U.S. (e.g. registration via the S-1 process) –in his own words, “remains the gold standard.”
Although we do not always agree with every opinion offered by every government official, in this case we think Commissioner Aguilar is absolutely right.
Traditional methods of public offering are cleaner, more effective, more accountable to investors, and if you take Commissioner Aguilar at his word, apparently favored by the SEC.
Compared to the “reverse merger” process, going public via the traditional IPO process is indeed the gold standard.
We made a decision years ago to steer clear of “reverse mergers,” seeing what we believed to be the handwriting on the wall even then. Now, it appears that we were right in our foresight.
For clients interested in raising money from the public, we encourage that it be done in the open, in the United States, using the traditional system of public offerings – the “gold standard,” – as espoused by Commissioner Aguilar, and to avoid at all costs these “reverse mergers,” which are currently viewed with disfavor.
Our goal is to provide legal services supporting these traditional methods at the most competitive prices on the market.
With best wishes,
Don Brown