Going Public Transactions For Smaller Companies: Direct Public Offering And Reverse Merger
Introduction
One of the largest areas of my firms practice involves going public transactions. I have written extensively on the various going public methods, including IPO/DPOs and reverse mergers. The topic never loses relevancy, and those considering a transaction always ask about the differences between, and advantages and disadvantages of, both reverse mergers and direct and initial public offerings. This blog is an updated new edition of past articles on the topic.
Over the past decade the small-cap reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly. The decline was a result of both regulatory changes and economic changes. In particular, briefly, those reasons were: (1) the recent Great Recession; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments, including the prohibition of use of the rule for shell company and former shell company shareholders; (4) problems
The Section 4(a)(1) And 4(a)(1½) Exemption; Recommendations For An Amendment To Rule 144 Related To Shell Companies
What are the Section 4(a)(1) and Section 4(a)(1½) exemptions, and how do they work?
Section 4(a)(1) of the Securities Act of 1933 (“Securities Act”) provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” Rule 144 provides a non-exclusive safe harbor for the sale of securities under Section 4(a)(1). In the event that Rule 144 is unavailable, a holder of securities may still rely upon Section 4(a)(1). Section 4(a)(2) of the Securities Act provides an exemption for sales by the issuer not involving a public offering. The issuer itself may not rely on Section 4(a)(1), and selling security holders may not rely on Section 4(a)(2).
Case law and the SEC unilaterally conclude that an affiliate (officer, director or greater than 10% shareholder) of the issuer may not rely on Section 4(a)(1) for the resale of securities. In particular, an affiliate is presumptively deemed an underwriter unless such affiliate meets the requirements for use of
SEC Has Approved A Two-Year Tick Size Pilot Program For Smaller Public Companies
On May 6, 2015 the SEC approved a two-year pilot program with FINRA and the national securities exchanges that will widen the minimum quoting and trading increments, commonly referred to as tick sizes, for the stocks of smaller public companies. The goal of the program is to study whether wider tick sizes improve the market quality and trading of these stocks.
The basic premise is that if a tick size is wider, the spread will be bigger, and thus market makers and underwriters will have the ability to earn a larger profit on trading. If market makers and underwriters can earn larger profits on trading, they will have incentive to make markets, support liquidity and issue research on smaller public companies. The other side of the coin is that larger spreads and more profit for the traders equates to increased costs to the investors whose accounts are being traded.
The tick size program includes companies that meet the following $3
Regulation A+; An In-Depth Overview
On March 25, 2015, the SEC released final rules amending Regulation A. The new rules are commonly referred to as Regulation A+. The existing Tier I Regulation A, which does not preempt state law, has been increased to $20 million and the new Tier 2, which does preempt state law, allows a raise of up to $50 million. Issuers may elect to proceed under either Tier I or Tier 2 for offerings up to $20 million. The new rules are expected to be effective on or near June 19, 2015.
On March 31, 2015, I published a blog with a high-level summary of the new rules. In this blog, I will give a deeper review of the entire new Regulation and then in future installments will drill down on different aspects of the new rules as such become relevant to this new offering regime.
Background on Rules
On December 18, 2013, the SEC published proposed rules to implement Title
ABA Federal Regulation Of Securities Committee Makes Recommendations On Regulation S-K
On March 6, 2015, the Federal Regulation of Securities Committee (“Committee”) of the American Bar Association (“ABA”) submitted its second comment letter to the SEC making recommendations for changes to Regulation S-K. The Committee’s recommendations are aimed at improving the quality of business and financial information that must be disclosed in periodic reports and registration statements in accordance with Regulation S-K. I note that I am a member of the Committee, but not a member of the sub-committee that drafted the comment letter, nor did I have any input in regard to the comment letter.
The recommendations fall into four major categories: materiality; duplication; consolidation of existing interpretive and other guidance from the SEC; and obsolescence. The recommendations in the letter are based on themes articulated by the Division of Corporation Finance in a 2013 report to Congress mandated by the JOBS Act and subsequent speeches by the Division’s Director, Keith F. Higgins.
Materiality
The Committee’s letter recommends that
