HOW TO USE REVERSE HOW TO USE REVERSE MERGER TO RAISE CPAITAL MERGER TO RAISE CPAITAL

By Deepak Tandon By Deepak Tandon

IILM GurgaonIILM Gurgaon

AGENDAAGENDA

• OVERVIEW ON REVERSE MERGERSOVERVIEW ON REVERSE MERGERS

• KEY FACTORS FOR A SUCCESSFUL KEY FACTORS FOR A SUCCESSFUL REVERSE MERGERREVERSE MERGER

• ALTERNATIVE FUNDING SOURCES FOR ALTERNATIVE FUNDING SOURCES FOR REVERSE MERGER (PIPE, 144A,REG S)REVERSE MERGER (PIPE, 144A,REG S)

• Examples Examples

What is Reverse Merger?What is Reverse Merger?

• Reverse merger is an alternative method for small and Reverse merger is an alternative method for small and medium size private companies to become public without medium size private companies to become public without going through the long and complicated process of going through the long and complicated process of traditional Initial Public Offering (IPO)traditional Initial Public Offering (IPO)

• In a reverse merger, a private company acquires a public In a reverse merger, a private company acquires a public entity by owning the majority shares of the public entity entity by owning the majority shares of the public entity (usually 90% or more)(usually 90% or more)

• At the close of merger, the private company takes on At the close of merger, the private company takes on corporate structure of the public entity with its own corporate structure of the public entity with its own company name, assets, officers, directors, management company name, assets, officers, directors, management team and becomes public team and becomes public

Benefits Benefits

• 1. Guaranteed outcome that the financing and 1. Guaranteed outcome that the financing and going public transaction will be completed and going public transaction will be completed and are not subject to market risk, as with an IPO are not subject to market risk, as with an IPO 2.Higher valuations than raising money privately 2.Higher valuations than raising money privately 3.Becoming a public company and raise money in 3.Becoming a public company and raise money in one transaction one transaction 4.Institutional financing validation, in time for the 4.Institutional financing validation, in time for the start of trading start of trading 5.Flexibility in amount of capital that is raised, 5.Flexibility in amount of capital that is raised, with a long term process and strategy (including with a long term process and strategy (including post closing) to minimize issuer dilution post closing) to minimize issuer dilution

The ProcessThe Process

• Step One:Step One:

– Finding a suitable shell and making sure it is “clean” Finding a suitable shell and making sure it is “clean”

– A public shell could be either a public traded reporting A public shell could be either a public traded reporting company or a non-trading public reporting company (A company or a non-trading public reporting company (A Blank Check Company)Blank Check Company)

– A public shell usually has no operation or business activities A public shell usually has no operation or business activities and has no remaining employees and management teamand has no remaining employees and management team

– Shells that have no significant assets can be purchased for Shells that have no significant assets can be purchased for prices generally ranging from $200,000 to over $400,000 prices generally ranging from $200,000 to over $400,000 USDUSD

The Process The Process

• Step Two:Step Two:

– Seeking experienced law firm Seeking experienced law firm

– Seeking reputable auditing firm Seeking reputable auditing firm

– The investors of private company buy an overwhelming The investors of private company buy an overwhelming majority of the shell shares for a nominal amount and/or majority of the shell shares for a nominal amount and/or the shell shareholders vote to authorize the issuance of the shell shareholders vote to authorize the issuance of a new large and highly diluted block of sharesa new large and highly diluted block of shares

The ProcessThe Process

• Step Three:Step Three:

– The large block of shell company shares that is now The large block of shell company shares that is now controlled by the private company investors are controlled by the private company investors are swapped for the private company, thereby acquiring it.swapped for the private company, thereby acquiring it.

– The shell company now owns the assets and ongoing The shell company now owns the assets and ongoing business of the private company, including its name, business of the private company, including its name, officers, directors and management team. officers, directors and management team.

The ProcessThe Process

Public ShellXYZ

Post-Merge(Public)

ABC

Private CompanyABC

Advantages Of Being Public Advantages Of Being Public Traded Company Traded Company • Increase liquidity of the ownership shares of the companyIncrease liquidity of the ownership shares of the company

• Higher share price and thus higher company valuationHigher share price and thus higher company valuation

• Greater access to the capital markets through future stock Greater access to the capital markets through future stock offeringoffering

• The ability to make acquisitions using the company’s public The ability to make acquisitions using the company’s public stocksstocks

• The ability to use stock incentive plans to attract talents and to The ability to use stock incentive plans to attract talents and to retain key employeesretain key employees

• Going public can be part of a retirement strategy for ownersGoing public can be part of a retirement strategy for owners

Advantages Of Going Public By Advantages Of Going Public By Means Of Reverse Merger Means Of Reverse Merger • The costs are significantly less than the costs required for The costs are significantly less than the costs required for

traditional IPO (Average $500,000 VS Over 1 million)traditional IPO (Average $500,000 VS Over 1 million)

• The time required is considerably less than for an IPO The time required is considerably less than for an IPO (Average 4-6 months VS Average 12-18 months)(Average 4-6 months VS Average 12-18 months)

• An IPO may be withdrawn due to an unstable market An IPO may be withdrawn due to an unstable market condition even after most of the up-front costs have been condition even after most of the up-front costs have been expendedexpended

• The lack of an earning history does not normally keep a The lack of an earning history does not normally keep a privately held company from completing a reverse mergerprivately held company from completing a reverse merger

• The company does not require an underwriter The company does not require an underwriter

Disadvantages Of Being A Disadvantages Of Being A Public CompanyPublic Company• Higher visibility: A public company is essentially under a

microscope. There is little confidentiality. All material transactions and contracts become public information.

• The ongoing public reporting requirements, need for audited financial statements, compliance with the SEC rules and regulations and investor relations activities substantially increase the cost of doing business.

• Public companies have long been accused of having a short term business focus. Management often is consumed with the daily price of the companies and manage the business in response.

• The public reporting process and the need to maintain interest in the company takes a tremendous amount of management's time and energy.

Skepticism About Reverse Skepticism About Reverse Merger Merger • No capital infusion after completion of reverse No capital infusion after completion of reverse

mergermerger

• Capital markets closed, no institutional following to Capital markets closed, no institutional following to raise stock priceraise stock price

• Private placements difficult due to low public Private placements difficult due to low public valuationvaluation

• Low liquidity – stock ends up trading OTC or on the Low liquidity – stock ends up trading OTC or on the pink sheetspink sheets

PART IIPART II

KEY FACTORS FOR A KEY FACTORS FOR A SUCCEFFUFL REVERSE SUCCEFFUFL REVERSE

MERGERMERGER

Assemble A High Quality Assemble A High Quality TeamTeam

• Highly Qualified Financial Advisors Highly Qualified Financial Advisors

• Registered And Experienced Auditing Registered And Experienced Auditing FirmFirm

• Experienced And Reputable Law FirmExperienced And Reputable Law Firm

Pre-Merger PlanningPre-Merger Planning

• Private Company PreparationPrivate Company Preparation– Cleaning up corporate structure Cleaning up corporate structure – Setting up corporate governanceSetting up corporate governance– Prepare financial statementPrepare financial statement– Independent Board of DirectorIndependent Board of Director– Independent Auditing CommitteeIndependent Auditing Committee– Good management team which includes English Good management team which includes English

speaking CFOs and CEOsspeaking CFOs and CEOs– Attractive business plan with ability to execute it Attractive business plan with ability to execute it

Post-Merger PlanningPost-Merger Planning

• Develop and implement a strategy that creates liquidity for the shares, Develop and implement a strategy that creates liquidity for the shares, raises capital, and provides long term value and market support for the raises capital, and provides long term value and market support for the firmfirm

• Elements of the strategy includes identifying market makers and brokers Elements of the strategy includes identifying market makers and brokers that trade small/micro cap marketthat trade small/micro cap market

• Develop relationships with managers and institutional investors of small Develop relationships with managers and institutional investors of small cap investment fund that creates infusion of capitalcap investment fund that creates infusion of capital

• A financial communication program that develops awareness and A financial communication program that develops awareness and attention of the company and thus creates long term value and market attention of the company and thus creates long term value and market supportsupport

– Road showsRoad shows– Independent Research Independent Research – Public RelationshipPublic Relationship

EXAMPLESEXAMPLES

• The corporate shell of REO Motor Car company, in what amounted to a The corporate shell of REO Motor Car company, in what amounted to a reverse "hostile" takeover, was forced by dissident shareholders to acquire a reverse "hostile" takeover, was forced by dissident shareholders to acquire a small publicly traded company, Nuclear Consultants. Eventually this small publicly traded company, Nuclear Consultants. Eventually this company became the modern-day company became the modern-day NucorNucor. .

• ValuJet AirlinesValuJet Airlines was acquired by was acquired by AirWaysAirWays Corp. Corp. to form to form AirTranAirTran Holdings Holdings, with , with the goal of shedding the tarnished reputation of the former. the goal of shedding the tarnished reputation of the former.

• AérospatialeAérospatiale was acquired by was acquired by MatraMatra to form to form Aérospatiale-MatraAérospatiale-Matra, with the , with the goal of taking the former, a state-owned company, public. goal of taking the former, a state-owned company, public.

• US AirwaysUS Airways was acquired by was acquired by America West AirlinesAmerica West Airlines, with the goal of , with the goal of removing the former from Chapter 11 bankruptcy. removing the former from Chapter 11 bankruptcy.

• The The New York Stock ExchangeNew York Stock Exchange was acquired by Archipelago Holdings to form was acquired by Archipelago Holdings to form NYSE GroupNYSE Group, with the goal of taking the former, a , with the goal of taking the former, a mutualmutual company, public. company, public.

• ABC Radio is to be acquired by Citadel Broadcasting Corporation, with the ABC Radio is to be acquired by Citadel Broadcasting Corporation, with the goal of spinning the former off from its parent, Disney. goal of spinning the former off from its parent, Disney.

• Frederick's of Hollywood parent FOH Holdings was acquired by apparel Frederick's of Hollywood parent FOH Holdings was acquired by apparel maker Movie Star in order to take the larger lingerie maker public.[1] maker Movie Star in order to take the larger lingerie maker public.[1]

• Eddie Stobart in a reverse takeover with Westbury Property Fund allowing Eddie Stobart in a reverse takeover with Westbury Property Fund allowing transport by ship, road, rail or boat to and within the UK, using only one transport by ship, road, rail or boat to and within the UK, using only one company. company.