Tip of the Week: Financing in this Environment

Many are noticing that, while reverse mergers continue in this difficult economic environment (and yes there are about 30% less deals than last year), a much higher percentage of reverse mergers are being completed without a contemporaneous financing. In some cases the hope is to do it after being public awhile, in some lucky cases the company has raised money while still private, and a handful of lucky companies are raising a few dollars at the time of going public. What to do?

Well, most of this stems from the difficulties in the PIPE market. PIPE funds remain concerned about their investors pulling their money out, and some have seen that happen. Thus they have to invest primarily in very liquid situations so that if redemptions come, they can sell whatever they have to get the money to fund the redemption. Investing in most reverse mergers involves taking pretty illiquid stock at first, of course with the hope of a much higher potential return than the very liquid deals. So right now there are very few PIPEs contemporaneous with reverse mergers. What to do?

Before PIPEs existed, we did reverse mergers, and did financings at the same time. Some were good old fashioned private placements, led by an investment bank that had wealthy individuals and some institutions as their clients, and money would be raised that way. Our clients are active in this market working on these types of private placements. Others are looking at post-merger “rights offerings.” Here you do an offering that goes through full registration with the SEC and is limited to the company’s existing shareholders. There is no underwriter typically involved. A fund, maybe a PIPE fund, agrees to “backstop” the offering by agreeing to buy whatever part of the offering is not bought by the shareholders. The fund is willing to do this because it gets fully registered and immediately tradable shares. Others are turning to funds that focus on mostly debt backed up by assets the company has, such as patents and the like.

And yes, the PIPE market is picking up. And at some point the funds will feel more comfortable that the redemption wave is passed, and they will return to taking a portion of their fund to invest in more risky, but more potentially rewarding, investments in going public transactions. Hang in there everybody.

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