PIPE Conference Take-Aways

I am heading home shortly from Las Vegas after moderating a panel at DealFlow Media’s PIPE Conference. It is the most important such conference in the industry each year, and the attendance was strong given the economy. I thought I would focus on a few items gleaned from the several panels that spent time focusing on reverse mergers and financing for OTCBB companies.

While it appears that the PIPE investors have returned to financing over-the-counter companies (over $2.2 billion in PIPEs were completed for OTCBB companies so far in 2009), the panelists felt that most of this money was “protective” follow-on investments by funds or others who provided financing for these companies before the market crash. It remains difficult to obtain traditional PIPE financing other than in highly liquid situations involving larger companies on senior exchanges that are able to provide investors with immediately tradable shares. A panelist said that trying in the last year to complete a PIPE with unregistered shares was “like trying to hand out anthrax.”

What to do about this issue? First, most felt that more traditional unregistered PIPEs will come when investors worry less about needing liquidity for possible redemptions from fund investors. Second, alternatives are all being tested. After all, before PIPEs, we did reverse mergers and financings for small public companies in other ways. One idea is to do a full registered S-1 offering for a company not eligible for short-form S-3 registration. It takes a little longer and must be done at a fixed price, but it provides immediately tradable shares.

After all our efforts a few years ago to deal with the Rule 415 fallout (the SEC limited the percentage of a company’s nonaffiliate stock that can be registered for resale at one time), the subsequent Rule 144 changes, shortening the holding period in most cases to 6 months before sale under 144 is possible without registration, appears mostly to have ameliorated the impact of the 415 issue. One panelist described the 415 matter as “old hat.”

A more interesting discussion centered around whether the continuation of the OTCBB itself is at risk. FINRA, which owns the OTCBB, apparently is trying to sell it, and the Pink Sheets is reportedly looking to do more in marketing quotation services that come closer to the OTCBB approach. It will be interesting to follow this.

Of course, as always, there was debate about Form 10 shells vs. trading OTCBB shells in reverse merger transactions. One panelist vehemently defended his view that Form 10s have no value, that only trading shells are worthwhile and he consistently recommends that his law clients not use Form 10s under any circumstances. The panelist pointed to the lack of liquidity following a merger with a Form 10 shell, the lack of a shareholder base, and the lack of a ticker symbol. Almost all the other panelists disagreed with this person at some level. Panelist John Borer of Rodman & Renshaw, as well as Charles Allen, formerly of Broadband Capital and now with TriPoint Global Equities, each participated in transactions with Form 10s and defended their value.

In particular the panelists pointed to WestPark’s WRASP model, now copied by at least three other major investment banks, starts with Form 10 shell merger and PIPE followed by a secondary public offering and a listing on the NYSE Amex or Nasdaq, solving the liquidity, ticker and shareholder base issues, and eliminating the negatives of a trading shell (unknown shareholders, insider trading, scrubbing past operations, fear of unknown liabilities, etc.). And all this at much lower cost than setting up or buying a trading shell.

In the next column we’ll talk a bit about my panel.

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