My friends at Rodman have consistently been a leading firm in the PIPE, IPO and reverse merger space since a group led by the amazing Michael Vasinkevich joined back in 2002.  Last year I think they had over 3000 people at this conference (and an awesome Diana Ross concert). Let’s hope things stay strong in the capital markets in the next few years so that all the conferences continue to be celebrations of success. Hope to see you there!

It seems strange to me that the article compares the performance of Chinese companies to that of a well-known China stock index which only a few short years ago Barron’s also trashed as allegedly manipulated and strewn with conflicts. Yet in this article the performance of the index as compared to the players they highlighted looked much better. Suddenly it seems Barron’s believes the index is reliable and worthy of use in an argument of comparison to others. This convenient change of heart is confusing to me, to say the least.

Yes there are some real problems with a few Chinese companies that are facing lawsuits and the like. And, frankly, it seems no player is immune, since some of the more recent alleged frauds related to companies advised by some of the most prominent law and accounting firms around, and included some of the brightest minds with a strong history working on Chinese deals on their boards. But if someone is determined to commit fraud, it is not always that easy to spot - read Enron, WorldCom, etc. So it is not just small companies or Chinese companies where this is a challenge.

There is no question that anyone involved with Chinese reverse mergers should work with experienced players who understand the culture of those they are dealing with. But that’s true in a reverse merger in any country. Frankly there’s been some fraud in US deals as well, all as we work so hard to upgrade the legitimacy, acceptance, transparency and reputation of IPO alternatives which can be an efficient and cost-effective way to help a company move to the next level when the players do so with integrity.

I am looking forward to the article highlighting the great successful Chinese companies that have grown and made a great deal of money for their investors. I wonder when that will be.

This is related to what I have discerned is a heightened scrutiny at the SEC (the SEC Commissioners appoint the PCAOB board members) with respect to Chinese companies going public. As the RMR reported in the same issue, a number of Chinese companies unfortunately are facing SEC investigations and shareholder lawsuits over a variety of alleged bad activities. Unfortunately, the many exciting and cleanly run Chinese companies do not make the headlines! It seems to me, though, that the heightened scrutiny by the PCAOB makes sense, to help improve the transparency and comfort level for regulators and investors in these transactions. Meantime we’re still awaiting final resolution of the US Supreme Court’s declaration that the method of appointing the PCAOB board members is unconstitutional….stay tuned all around…

Without getting too technical, the most common error is a company that had an obligation to file reports for a period of time (such as right after a public offering) but never made that obligation permanent. It might have a stock trading on the OTCBB, which requires a company to be required to report in order to be trading. This could lead observers to assume that it is so obligated to report. Unfortunately, FINRA, in its oversight of its own rules, has not monitored whether a company has transitioned from mandatory to voluntary reporting, so long as they actually continue to file reports. Only if you stop filing does the OTCBB de-list the securities and send it down to the Pink Sheets.

There are times when a shell or acquisition vehicle claims it is non-reporting. Some see advantages to a combination with a non-reporting shell as it eliminates some costly and time-consuming SEC filings (and the avoidance of the need to complete an audit), but still retains a trading stock and the possibility to become reporting again in the future when the company is ready. If a company was reporting in the past and now claims it is non-reporting, again check carefully. It may have filed Form 15 with the SEC which requests a suspension of the company’s filing obligations (it does not technically de-register the class of stock that had the obligation). But be sure to confirm that all conditions to the Form 15 being applicable have been followed, since sometimes the SEC does not look at Form 15 filings to see if they comply. For example, if a company is delinquent in filings before filing the Form 15, you do not eliminate the need to make those filings just by filing the Form 15. In addition, the company cannot use Form 15 if it has too many shareholders, so this also has to be confirmed.

Here’s another to check. A company that is required to report but has not made filings in, say, a year or two, may think it is still obligated to report and do its catch-up filings. We are engaged at times to help shell companies get current in that manner. A couple of quick tips if that is the case: 1) there is a process with the SEC to request one giant catch-up filing instead of filing every missing report. How? Email me and I’ll tell you. 2) Double check that the SEC has not already brought an enforcement action to de-register the company’s securities. They may have sent a notice to an old address and the company may not even be aware. 3) If you are very delinquent and have time, there are various ways to work with the SEC to effectively end the obligation to make the delinquent filings. How? Ask me.

If combining with a Form 10 shell, if the Form 10 went effective it is definitely a reporting company unless a Form 15 was filed or the SEC took some action to de-register. So the analysis is pretty easy in that context.

Those of us of a certain age remember the great TV show, “The Odd Couple,” in which a famous episode tells what happens when we assume…

Some of this seems to have come from various websites that seek to aggregate small investors into small offerings for small companies. This “crowd funding” concept (I have written about this previously) has begun to pick up steam, but requires much SEC oversight.

The petition argues that current exemptions for intrastate offerings, Regulation D and Regulation A are insufficient. In particular, it appears the petitioners want state “blue sky” or state securities law exemption as well. Plus other exemptions require substantial disclosure documents or that investors be sophisticated. The theory here is that for $100 investment, we should not have to worry too much about all that stuff as compared with the benefit for small businesses which provide 2/3 of all new jobs in our country.

I think it’s a cool idea. Heck if Rule 504 under Regulation D permits raising up to $1 million with no federal registration, and shares become publicly tradable thereafter, why not allow this? In fact, if I were the SELC I would consider upping the maximum investment, maybe to $1,000. Anyway, I’ll let you know if I hear of anything more on this petition.

Good luck to the SELC!

Thoughts these days are with my mother-in-law at NYU, we know she’ll be up and telling us all what to do soon!

The world continues to grow smaller for reverse mergers, as deals in the second quarter came from South Korea, Ireland, the UK, Turkey, Chile, Australia, New Zealand and Brazil. How about Russia??

We did see a big drop in the average market capitalization of companies completing reverse mergers. In the second quarter the average was $12.6 million in market cap, whereas that number was $21.4 million in the first quarter. The average funding size is also down from $4.8 million to $4 million. But put that in perspective. The total raised in deals in just the first half of this year ($200 million) is more than was raised in all deals from October 2008 through December 2009 ($174 million)!

Nice to have good news to report.

• Advisers to private equity and hedge funds managing over $100 million will now have to register as investment advisers with the SEC and be subject to reporting and recordkeeping requirements and regular inspections.
• A new Financial Stability Oversight Council, led by the Treasury Secretary, can select companies whose failure creates “systemic risk” for our economy, upon which they can be more heavily regulated and be forced to shed assets if necessary.
• The definition of  “accredited investor” in SEC Regulation D has now been changed so that if you qualify with $1 million net worth it must exclude your primary residence. This is effective now.
• The bill is just the beginning, as it instructs various agencies to conduct 243 rulemakings and 67 studies.
• “Smaller reporting companies” with a public float below $75 million are now permanently exempt from Sarbanes-Oxley Section 404(b) which requires auditors to attest to the adequacy and sufficiency of a company’s internal financial controls.
• Whenever a public company issues a proxy including executive compensation, shareholders have the right to conduct a non-binding vote on the proposed compensation, this is so-called “say on pay.” But the company is not obligated to follow the vote.
• A “bad actor” disqualification has now been applied across Regulation D, prohibiting those with conviction of a securities related crime, a bar from being in the securities business, or with an order saying they committed fraud or deception from conducting private placements under Regulation D.
• Other big stuff is there but less applicable to our space: the “Volcker Rule” restricting banks’ proprietary trading, establishment of a Consumer Financial Protection Bureau to monitor things like mortgages and credit cards, and much greater oversight of the over-the-counter derivatives market.

So is this good or bad? I admit to leaning towards libertarian when it comes to regulating business. Adam Smith’s “invisible hand” theory of the workings of markets has always been attractive to me. At the same time, there is no question that excessive greed and to some extent extreme stupidity led to the financial meltdown that came this close to crushing our entire economy. And the Great Depression made clear that some oversight of our key financial institutions is necessary. So it’s all about balance. Often after a crisis a legislative response (read: Sarbanes-Oxley) goes too far and swings the pendulum more than necessary. The very broad powers given to the new Financial Stability Oversight Council are a bit scary, and in control of the wrong hands could be quite dangerous indeed. But one would think it will help reduce the risk that we will face the same crisis that hit us in 2008 and 2009. The fund industry has been ready for registration and many had already registered, so not that big of a deal. I actually thought they would go further to tighten the accredited investor standard, so I don’t see the $1 million net worth change as too troublesome.  The help for smaller public companies certainly is a plus and welcomed. So this one will be judged more by its implementation I think than its content. But overall, some good stuff and the less good stuff could have been worse. Sounds like US politics. Now back to RM!

• There’s going to be a new Office of Credit Ratings to keep an eye on, you guessed it, credit rating agencies.
• They have now also pushed the “bad actor” exemption (I guess it’s no longer PC to say “bad boy” as they used to) all across Regulation D (it previously did not apply in a Reg D 506 offering which most of us utilize). If you are a bad actor (ie conviction of a securities related crime, bar from being in the securities business, have an order against you saying you committed fraud or deception), you cannot use Reg D to make an offering.
• There’s now going to be big time oversight of the over-the-counter derivatives market. Not too many swaps and derivatives trading in smaller public companies.
• The “Volcker rule” has been adopted, prohibiting banks and certain others from being involved in proprietary trading or investing in more than 3% of a hedge or private equity funds (but they can be underwriters and market makers). This is probably a good thing. It will be interesting to see how the Bank of Goldman reacts to this. It doesn’t kick in for well over a year however.
• There’s going to be a new Consumer Financial Protection Bureau to oversee anyone offering consumer financial services including mortgages, student loans and credit cards.

OK? Happy? Tell your friends. Seriously, now back to executive compensation. We’ve heard a lot about “say-on-pay,” though the final version is somewhat watered down. If you’re doing a proxy statement and it has to include disclosure about compensation, you have to have a separate, but non-binding, vote of shareholders to approve the compensation or not. The Act makes clear that the vote doesn’t change anyone’s fiduciary duties and the board does not have to react or respond to the vote. The shareholders also are permitted to vote to only be allowed their say on pay once every two or three years instead of every year. Also, the Act directs the stock exchanges to adopt rules requiring any compensation committee to be completely independent of management, however, it still will not require companies to have compensation committees.

Here’s another one I like. Public companies will have to put in their annual proxies how their executive comp relates to the company’s financial performance. Guys, we are so out of line with the rest of the world in executive compensation. I’m a strong believer in giving “the talent” whatever is fair, but I’m also a strong believer in tying compensation to getting the job done. If everyone does it, then you won’t lose talent who say hey, I can get big bucks for not performing somewhere else.

OK, summarizing everything in the next and last.

Seriously, small public companies indeed can rejoice in the last minute addition of relief for “non-accelerated filers” from Sarbanes-Oxley Section 404(b), which requires outside auditors to attest to the adequacy and sufficiency of internal financial controls. These filers are now (once the President signs it - I just looked and he’s still speaking!) permanently exempt from the provisions of 404(b), as I have reported here. In addition, the act directs the SEC to study whether it would be good to broaden this permanent exemption to companies with market capitlizations between $75 and $250 million. This may well be the best news for smaller reporting companies since Sarbanes was passed back in 2002.

Only two more pieces to this series coming- first on the executive compensation changes, then summarizing it all. Then back to regular stuff!