Special Edition for 1.1.4

Going Public by Means of a Reverse Takeover

In 2007 July, it was disclosed that it was going to seek IPO, Initial Public Offering. This special edition newsletter is to announce a better alternative than going IPO.

Given the right set of circumstances, completing a business combination with and into a U.S. public shell (“RTO”) can be a quicker and more cost effective way to take the company to public than an initial public offering (“IPO”).

One of the most important components of the RTO transaction is the public shell into which the operating company will merge. A public shell is a company that has registered securities with and is itself reporting to the SEC, but is not an operating company. Public shells are typically listed on the Over-the-Counter Bulletin Board (“OTCBB”) or, more commonly, on the Pink Sheets.

Ideally, the public shell will be free from liabilities, either because the shell company's prior liabilities have been “scrubbed” clean by bankruptcy proceedings or because the shell company has been dormant for at least the past six years. If the shell company has not been scrubbed by bankruptcy proceedings, thorough due diligence is required to ensure that all potential liabilities of the shell, actual and contingent, have been identified and quantified.

Once a clean public shell has been found, the method for business combination must be chosen. While there are several ways to combine the operating company with the public shell, a reverse triangular merger is the most advantageous in most cases. As a result of the reverse triangular merger, the stockholders of the operating company will typically hold about 90-95% of the issued and outstanding stock of the public shell, and the public shell will hold 100% of the issued and outstanding stock of the operating company. Within 15 days after the closing of the RTO transaction, the postmerger company must file a Form 8-K with the United States Securities and Exchange Commission (“SEC”) (this period will be shortened to 4 days after August 23, 2004). Within 75 days after the closing of the RTO transaction, at least two years of the operating company’s audited financials must and its pro forma financials must be filed with the SEC.

Since the RTO transaction itself may not be capital raising event, most companies plan a capital -raising transaction, often structured as a PIPE (“Private Investment in Public Equity”) transaction to occur simultaneously with the closing of the RTO transaction.

Alternatively, some companies choose to complete a public offering by registering additional securities with the SEC shortly after the completion of the RTO transaction.

As RTO would allow the company to use the publicly listed company as the equity issuer for the project, many institutional investors who are only allowed to invest in listed companies could now invest in the company through Private Placement of shares. This way, the company can raise more funds from the market without long scrutinizing process of IPO.


Advantages of an RTO vs. and IPO:

Compared to the IPO method of going public, an RTO can be:
Quicker (1-3 months to complete an RTO vs. up to 6 months for an IPO)
Can be considerably less expensive (often US$1 million or more for an IPO, and perhaps as low as US$350,000 to US$500,000 for an RTO)
No “IPO window” - market considerations - company can go public regardless of the state of the current market for IPOs

* Less of management's time is diverted from running the business
* Less dilution of management control
* Less intrusion from underwriters trying to reposition the company before taking it public


Disadvantages of an RTO vs. an IPO:

Compared to the IPO parties pursuing an RTO are likely to experience:
Low liquidity, low visibility. It may take 1-2 years to develop support for the post-merger company's stock, if secondary market support develops at all. The company bears the burden of SEC compliance during that period without fully enjoying the benefits of being a public company.
This should be taken into account when considering the costs of an RTO vs. an IPO.

The RTO transaction itself may not be a capital-raising event, and the financing that typically accompanies an RTO generally raises far less capital than an IPO.

At least initially, the stock typically trades on a low exposure exchange, such as the Pink Sheets


Summary:

RTO's may be appropriate for some companies that do not need to raise capital quickly and that expect to experience enough growth to reach a size and scale at which they can succeed as public entities.

The ideal RTO candidate should also have a solid financing strategy and analyst or investment bank “friends” or sponsors in the U.S. to assist with the initial capital raising event and, if possible, to provide analyst coverage.

The aim of this exercise is to raise enough funds, not unnecessary amount of funds, to set-up the factory as soon as possible so that the company can provide the products to the customer faster. However, at the same time, the company is careful in the quality of growth and who it is associated with, in addition to cut the cost and time of going public. For all these considerations, the company has chosen the path of RTO over IPO to bring the company to the next stage. The company also has the capable advisors connecting it to investment bankers and analysts in the market.