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Thursday, October 13, 2005

Chinese reverse mergers

Halter Financial Group touts their reverse mergers: AVEE, CAAS, CAGC, CBBT, CHDW, DXPE, KMGB, PGJ, SZI, TBV, TLF.

Companies are nowadays raising capital in addition to a simple reverse merger. They cite China BAK Battery, who Halter handled.
...even though an exit strategy exists, which also appeals to investors, liquidity is virtually non-existent for a period of time after a merger. Case in point: Over July, August and September, China BAK's daily volume averaged about 1,600 shares.
Even so, the deal was oversubcribed with 17 funds and several individuals taking part in China BAK Battery's placement.
With new rules requiring reverse merger companies to submit 10-K quality financials immediately upon completing the transaction, reverse mergers typically take about 45 to 60 days to close after an audit is conducted, Halter says. By comparison, it took the SPAC Millstream Acquisition Corp. about seven months to complete its combination with NationsHealth, a Medicare supplier of medications that also provides discount drug cards.
No way would I ever invest in a blank check company. It's just spinning the roulette wheel hoping they actually buy some decent business at a good price (two ways to go wrong). They mention ESNR which I passed on as an investment:
His firm [Richardson Patel], along with Gottbetter & Partners, represented homeland security company Electronic Sensor Technology in its $4.1 million raise in conjunction with a reverse merger in February [The stock went from $2.40 to 34 cents]. 'There are a lot of great private companies that are in revenues with significant EBITDA that could be great public companies. But liquidity is the name of the game, and so investors are requiring a simultaneous reverse merger as a condition to getting the money.'
Regarding pink sheets stocks:
Halter, who was involved in the Uni- Pixel reverse merger, downplays the significance of a Pink Sheets listing. All APO companies intend to list on the Nasdaq or AMEX, he says, and Pink Sheet companies first must go through the process to become a reporting company. 'In all instances, it's a company's fundamentals that determine whether it qualifies for a listing, and all these companies qualify going in,' he says. 'Investors wouldn't put their money in unless the companies qualified and planned to list.'
A lot can go wrong on the road to being a reporting company. Passing on FPGR as an investment was tough, but I just couldn't invest in them. Great results are only great if they're real.
To date this year, the largest concurrent reverse merger and PIPE occurred in June, when the cutlery, appliance and gadget icon Ronco Corp. issued some $13.3 million shares of Series A convertible preferred stock to raise $50 million and merged with Fi-Tek VII.
I saw that one and the company claimed to have no operations. It must have been the shell company, although it had the Ronco name in the financials. This more recent 8-K looks better, although it's losing money horribly, tons of inventory, crappy cash flow, etc.

World Capital Market seems to be a big player in Chinese reverse mergers. They handled PetroChina which Buffett invested in. They also handled GBLP (selling at full price, I'd say).

I missed an interesting conference on reverse mergers. $895

In this article in 2004, Tim (not Charles) Keating of Keating Investments LLC says "There is a slew of Chinese companies lining up trying to go public in the U.S."
...the downside, it also can mean little exposure to the investment community. A company can get forgotten among more than 3,200 Over the Counter Bulletin Board (OTCBB) stocks and more than 4,000 stocks on the "pink sheets,"
The article talks about Sorel which I covered earlier (calling it Sorel incorrectly)
SORL has a market cap of $80 million. It had $33 million in sales last year and expects $46 million this year. Keating and its Chinese partner charged it $400,000 in fees and also got 4.5 percent of the newly merged company. The money for the shell, Enchanted Village Inc., came from Keating Reverse Merger Fund LLC, which was formed to invest in shells and also in private companies planning to reverse merge into the shells.
This one was priced about right so I passed. They also talk about Catalina lighting fixtures which I looked at years ago (pass, along with JUNO lighting fixtures which has a funny story related to the Juno ISP company).

This PDF file has some good background material.

The Wall Street Journal had an article in June about reverse mergers.

Excluding deals with Pink Sheet companies, there have been 55 reverse mergers so far this year compared with 89 for all of 2004, according to the Reverse Merger Report, a trade publication. This year's deals include private China-based businesses, fledgling biotechnology companies and software companies.

Compare that to the IPO market, which has seen 83 issues this year -- well off the 251 of 2004, according to Thomson Financial.

The article goes on about "There are pitfalls with reverse mergers, but they have become a lot more legitimate and popular," says David Feldman, managing partner of New York law firm Feldman Weinstein LLP. That website has links to other items by David Feldman.
Cyberkinetics Neurotechnology Systems Inc. went public last October. And no initial public offering, for that matter. Instead, the Foxborough, Massachusetts, medical-device company merged with an existing shell company: Vancouver, Canada-based Trafalgar Ventures Inc, registered in Nevada in 2002 for the purpose of mining copper, nickel, and platinum.

Cyberkinetics, which develops interfaces between computers and the human brain, is widely regarded as a well-run, respected young company, even if its combination with Trafalgar could have given some investors pause—or shivers. (Trafalgar’s original Securities and Exchange Commission filing noted that “to date, we have not conducted any exploration activities.”) But Cyberkinetics is far from alone in choosing a “reverse merger” into a shell as its way of taking itself public. In January, Worcester, Massachusetts, biotech firm Advanced Cell Technology Inc. merged with Two Moon Kachinas Corp., a four-year old Utah firm created to sell wooden Hopi Indian statues over the Internet. (Like Cyberkinetics, ACT kept its old name after the merger.)
There's a lot of fraud going on, but everything I've read indicates the fraud occurs in the shell company itself rather than the merged company well after the merge has settled. Also the fraud is more typically perpetrated against the merging business by the owners of the shell.

Some businesses don't realize that they need to file SEC statements.

Darren Ofsink
seems to have some extensive experience in the field. He gave a presentation at the recent PIPEs conference (private investment in public entity) and recently worked with Brightstar.
Darren Ofsink’s legal experience includes assisting a variety of Chinese companies to become public through reverse merger transactions. Learn about the recent “SAFE Circulars” and hear first-hand accounts of financial and regulatory issues that impact investing in Chinese companies and bringing these companies public in the U.S.

The Statue of Liberty shouts with silent lips, "Ancient kingdoms, keep your wealthy leaders! Keep your corrupt government officials! Send to me your ordinary people. Send to me your working people. Send to me people who want to live in a world where they own the things they create and a world where they can create what they want and a world where they can do what they want. Those people without fortune in your kingdom, send them to me. I lift my lamp to show them the way."
Americans created America. People can improve their government.

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