In today’s Calgary Herald, the newspaper reports a Calgary based company uses a financial trick to raise capital without issuing an Initial Public Offering (IPO).
The link to the article is here.
I intent to comment not on this specific deal, but the practice of reverse takeover.
Reverse takeover comes with different names such as “reverse merger”. The practice is better known as “back-door registration” in the financial world. The concept is fairly simple: a private equity firm takes over a public listed “shell” company. There is nothing groundbreaking on the surface, but careful examination of why the practice is widely exercised reviews some troubling questions. Again, I’m not commenting on this deal specifically.
Why back-door registration? Because it is a cheap way to raise capital. First, the private equity firm which initiates the reverse-merger benefits greatly from avoid paying hefty underwriting fees to investment banks. Second, the private firm involved does not have to disclose its financial sources fully. It could cook up its books in his home country with less stringent accounting standards and business laws to quickly snap up legitimate assets to strengthen their position, making illegitimate firms become legitimate overnight avoiding the often truth reviewing IPO process.
In 2009, one single case took the spotlight. Chinese MediaExpress tried to reverse-merged its way onto NASDAQ. During the preliminary listing process, its appointed auditing firm Deloitte, quit after it learned many of the private firm’s sales were manufactured and contracts were untraceable.
Unless more stringent auditing standards are applied to close the loopholes, many small private equity firms will try to crash the back-doors.
