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19 Jan Alternative Public Offerings: Combining Private Placements with Reverse Mergers

An Alternative Public Offering (APO) is the combination of a reverse merger with a simultaneous Private Investment of Public Equity (PIPE). It allows companies an alternative to the most well-known type of public offering–the Initial Public Offering (IPO). The two aspects of an APO– the PIPE and the reverse merger–combine together to create a public company with no liabilities and no real assets, other than the PIPE cash on the balance sheet. This cash is typically used for making a strategic investment within the public vehicle that is eventually combined with a privately-held business. In an APO, a simultaneous PIPE occurs and unregistered and restricted stock is sold to private, accredited investors (the full weight of the JOBS Act may change this in the future, however). In most cases institutional investors are tapped by the underwriting investment bank help to complete the private placement and complete the capital raise for the APO.

APO Process

In true fashion of a typical reverse merger and unlike its sister public offering, the IPO, an APO can occur quite rapidly once the shell has been created and the financing obtained through the PIPE. When due diligence on both sides has been performed an 8K will be filed with the SEC for disclosure. The PIPE shares will then be registered in a separate registration statement with the SEC and then the PIPE will be released from escrow. Once this occurs, an announcement of the deal is typically made and the stock begins trading.

If the funding is ready, an APO can close within a month or two. Similar to an IPO, an APO has the same disclosure and reporting requirements and roughly four months after the official completion of the deal, the company should receive clear the SEC for effective trading. This is typically when the company obtains a listing with the stock exchange which can take a few weeks. This is when investor relations really gets kicked-off and stock promotion typically begins.

 Benefits of an APO

APOs are great for going public with speed and on a budget. They also offer an interesting alternative to other investments fro traditional sources. In a typical APO, the new public vehicle will receive investment money from accredited and institutional sources. My personal take is that this will change as equity crowdfunding begins to really ramp. The benefit for investors is that an existing market for the stock is created prior to going public, the shares are more liquid if traded on an exchange and the company is well-positioned to raise even more capital through the market. The cash on the balance sheet also allows for investment in some pretty interesting public opportunities that can gain immediate public market accretion if closed.

Unlike an IPO, an APO also does not require massive public disclosures until after the deal closes. This helps protect suppliers, employees and customers from rocking the boat before the deal is consummated. It also helps because the private company can feel out investors sentiment with an APO prior to even making the announcement of going public. This initial gauge of the proverbial temperature is extremely helpful before the company takes on the unknown and potential risk of investor non-interest. In a typical IPO, a company must be dragged through an arduous vetting process through the road show and beauty contest before they know what investors’ sentiments on the deal may be. Alternative offerings, on the other hand, keep things quiet and allow this market “test” before any announcement is made–a huge boon for founders and shareholders.

APOs have a much higher success rate than a typical reverse merger. The reasoning is threefold:

  • They’re properly funded. Typical reverse mergers can be all-too light on the funding side. APOs have a funding component which greatly increases the probability of success.
  • Because of the first point above, APOs often find themselves in better deals with more solid potential and greater upside.
  • Investment bankers in the deal will avoid bad deals and bad players. Essentially, the ibankers in the PIPE portion of the transaction assist as a B.S. filter for terrible companies and ideas. The investment bank also bring research, promotion and additional add-on capital raising through the market.

APOs are also appealing to investment banks because they can often charge similar fees but the time-frame on the deal is much more condensed and the number of investors needed to participate is much smaller.

For the PIPE investors, the benefits can be huge. For one, stock is typically purchased at a discount from the public market valuation. While initially selling stock into the PIPE at a discount may sound unappealing to the founders, it’s a way to get investors excited about an immediate return on their money. An immediate exit is also guaranteed. As soon as the funds move out of PIPE escrow, they hit the public market where immediate liquidity can occur. This immediate liquidity means that the investors can turnover their investment into a new PIPE very quickly and keep receiving a quick return on their investment. Investors are also inclined to invest because of the substantial public disclosure requirements on the financial statements and other 10Q, 8K data (thanks to SOX).

There are a number of creative and most excellent investment opportunities available to a PIPE once it is up and trading. It can be an extremely powerful tool for raising capital and gaining an immediate liquid return on investment.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.