Alternative Public Offering
Encyclopedia
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 an initial public offering
(IPO) as a means of going public while raising capital.
is a public company that has no assets or liabilities. When the private company and public shell merge together, the combined entity thereafter trades under the previously private company’s name rather than the shell company’s name as it did before.
What differentiates an APO from a reverse merger is the simultaneous PIPE raise. A PIPE is when a publicly traded company sells its stock to investors in a privately negotiated transaction. The stock is normally sold at a discount to current market value and investors are normally acquiring unregistered “restricted
” stock. The typical PIPE investor is an institutional investor such as a hedge fund or mutual fund. PIPEs are usually completed by investment banks who act as “Placement Agent” in the transaction.
(IPO). At the closing of an APO, the public shell and private company sign merger documents to complete the reverse merger; file a Super 8K
with the Securities and Exchange Commission (SEC), which is the required public disclosure of transaction; file a registration statement with the SEC to register the PIPE shares; release PIPE funds from escrow
; and issue a press release announcing the completion of the transaction. The company’s stock now begins trading on the OTCBB, reflecting the new valuation.
A company can close an APO in as little as 30 – 45 days. After the close of an APO, the company is funded and has exactly the same SEC disclosure requirements as an IPO. Approximately 3 to 4 months after the completion of the APO, the company’s registration statement should clear comments and “go effective” with the SEC. When this is accomplished the company can then submit its application to obtain a listing on NASDAQ
, AMEX
, or NYSE
. Listing approval for the exchanges typically takes about one month. At this point analyst research coverage begins and the company focuses on IR efforts
, non-deal roadshow, conferences etc.
At the conclusion of a successful APO transaction, a company has received equity funding and has a base of institutional investors. The company has the sponsorship of an investment bank and is exchange listed with analyst coverage. There is now a true market value for the company and the company is positioned to raise additional capital in PIPE transactions.
The APO model owes much of its success to the involvement of the Investment Bank as the gatekeeper that standalone reverse mergers never had. In a traditional reverse merger, anyone could simply buy a shell and go public whether or not they had sufficient financial performance to justify being a public company. With an APO, the investment bank would not raise capital for a company that it did not believe would be successful in the marketplace. This is why the APO has such a high success rate. The investment bank also brings research, trading and liquidity to the company’s stock after the transaction closes. Investment banks find the APO process appealing because they can receive the same fees and breakage for raising the capital as they do in an IPO in a much condensed period of time and to a significantly smaller number of investors.
PIPE investors are attracted to the APO because they get to buy stock at a negotiated discount to the projected public market value of a company. In addition, because the company completed a reverse merger and is now public, there is a guaranteed exit defined upfront if they wish to get out. After a company completes an APO, potential investors will be inclined to invest in additional PIPE raises for the company because the public company has had SEC disclosures from day one including audited financial statements, Sarbanes-Oxley
, 10Qs, 8Ks, etc. Many tier 1 hedge funds are active investors in APO and many investment banks support the process. There are many tier 2 and tier 3 banks that are active in APO business.
Private investment in public equity
A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors. In the U.S...
(PIPE). It allows companies an alternative to an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
(IPO) as a means of going public while raising capital.
Overview
There are two parts that comprise an APO: the reverse merger and the PIPE. In the reverse merger, the private company becomes public by merging with or being acquired by a public “shell” company. The shell companyShell (corporation)
A shell corporation is a company which serves as a vehicle for business transactions without itself having any significant assets or operations. Shell corporations are not in themselves illegal and have legitimate business purposes. However, they are a main component of the underground economy,...
is a public company that has no assets or liabilities. When the private company and public shell merge together, the combined entity thereafter trades under the previously private company’s name rather than the shell company’s name as it did before.
What differentiates an APO from a reverse merger is the simultaneous PIPE raise. A PIPE is when a publicly traded company sells its stock to investors in a privately negotiated transaction. The stock is normally sold at a discount to current market value and investors are normally acquiring unregistered “restricted
Restricted stock
Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.One type of restricted...
” stock. The typical PIPE investor is an institutional investor such as a hedge fund or mutual fund. PIPEs are usually completed by investment banks who act as “Placement Agent” in the transaction.
Process
An APO is a quick transaction compared to an initial public offeringInitial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
(IPO). At the closing of an APO, the public shell and private company sign merger documents to complete the reverse merger; file a Super 8K
Form 8-K
Form 8-K is a very broad form used to notify investors of any material event that is important to shareholders or the United States Securities and Exchange Commission. This is one of the most common types of forms filed with the SEC...
with the Securities and Exchange Commission (SEC), which is the required public disclosure of transaction; file a registration statement with the SEC to register the PIPE shares; release PIPE funds from escrow
Escrow
An escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...
; and issue a press release announcing the completion of the transaction. The company’s stock now begins trading on the OTCBB, reflecting the new valuation.
A company can close an APO in as little as 30 – 45 days. After the close of an APO, the company is funded and has exactly the same SEC disclosure requirements as an IPO. Approximately 3 to 4 months after the completion of the APO, the company’s registration statement should clear comments and “go effective” with the SEC. When this is accomplished the company can then submit its application to obtain a listing on NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
, AMEX
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...
, or NYSE
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. Listing approval for the exchanges typically takes about one month. At this point analyst research coverage begins and the company focuses on IR efforts
Investor relations
Investor Relations is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a...
, non-deal roadshow, conferences etc.
At the conclusion of a successful APO transaction, a company has received equity funding and has a base of institutional investors. The company has the sponsorship of an investment bank and is exchange listed with analyst coverage. There is now a true market value for the company and the company is positioned to raise additional capital in PIPE transactions.
Benefits
Companies want to become public through an APO for several reasons. The public shell company already has shareholders, so after the APO is complete, the formerly private company typically already meets the shareholder requirements for NASDAQ and AMEX; 400 and 300 respectively. A company that goes public through an IPO must sell its stock to a large number of shareholders in order to meet these requirements necessitating a broad marketing and roadshow process. Unlike an IPO, there is no public disclosure required until the transaction closes. Customers, suppliers, employees, and press are unaware until closing. Therefore, a private company can pursue going public through an APO and understand what kind of investor response and valuation they will receive without having to make the “leap of faith” requirement of an IPO. With an IPO a company must publicly announce its intentions and file with the SEC at the beginning of the process. It is only after clearing comments with the SEC and after going on the roadshow that a company learns what kind of investor response and valuation it will receive.The APO model owes much of its success to the involvement of the Investment Bank as the gatekeeper that standalone reverse mergers never had. In a traditional reverse merger, anyone could simply buy a shell and go public whether or not they had sufficient financial performance to justify being a public company. With an APO, the investment bank would not raise capital for a company that it did not believe would be successful in the marketplace. This is why the APO has such a high success rate. The investment bank also brings research, trading and liquidity to the company’s stock after the transaction closes. Investment banks find the APO process appealing because they can receive the same fees and breakage for raising the capital as they do in an IPO in a much condensed period of time and to a significantly smaller number of investors.
PIPE investors are attracted to the APO because they get to buy stock at a negotiated discount to the projected public market value of a company. In addition, because the company completed a reverse merger and is now public, there is a guaranteed exit defined upfront if they wish to get out. After a company completes an APO, potential investors will be inclined to invest in additional PIPE raises for the company because the public company has had SEC disclosures from day one including audited financial statements, Sarbanes-Oxley
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
, 10Qs, 8Ks, etc. Many tier 1 hedge funds are active investors in APO and many investment banks support the process. There are many tier 2 and tier 3 banks that are active in APO business.