June 03, 2011
IPO "mania" and below-the-radar IPOs
Posted by Usha Rodrigues

As Christine has noted, IPOs are back, and that means fun for corporate law types.  Today's front-page WSJ reads "Groupon to Gauge Limits of IPO Mania."  Facebook, Zynga, and companies I'm not cool enough to have heard about are being floated as IPO candidates, and venture capitalists are salivating over the social network economy, both leading actors and bit-part players.  IPOs are back, baby!

Except that they never really left.  Rather, companies were accessing the public markets while skirting the regulations surrounding going public, by way of "reverse mergers."  With a reverse merger, an already-public shell corporation acquires a public company.  Presto, the once-private company trades publicly--generally over-the-counter, it's true, but publicly.  Chinese companies in particular have used this method to trade in the U.S.   Reverse mergers figure in today's WSJ because the SEC is examining whether audits of these Chinese firms were up to snuff.  According to the article, since February about 40 Chinese firms have acknowledged accounting problems or had trading of their stock suspended for accounting issues. 

Some readers might remember that I've been working on a special flavor of reverse merger, a SPAC. Among other things, it's given me a window into the world of OTC trading and the Pink Sheets--a world of tiny companies that don't usually make it to the paper or to the attention of law professors.  They're not generally mentioned in the financial press, but there have been a healthy number of IPOs in this space.  

I'd argue that we know relatively little about IPOs, but we know even less about this marginal world at the edges of securities law.  More on SPACs, and on what they can teach us, at the end of the summer.  I hope. 

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