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Reverse TakeoversPurchasing a Shell

Grand Avenue Capital Partners LLC

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Reverse Mergers

Reasons for increased activity in reverse mergers: Alternative strategy for going public Greater access to capital Greater valuations in raising capital Sarbanes-Oxley Chinese Companies

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Greater Access to CapitalGreater Valuation in Raising Capital

Premium for publicly-traded companies Generally 50% to 100% For early stage/emerging growth companies

can be much higher

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Greater Access to Capital

Capital Markets Today

Fewer deals and lower valuations in venture capital, private equity, M + A transactions

M & A activity Turmoil in credit markets

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Funding Gap solution for Emerging Growth Companies

For Companies Revenues from $0 to $100 million Limited history of earnings High growth potential Not satisfied with valuations in private equity and

M & A markets. Need less than $80 million in an IPO. Chinese companies seeking to raise capital in the

US.

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Private Investments in Public EntityMajor Capital Source forSmall Public Companies

PIPEs Private placement/commitment to

register shares Faster, easier than IPO or secondary

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Major Capital Source forSmall Public Companies

Highly flexible Negotiate protections for investors Can be dangerous for issuers if not

structured properly Resets Floating Convertibles Toxic Convertibles “Death Spirals”

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Advantages of Reverse Takeovers

Liquidity for prior investors Equity incentives for key employees Use of equity in making acquisitions Industry roll-ups and consolidations Arbitrage between cost of acquiring private

companies and valuation of raising capital for public company

Faster than IPO or direct registration

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History of the Shell RTO

Post - 1960’s Operating companies Blank check public offerings 1992 – SEC Rule 419

Reduced supply of shells Started to clean-up the shell game

The Private Shell Strategy

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History of the Shell RTO

1999 Bulletin Board requires SEC reporting NASD imposes unwritten requirements for Bulletin

Board trading Wulf and Worm letters NASD Notice to Members 00-49 NASD investigates some Bulletin Board applicants

Today non-BB shells have risks of not getting on BB without SB-2

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Shell Market Today

Large demand for Shells Much smaller supply of good shells, higher

prices Many private companies taking risks with non-

Bulletin Board or “unclean” shells

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Where Do Shells Come From?

Previous operating companies 419 shells “Manufactured shells”

Formed as a “blank check” and obtained shareholders through public offering, private offering or “gifting” shares

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How to Find a Shell

Shell websites Shell brokers Shell owners

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Purchasing a Shell

“Purchasing” a shell v. doing a reverse merger Most owners of clean Bulletin Board shells are

“deal driven” They are not “selling” a shell

Non-trading shells and “stalking horse” shells are sometimes for sale

Non-clean shells are for sale

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Reverse Merger Basic Terms

Cash and Equity Amount of cash and equity depends on perceived value of

private company Selling the value of the private company is important

Amount of cash also goes up if private company wants more equity

High percentage and low percentage deals How much equity How much float

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Action Plan for RTO Determine whether Reverse Takeover is

best course Consider disadvantages of going public Consider alternatives to RTO

Initial public trading through SB-2 4 to 6 months

Can the private company do a RTO Too many shareholders Is private company prepared to go public

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Action Plan for RTO Prepare Private Company

Enhance value Prepare “pitch sheet” and business plan

Get prepared to go public Complete management team Retain attorneys Retain auditors Retain advisors for RTO going public

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Action Plan for RTO

Corporate clean-up Disclosures Contracts Disputes Capital Structure Balance Sheet

Retain IR (investor relations) firm

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Action Plan for RTO Determine type of RTO terms private

company wants High percentage Low percentage Cash v. equity

Be prepared to move fast Letter of Intent Deposit Due diligence team in place

Be prepared to be public within weeks

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Negotiating the RTO

Initial contacts Initial due diligence Letter of intent Deposit Definitive agreement

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Negotiating the RTO

Complete due diligence Close Change Board of Directors Change Name New CUSIP/Symbol File 8-K Complete audit of private company File 8-K/A with audited financial statements

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Initial Contacts with Shell Owner/Broker and Initial Due Diligence

Do they control this shell What terms do they want

Cash/equity/deposits

Background of shell owners/brokers What are their time requirements

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Initial Contacts with Shell Owner/Broker and Initial Due Diligence

Initial due diligence Due diligence package from shell Review SEC filings Trading status

BB Pink sheets Non-trading NASDAQ AMEX

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Initial Contacts with Shell Owner/Broker and Initial Due Diligence

SEC reporting status Reporting/non-reporting Late or delinquent filings 12(g) or 15(d)

Percent of stock/float available

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Initial Contacts with Shell Owner/Broker and Initial Due Diligence

Regulatory Background How long trading How long reporting How start trading

Public offering Manufactured Stalking horse Bankruptcy

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Initial Due Diligence

Liabilities from past How long dormant Nature of operations Possible SEC, NASD problems

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Initial Due Diligence

Capital Structure Number of shares outstanding Warrants, options, convertibles Number of shares authorized Number of shares in float Number of shareholders Number of shareholders in float

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Initial Due Diligence

Ownership/Control History Multiple prior owners/control persons Background of prior owners/control persons Prior RTOs

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Terms of RTO

Merger Reverse triangular merger Exchange offer Cash for control Cash for float

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Terms of RTO

Equity exchange ratio Hold back, scheduling agreements Assets/liabilities Representation and warranties Investment capital at closing of RTO

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SEC Reporting Requirements Current rules

Form 8-K within 4 business days Terms of RTO agreement Brief description of company ID of new control persons

Amended 8-K within 71 days after 8-K Audited financial statements

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SEC Reporting Requirements

Proposed Rules Form 8-K within 4 business days with Form

10 level of disclosures including audited financial statements

Minimum requirements More extensive disclosures

recommended

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Disclosure and Marketing Plan

Investor Relations (IR) Firms Budget for IR Importance of credibility, meeting

expectations

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Major Reasons for Failure

Failure to protect against illegal and abusive practices after the reverse merger

Failure to adequately conduct due diligence Poor structuring of finished public company Failure to adequately prepare to be publicly

traded

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Major Reasons for Failure,

Failure to prepare and execute plan for managing the market

Failure to prepare and execute disclosure program

Poor selection of professionals and advisors