IPO. Raising foreign investment by taking a company to the stock market through a reverse takeover

A reverse takeover gives a private company an opportunity to obtain a public corporate structure faster and prepare for raising capital. The economic meaning of the transaction is to combine an operating business with an existing public issuer and then develop the value of its shares. For the owner, the key tasks are to select a suitable company, agree the share-exchange structure and prepare a financing programme after the transaction.

Large companies have long appreciated the advantages of entering Western stock markets and most often do this in the standard, long and expensive way, starting with an ADR Level III issue. This method is expensive and takes a long time, so it is often unavailable to companies with small and medium capitalisation, or unsuitable for other reasons. TAXC Limited offers small and medium-sized companies a faster and less expensive programme for raising foreign investment — entering a Western stock market through a “reverse takeover” of your company by an existing Western publicly traded shell company. Formally, you sell the whole business to a Western investor, which then raises additional financing for it.

Using international business contacts, TAXC Limited supports the acquisition for the client company of such a shell corporation — a European or American company that previously entered a stock exchange but later stopped its main activity, sold assets to cover liabilities and suspended commercial activity. In some cases, it is possible to register a new European joint-stock company that is admitted to a stock exchange, receives quotations and then acquires assets abroad and carries out an additional share issue.

If a ready-made company is considered, it is usually a public joint-stock company without debts or litigation, which at the same time has not lost its place on an electronic exchange and may remain in such a “dormant” state for several months on NASDAQ or LSE. Its shares remain registered, have official quotations (close to zero because it no longer has assets or turnover) and can theoretically be bought and sold by the public. The acquisition of such a company gives the owners of a foreign business a fast and inexpensive entry to the stock market.

If European countries are considered, each of them has its own stock exchange, and some have several exchanges. If an IPO by reverse takeover is considered where it is necessary to create the image of a public European company (in practice, shares of the additional issue are bought using the funds of the existing asset owners and almost 100% of the shares are brought to the market), then, for example, the Swiss exchange in Bern or Zurich may be an optimal option. You can obtain the full list of European exchanges at this link (list of stock exchanges in Europe).

Finding a company in the EU whose shares are quoted on one of the European exchanges will be much easier than finding a company directly on LSE, NYSE or NASDAQ. An IPO on LSE, NYSE or NASDAQ is recommended if you have really decided to raise investors’ funds and are ready to give up part of the rights to control and manage your business in exchange for investment.

Entry to AIM will certainly be simpler, because LSE positions it as an alternative market for small and developing businesses — but consider how much you want to be in this group. A reverse takeover may be a simpler method.

The essence of raising foreign investment by reverse takeover:

A European public shell company purchased by domestic owners acquires a Ukrainian or Eastern European business in exchange for 90%–95% of its shares. In practice, the owners of the business being brought to a Western exchange transfer control over it to a public joint-stock company that is 90%–95% owned by the same owners as beneficiaries. Another 2%–5% of the former public shell company goes to its original shareholders, who support the liquidity of the company shares at the beginning of trading, while the remaining 3%–7% is transferred to TAXC Limited and the organising bank for carrying out the programme and, most importantly, for subsequent promotion of the business brought to the Western market.

The domestic business thus becomes a holding structure with a head European publicly traded company controlled by the owners of the business and an operating branch (the business itself) continuing to operate in its own country. The financial statements of this structure are consolidated, so the head company (the former public shell company) shows in its financial statements the assets, turnover, profits and other data of its Ukrainian subsidiary and changes from an empty shell into a fully operating company. Accordingly, its shares acquire economic substance and value, often much higher than the same business would receive on the domestic stock market.

Advantages of raising foreign investment by reverse takeover:

• Higher company capitalisation. The capitalisation that a company can achieve on the American or European securities market may be 3–5 times higher than the value that could be achieved in the countries of the former USSR. In addition to growth in capitalisation from the company’s operating results, an additional factor increasing its value is the ability of a European public company to raise Western equity financing quickly and efficiently, as well as inexpensive short-term and long-term debt financing.
• Access to foreign investment. Entry to the European stock market makes it possible to create an efficient and relatively low-cost mechanism for raising long-term financing for large investment projects of the company.
• Higher liquidity. As a result of TAXC Limited distributing information about the company and stimulating investor interest and demand for its shares, the company shareholders can gain the opportunity to sell shareholdings of any size quickly and freely on the market, including relatively small holdings. As such sales can be made on the basis of growing company capitalisation, shareholders gain an opportunity to receive financial resources in the West without substantially diluting their control over the company.
• Economic security. The status of a European public company moves domestic assets, operations and company economic-security issues to an international level. Unjustified claims against the company may be more difficult because it has dispersed American and other Western shareholders, who at the same time do not influence management of the company or interfere with corporate control.

Requirements for a company raising foreign investment

Requirements for a company using a reverse takeover are less strict than for a standard IPO: assets and/or annual turnover may be from €3–€10 million, the business may only be reaching break-even, and an audit may cover only two years. If information for the information memorandum is provided on time and the audit is carried out promptly, the reverse takeover process may be completed in 3–4 months. Depending on the size and structural complexity of the client company, the total programme cost ranges from €300,000 to €550,000, including the cost of the information memorandum and audit of the client company, as well as legal due diligence and acquisition of the shell company.

The cost of maintaining a public company in Europe or the USA is €120,000–€150,000 per year. The cost of the company itself depends on the current state of its assets, market position and exchange quotations and is discussed individually in each case.

Result

An additional off-exchange share issue of a company “Europeanised” in this way can often become possible even before it reaches full liquidity. Sometimes initial financing takes place during the reverse takeover itself, when cash balances in bank accounts of some shell corporations (sometimes amounting to millions of dollars) are exchanged for an additional shareholding going to the original Western shareholders. This can immediately more than cover all the costs of the business for carrying out the reverse takeover programme. However, full use of all advantages of the programme is still connected with growth in stock-market turnover of the shares of the business brought to the Western stock market.

As the newly publicly traded company begins, through the work of TAXC Limited, to attract the interest of public investors by actively communicating information about itself — through press conferences, meetings with potential investors and market makers, press releases, media materials, official reporting to the Securities Commission and analytical reviews prepared by TAXC Limited experts — its shares begin to trade more actively and become liquid. At a certain point TAXC Limited organises an additional issue of its shares — in substance, an IPO — placing them on the American and European public market (or as a private placement in the USA or Europe) and thereby raising the required investment capital for the client company. It is important that this financing is not necessarily one-off and may be repeated through a series of additional exchange and off-exchange issues using different financial instruments and mechanisms.

After establishing itself on the American stock market, building a “credit history” there and increasing the liquidity of its shares, a domestic company receives a mechanism for attracting almost unlimited foreign investment resources, provided that the funds received from each share issue are used efficiently and improve its operating and financial results.

Advantages of a reverse IPO

The first advantage is time, because you do not need to wait two or three years or adjust performance indicators. You buy a company that is already quoted on an exchange and simply organises an additional issue — this gives direct entry to the exchange. The other question is who will buy the additional issue, but this is more a question for the business owners because the market objectively evaluates the risks and advantages of each offer. Nevertheless, you receive a chance to access a source of capital that is almost unlimited by the standards of a local business.

First of all, this means access to very large investment resources, a higher valuation of company shares than on local stock markets and liquidity that cannot be achieved on a local market. For example, the capitalisation of the NASDAQ electronic exchange alone was stated at €2.5 trillion, while in 1995–2003 the total volume of initial public offerings (IPOs) there exceeded €220 billion. The average ratio of NASDAQ company capitalisation to annual turnover and own funds, even after exchange quotations fell by more than three times over the preceding three years, was stated at 2.0 and 3.0 respectively, which was 2–3 times higher than company valuations, for example, on Eastern European stock markets. Daily trading turnover on NASDAQ was stated at about €23 billion (1.5 billion shares), or about €4.7 million per day on average for each of the 4,900 companies traded on the exchange.

Assistance in raising foreign investment

Using its network of business contacts, TAXC Limited supports the acquisition of a public shell company that meets the client’s requirements; conducts negotiations with its shareholders and management to agree the transaction terms; and engages qualified lawyers and accountants to analyse the financial and business activity of the shell company. If necessary, it is possible to acquire European companies with registration years starting from 1930 for subsequent registration or acquisition, for example on behalf of a Swiss company, of a public shell company quoted on an exchange that will carry out an additional share issue.

TAXC Limited organises final completion of the acquisition of the public shell company and filing of all required forms with the Securities Commission, as well as full subsequent support of the activity.

Alternative to an IPO. Bank investment funds. Raising investment through an investment fund opened with a bank in Switzerland or Luxembourg.

TAXC Limited supports raising capital using alternative business-financing instruments. One of the fastest methods, providing almost 100% confidentiality of ownership and not requiring transfer of management rights, is opening an investment fund with a bank in Switzerland, Luxembourg or another European country. More about bank investment funds in Switzerland and Europe.