Outlook for the APO market in 2011




FW moderates a discussion on recent trends and future predictions for the alternative public offerings (APOs) market between Amir Heshmatpour at AFH Holding and Advisory, LLC, Joseph Meuse at Belmont Partners, LLC and Adam S. Gottbetter at Gottbetter & Partners, LLP.

FW: How would you describe APO activity over the last 12 months? Is there a strong appetite for these transactions?

Heshmatpour: We are continuing to see strength in IPOs and APOs, especially as the market continues its strong recovery. Since the IPO market remains relatively strong for larger capital procurements, small and mid-cap companies that see the benefit of a public listing are continuing to see alternatives such as APOs.

Gottbetter: The total deal value of APOs doubled and the number of deals increased from Q1 2011 versus Q4 2010; however, the total number of deals decreased from Q1 2010 to Q1 2011 by 15 percent, according to DealFlow Media. APO activity has been impacted by the slowdown in Chinese APOs and preference by some investors for registered directs as opposed to the private placement offerings related to APOs.

Meuse: The APO market continued to grow over the last 12 months, thanks primarily to the fact that companies could only find limited capital availability through more traditional channels such as banks and private equity, and other lending institutions. In addition, in 2010 the market saw a large increase in the number of overseas companies completing an APO, as investors were willing to take on additional risk and sought to place their capital in emerging markets such as China, Brazil and other countries that have above average macro GDP growth. While overseas companies continue to be a strong undercurrent in the APO sector, by the beginning of this year investors’ risk appetite decreased and they focused their capital more on domestic enterprises.

FW: What benefits can an APO bring to participants?

Gottbetter: APOs provide both much needed capital to private companies as well as liquidity for the shareholders of those companies. Private company shareholders are demanding increased liquidity as evidenced by the tremendous growth of secondary trading platforms for trading stocks of private companies like Second Market. The severe limitation on the availability of IPOs for companies and other liquidity events for private equity will continue to fuel the supply of private companies seeking an APO as an option. Companies like Facebook that have the IPO option can also access the secondary trading platform as shareholders demand liquidity; however, smaller companies do not have that luxury which is why they pursue APOs.

Meuse: An APO transaction has many benefits. First, it allows companies that do not normally qualify for an IPO due to lack of size, to get the same benefits: equity capital and a public listing allowing easier access for future capital raises. Many people say the IPO market is closed to companies below a $500m market cap, where the APO is open to companies with a market cap as low as $10m. Second, the time required to complete an APO is substantially shorter than a traditional IPO, taking six months or less. In addition, where an IPO can be cancelled due to the overall economy at the time, APOs are far less sensitive to macro and global issues, which gives the company a greater chance of the transaction taking place. Lastly, the cost of an APO is significantly less than an IPO. 

Heshmatpour: APOs bring all the benefits of being public, including easier access to capital, growth by acquisition, a path to liquidity for entrepreneurs and investors and the like, as well as using the company’s stock for  currency to pay for M&A activities. The technique has benefits over a traditional IPO because of the speed and low cost of the transaction, including the opportunity for small and mid-cap companies to access the US capital markets.

FW: Could you explain the general mechanics and different types of alternative public offerings? How do their structures set them apart from similar transactions?

Meuse: In general, an APO is defined as a public listing (via an already public shell company) simultaneous with a capital investment (equity) in the company. The use of an already existing public listing shortens the time requirement, and reduces the cost, to complete the going public process, while still giving the investors a public structure to invest in. While there are different ways to structure the investment in an APO transaction (preferred stock, common stock, convertible equity, etc.), the end point is the same – the company sells equity, in some form, at the time of listing. The alternatives would be the traditional IPO, or simply a public listing without capital. 

Heshmatpour: The term ‘APO’ refers to a combination of a reverse merger and IPO blended transaction, between a special purpose vehicle (SPV) and a privately held business. Completion of financing for the company sometimes takes place simultaneously with the closing of the merger and sometimes after the completion of the S1. These transactions are much speedier and less costly than a traditional IPO and bear less market risk than a traditional IPO, since the management agrees to a 12-24 month ‘make good’ provision post funding to achieve financial milestones. 

Gottbetter: Most APOs involve a merger with a publicly traded ‘shell’ company which typically has limited operations; however, there are a number of key differences with various shell companies. There are shells that have a stock symbol and approved for trading on an over-the-counter market and there are some that don’t have a symbol; shells that file reports with the Securities and Exchange Commission and some that don’t; and some that have declared themselves as ‘shells’ and some that are operating companies. These differences are significant and will greatly impact the timing, cost and probability of success of an APO.

FW: What are some of the key procedural requirements involved in executing an APO? What legal considerations need to be addressed throughout the process?

Heshmatpour: For a successful APO offering, some key procedural requirements are: a management team that is honest and capable, along with best of breed auditors, legal team, and advisory team, making sure the company has capable and active board members to meet SOX compliance, a compensation committee, audit committee and compliance committee. Also important is to obtain expert third-party compensation analysis due to ‘say on pay’ provisions and recent requirements under the Dodd-Frank financial reform act, to be totally transparent to Wall Street. Further, having your auditors issue a comfort letter to the underwriters and a 10-B-5 opinion from your legal team assures the accuracy and transparency of your legal and accounting due diligence and reporting process. Finally, make sure that the company meets all requirements of the exchange, whether NASDAQ, AMEX or NYSE.

Meuse: APOs are driven by good accounting and legal. Accounting, especially in a market that hates risk, is the most important. The company is required to provide two to three years of audited financial statements by a qualified auditor. The SEC has recently tightened up the regulation in this area making the audit process more difficult, especially for overseas companies. However, this also provides the market greater confidence in the company and thus more funding opportunities over the long term. As good accounting eliminates risk for investors, so does good legal work. Overseas companies need to comply with the unique laws of their home country, some of which do not allow for overseas ownership – and all companies need to properly structure the investment that comes at the time of listing.

Gottbetter: Procedural requirements include the timing and coordination of the audit of the target company; preparing the offering documents used to market the financing; the merger and related documents prepared by counsel; and obtaining approval from FINRA for the name change and any changes to the public company’s authorised capital. These myriad issues need to be coordinated efficiently so that a Super 8-K, which incorporates all of these issues, can be filed and the APO and financing can close.

FW: What advice would you give on managing the risks in APO transactions? How important is the due diligence process and what areas should be targeted for analysis?

Gottbetter: The saying, ‘guns don’t kill people, people kill people’, is very apropos for APOs. It is critical that a company choose advisers, auditors, lawyers, bankers and vendors (e.g., transfer agents) who are both experienced in completing APOs and are reputable. Just as target companies must check references on the professionals they engage, lawyers and bankers must do due diligence on the target company including background checks on key management of the target company and ‘audit’ like checks on customers and revenue sources relating to the target company’s business.

Heshmatpour: Background checks on the officers and directors, and due diligence is critical in both directions, as with any going public event. Working with best of breed professionals who understand the process and have had significant business experience to examine the operating company and its management, the market size and the growth potential is essential to a successful public listing. Engaging all the professional service providers simultaneously to start the process also allows for collaboration between the professional service providers of all the company’s legal and accounting documentation and information, which will reduce risk in the APO transaction.

Meuse: The risks for both the company and the investor are primarily with the legal and accounting work that is required for the listing. Companies should never be cheap when it comes to hiring legal and accounting professionals. The company must hire Tier 1 auditors and attorneys – otherwise they risk getting to market and finding out that investors have no confidence in what the company is reporting to the SEC. Most private companies are not used to sharing information with the outside world, yet to be successful as a public company they need to be as transparent as possible. 

FW: Are you seeing more APOs executed by emerging market companies? If so, what factors are driving this trend?

Meuse: We continue to see more APOs coming from BRIC countries and other emerging markets. This is due to the fact that in their home country, the financial markets are not as mature and thus a public listing is either impossible or many years away. Because these emerging economies are growing so quickly, and competition is fierce, quickly accessing capital can mean the difference between success and failure. Investors see the opportunity to invest in fast growing companies and many have set up offices in a variety of overseas locations. Since developing a sophisticated, mature market can take decades, and because investors continue to look for new areas to invest in, I expect this trend to continue. 

Heshmatpour: APOs are picking up after a bit of a drop in 2009, which was expected. In 2010, over 200 such transactions were completed and it appears the first quarter of 2011 is also very strong. For the most part, the pickup in the stock market has been a factor. We continue to see APOs coming not only from BRIC countries but from other emerging markets as well.

Gottbetter: The US markets remain the most liquid in the world, and welcome entrepreneurs and companies of all sizes, including those from emerging markets where capital tends to be limited to the largest companies. In addition to China, which has been the source of many deals, companies based in South America are completing APOs in increasing numbers. In addition, US investors are looking for opportunities in attractive sectors regardless of where they might be based.

FW: In your opinion, has there been an increase in regulatory scrutiny of the APO market? If so, what impact could this have on the market?

Heshmatpour: There has been an increase in regulatory scrutiny of the overall market, not just APOs. Such scrutiny has helped the overall US capital markets to be the most precise, accurate and liquid in the world. It allows transparency and makes these companies abide by regulatory scrutiny that is welcomed by investors.

Gottbetter: There have been a number of positive developments over the past several years as regulators have reluctantly acknowledged APOs. There has been an increase in reporting requirements and the timeliness of those disclosures by companies completing APOs; revisions to rules relating to the resale of restricted stock; review of proposed APOs by FINRA; and increased attention to auditors who review target companies. These changes have helped to raise the bar on the types of companies accessing the APO market and to expose questionable transactions more quickly.

Meuse: Since the global meltdown of 2008, almost all areas of the securities market have come under increased scrutiny. The APO market is certainly no different. The goal of the new regulations is to decrease investor risk, which in turn will increase investor confidence. As history shows us, it takes time for the market to adjust to large changes in the regulatory environment, so the market at this point is still in the adjustment phase. That being said, the APO structure is still the most efficient in getting equity capital to growing companies at valuations that are advantageous to both the company and the investor.

FW: What are your predictions for activity on the APO market through 2011?

Gottbetter: We expect the total number of APOs to increase slightly over 2010 as the demand for companies seeking capital and the APO process outstrips available capital. Although the number of China deals will decrease after years of incredible growth, APOs from other emerging markets will offset that loss. Private equity will have to look at APOs as part of the solution addressing the lack of liquidity for private equity investors. This is driven by an IPO market limited to large companies and secondary trading platforms currently focused on large social media companies. The historical bias by regulators favouring large companies will continue to push small companies to consider APOs which provides the self-determination that entrepreneurs typically crave.

Meuse: The APO market will only strengthen as growing companies seek capital that is easier to access and at better valuations than other traditional sources. In addition, as more overseas economies (and their private sector businesses) mature, we will see above average growth in offshore listings. I expect to see not only more companies from the BRIC market, but also from new countries such as Vietnam and Argentina – where there are now a number of mature private enterprises that merit an APO transaction. Lastly, as more companies complete APO listings, the APO market becomes more well known and acceptable.

Heshmatpour: I believe things will stay strong through 2011, although the pre crisis level of IPO and APO activities have not been achieved for 2011 global markets, despite the surging stock market and the overall recovery of the world economy. We believe the second half of 2011 should be stronger than 2010, notwithstanding another unforeseeable crisis.


Amir Heshmatpour is founder and managing director of AFH Holding and Advisory, LLC, an integrated advisory and consulting firm serving US and international clients who seek strategic counsel and sophisticated access to global capital markets. Since founding the company in 2003, he has led AFH through numerous successful transactions both in the United States and China. Mr Heshmatpour was recognised as ‘Businessman of the Year’ by the National Republican Congressional Committee in 2003 and served as Head of the Republican Congressional Business Advisory for the year. Mr Heshmatpour is also a board member of the California Economic Council for Education as well as a board member of Emmaus Medical, Inc. He can be contacted on +1 (310)492 9898 or by email: amir@afhholding.com.

Joseph Meuse is founder and managing partner at Belmont Partners, LLC, a financial services and consulting firm located in Washington DC and Shanghai China. Belmont Partners provides innovative public strategies for small-to-middle cap emerging growth companies seeking alternative access to capital markets through the successful selection and inventory of quality shell public companies. Since its founding in 2004, Belmont has participated in 200 public company transactions, including over 40 with overseas clients. He can be contacted on +1 (703) 831 6000 or by email: jmeuse@belmontpartners.net.

Adam S. Gottbetter is the managing partner of Gottbetter & Partners, LLP, a law firm offering corporate, securities and M&A legal services including supporting the capital needs of public and private companies. Mr Gottbetter specialises in alternative going public structures (APOs) and the GPO in which a company goes public without an underwriter. Since 1993 M. Gottbetter has created a one-stop approach to legal and finance services for public companies. The organisation includes Gottbetter Capital Markets, LLC, a broker-dealer licensed with FINRA, which acts as placement agent for raising capital for its clients. He speaks regularly on the issues related to APOs including the upcoming DealFlow Media Reverse Merger Conference in Los Angeles on June 13, 2011. He can be contacted on +1 (866) 586 4098 or by email: ASG@gottbetter.com.

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Amir Heshmatpour

AFH Holding and Advisory, LLC 


Joseph Meuse

Belmont Partners, LLC


Adam S. Gottbetter

Gottbetter & Partners, LLP

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