I’m really disappointed I wasted one of my limited number of free articles on THIS.
If you don’t want to suffer the same fate, let me summarize for you. Barrie McKenna argues that the OSC is not keeping pace with other world regulators by shutting down reverse takeovers. He blames Sino Forest on lax reverse takeover rules because there are no prospectus requirements. He argues the regulatory burden is shifted to the stock exchanges and, since the TSX is now a for profit organization, they have incentive to list frauds.
Reverse takeovers are of great importance to capital markets, particularly in Canada where we encourage public resource exploration and development (and therefore have a number of shells). Stakeholders of public companies that have initially failed and have little or no remaining operations are left with two options: find a reverse merger candidate (and recapture some value) or de-list and wind up (and lose their investment). Junior resource, high-growth or smaller companies seek shells often because they simply can’t afford the regulatory process of a direct initial offering.
Reverse takeovers are so critical to Canadian capital markets that many years ago the regulators collectively created and approved the Canadian Capital Pool (CPC) program. This is a program that permits a group of individuals to create and list a public company that has no operations at all – it is a clean shell. The only purpose of the CPC is to find a qualifying transaction (a reverse merger candidate). So, in Canada, we actually promote reverse mergers. HERE is an analysis we prepared on CPCs last year.
The premise of Mr. McKenna’s article is flawed. There are plenty of gatekeeper requirements at the time of the reverse merger and after. The most important is that the shareholders of the public shell approved the merger. To suggest a new prospectus will stop potential frauds is simply out of touch with reality and ignores the very difficult issues related to emerging market issuers.
Posted by Scott Sinclair, Range Corporate Advisors
Range Corporate Advisors provides multidisciplinary solutions to medium and small business requiring transitional, transactional or management assistance.