OBTAINING CAPITAL FROM THE PUBLIC MARKET IN THE UNITED STATES

By Charles Hecht[i]

Access to the United States public capital markets has been critical to the recent growth of many Chinese companies.  The U.S. markets are still the deepest and instill the most confidence in investors throughout the world.  There are three avenues for obtaining access to this type of capital:

             1.         an initial public offering (“IPO”);

             2.         purchase of an existing public company, often through a reverse merger; and

             3.         formation and underwriting of a Special Purpose Acquisition Company (“SPAC”).

An IPO and a reverse merger require certified financial statements prepared in accordance with U.S. and SEC accounting rules. We work with a number of accounting firms that do this type of work who have offices in China.  The requirements for the type and periods covered by these financial statements vary depending on the type of filing with the SEC, the particular financial schedule involved, the length of time the company has been in business, the size of the company, etc.

There are many things a Chinese company should do to put itself in a position to obtain this type of capital.  Once the preliminary work has been completed, the next step for an IPO is to obtain an underwriter to sell your stock.  For a reverse merger the next step is to find a suitable merger partner.  On the closing of the IPO you obtain cash equity.  On the closing of the reverse merger you do not receive any capital, unless there is a pre-arranged financing with a PIPE investment banker.  Once your stock is trading, that is used as a basis to raise more capital.

A SPAC requires an experienced management team that is in a position to obtain an underwriter for a public offering to raise a pool of money to make an acquisition within 2 years of the closing of the IPO for the SPAC.  There are certain underwriters who specialize in SPACs.  The underwriter will require that management invest its own money for up to 3% of the full IPO.  If the shareholders do not approve of an acquisition in two years, some of this investment is at risk.  Statistically, SPACs are more popular when the traditional IPOs are not as readily available and the U.S. stock market is not doing well.  The reason is that most of the public investors in SPACs are hedge funds or private equity firms, and this is considered a good way of obtaining a small return until an acquisition acceptable to the public investors is completed.  Although the failure to timely approve a SPAC acquisition is a major risk, over 95% of the acquisitions are approved.

Going public can be a very rewarding experience for a Chinese company and its management.  The procedures for all three are quite complex, detailed and require close cooperation and trust between the officers of the company, Chinese counsel and special U.S. counsel retained for the project.  We look forward to working with Bright & Right to help Chinese companies gain access to the U.S. capital markets.

--------------------------------------------------------------------------------

[i] Charles Hecht is the principal of Hecht & Associates, P.C., part of the international network of law firm associated with BRIGHT & RIGHT.  He was formerly with the U.S. Securities and Exchange Commission.  His firm has specialized in this area since 1971.  The firm website is www.securitiescounselors.com.  Mr. Hecht travels to Beijing often and has an office/home in the Chaoyang district, Beijing, China.