Legal Question in Securities Law in California

Convertible LLC Unit To Common Stock For Reverse Merger?

I am looking to do a $20 million dollar placement of LLC Units for a private company.

However, my option is to do it as a convertible LLC where if I ever do a reverse merger, I would want investors to have additional liquidity and be able to convert their LLC shares into common stock. While I know this usually happens with convertible preferred, my deal needs to be structured where investors get 50% of cash flow from private LLC + public float stock.

So my question is:

1. In the actual offering, do I need to have a ''warrant'' description or can I just define that each LLC share is equal to X amount of common stock?

2. If I am selling 100,000 LLC Units, what would be the best conversion in price and liquidity for common--$1.00 per share of $5.00 per share where I would divide the $100,000 LLC Unit to reach the stock--ie 100,000 = 20,000 shares of common or 100,000 shares of common.

3. Do I have to define the description of the common stock Units in the actual offering as well and what is usually the hold back period on selling after a reverse merger/IPO

4. Can investors still retain liquidity on a % basis for the LLC, or do they give it up if they convert to common as I want them to have both,


Asked on 10/08/06, 3:49 pm

1 Answer from Attorneys
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Convertible LLC Unit To Common Stock For Reverse Merger?

Your questions are all excellent, and show a high degree of financial sophistication. However, they tend to call for business advice more than legal opinion, and securities lawyers are reluctant to give business advice unless they are very well acquainted with all aspects of the transactions and the businesses for which the transactions will be done.

Having said that, my lawyer reaction is to prefer structuring deals that anticipate future refinancings, mergers, follow-on offerings, etc. so as not to prejudge the future value of the securities. For one thing, that could be looked at as a forward-looking statement or a prediction or promise. Also, if you are off the mark one way or the other, the deal may fall through or be unfair to either the issuer or the securities holders. For this reason, I'm inclined to favor the warrant idea.

Giving you truly useful advice would require knowing a lot more about the company and the number of investors to be targeted. I assume this is not a startup.

An overarching concern here is that someone who is planning a $20 million offering is looking for deal advice on a BBS. You will preumably need to register these securities, unless you can find an exemption that fits such a large offering, which I doubt. In any event, at some point you are going to need substantial legal representation.

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Answered on 10/09/06, 12:38 pm


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