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Vicky Nolan

I-Gaming Companies Do it Backwards

19 May 2000

Looking for capital in all the wrong places? Obtaining financial resources to fund improvements or growth can be troublesome. Perhaps it's time to consider going public. Admittedly, it's not an easy step to take, and deciding how to accomplish it is equally difficult. The first assessment to make is whether to go the route of an initial public offering or via a reverse merger. For interactive gaming companies, the trend has been to get there via reverse merger.

Both options have their advantages and disadvantages. The IPO process requires a general underwriter and can take six to nine months to accomplish. On the good side, the process can enable you to raise $3-4 million in capital. On the down side, should the stock market dip during the IPO process, the underwriter may refuse to continue the process. (This is what happened to Lasseters, the online casino operator in Australia's Northern Territory. The company's underwriter bailed out when the Nasdaq recently nose dived, but company officials are still working on the IPO, which could occur just a little later than originally expected.)

The underwriter usually agrees to raise a certain amount of money, so companies are virtually guaranteed to raise the amount of capital needed, but the guarantee comes with a hefty price tag. If you want to raise $10 million through an IPO, for example, your company is likely to receive only $7 million while the rest pays for the underwriter's service. Less commonly, some underwriters will perform a "best effort," instead of guaranteeing to sell a pre-determined amount, although this method is sometimes unsuccessful because investors are left wondering why the underwriter is unwilling to guarantee that enough money can be raised.

Nearly 100 publicly listed companies are either directly or indirectly related to the online gaming industry and most of them went public through a reverse merger. (Most of the exceptions to this tendency are Australian companies. Seven of them are currently in the process of floating or have just gone public: Canbet Ltd., MyCasino, Lasseters, Access Gaming Systems, Gocorp Ltd.,, and Go Bet Ltd.)

To accomplish a reverse merger--the acquiring of a corporate shell--the shareholders of a private company must purchase at least 90 percent of a public company and then take over its management. The process is often much quicker and easier than the IPO, but there are two drawbacks: First, a reverse merger won't bring an immediate and large influx of cash into the company's coffers; typically only $500,000 to $1 million is raised in this way. Additionally, a stigma is often attached to the corporate shell route. No matter the circumstances, some investors perceive companies as using a reverse merge to hide something. Plus, reverse mergers don't have underwriters to attract more investors and ease the path to listing. Instead, companies undergoing reverse mergers, when looking for additional capital, need to find sophisticated investors willing to take a chance on them.

Beyond the apprehension reverse mergers strike in many investors, Net betting companies have to deal with the image of being associated with an activity that is looked upon in many places as being shady. For that reason, companies looking for Nasdaq-bound shells might want to look elsewhere. Despite the attractiveness of the Nasdaq, particularly for tech firms, other markets may be more suitable for I-gaming companies. For example, during last week's Global Interactive Gaming Summit and Expo in Montreal, U.K. gaming executive Ben Shaw of Zetters Group told attendees that the U.K. financial market views gaming companies favorably--so favorably, in fact, that Shaw recommended that any gaming company considering a reverse merger should search in his neck of the woods for a corporate shell.

Before making that decision, however, you might want to learn from others who've chosen the reverse merger route. We asked executives from a few I-gaming companies to share with our readers some of the benefits and/or pitfalls they've encountered on this path. Here's what we learned:

CryptoLogic of Toronto accomplished several goals with its reverse merger. "As an Internet start up, listing on the CDN (Canadian Dealer Network) enabled us to gain access to the capital markets and apply a public market/valuation for our shares," Nancy Chan-Palmateer, company communications director said. "As a software company, we could also offer stock options as an incentive to retain and attract employees." The company is now listed on the Toronto Stock Exchange as well as the Nasdaq.

Chartwell Technology is listed on the Canadian Venture Exchange and is working on a listing in the U.S. The company's reverse merger gave it income-generating potential. In conjunction with the reverse merger, a private placement was issued offering $500,000 in 10 percent convertible debentures and 250,000 warrants exercisable at $1 per share for the next two years. Another private placement of 500,000 special warrants was announced in 1999. At that time, the company issued the warrants at $2.00 each, convertible into one common share and one warrant to purchase a common share exercisable at $2.50 per share until May 26, 2000.

Starnet Communications International of Antigua, according to Rob Gracen of the company's investor relations department, benefited from its quick listing, which was parlayed into greater financing opportunities when the company applied for the Nasdaq. The plan was sidetracked, however, when the company's offices were raided by the RCMP last summer.

dot com Entertainment Group CEO Scott White points out that one of the most important steps in acquiring a corporate shell is performing due diligence on the company being purchased. The better your research is before the process, says White, the less likely you are to find any skeletons in its corporate closet. An unknown problem could really delay the reverse merger and may even cost you extra money.

Tony Schor, president of Investor Awareness, echoes White's advice, and added that companies should also learn about the shareholders. Disgruntled shareholders, he points out, could put a damper on acquiring the corporate shell, wasting the acquiring company's time and money.

Schor also advises contacting financial or investment consulting firms for help in finding a good corporate shell. (Admittedly, you might find one on your own, but these firms frequently have the resources for finding a "clean" company, one that doesn't carry risky baggage.)

Another concern regards the kind of support you'll have once you accomplish the reverse merger. Here again, Schor says a consultant could help you in the after-market. Once you've gone public, someone needs to maintain the stock and help it retain its value. A consultant can perform the work necessary to keep your stock looking good.

While a reverse merger is not a guarantee for financial success, many companies have used it as the basis of raising capital. Additionally, as CryptoLogic found, companies use their public statuses to attract not only new clients, but also the necessary staffing for their plans. As always, before embarking on such a venture, you need to do some research. Ill-conceived plans can drain your company's resources and lead to costly mistakes.

I-Gaming Companies Do it Backwards is republished from
Vicky Nolan
Vicky Nolan