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Kerry Propper, our chief executive officer and a director, and Chardan Capital, LLC, an affiliate of Li Zhang, chairman of our board of directors, have advanced an aggregate of $32,434 to us as of the effective date of the registration statement to cover expenses related to this offering, such as SEC registration fees, Nasdaq Capital Market listing fees, FINRA registration fees and legal and accounting fees and expenses. The loans will be payable without interest on the earlier of September 30, 2008 or the consummation of this offering. We intend to repay these loans from the proceeds of this offering not being placed in trust.
We have agreed to pay a monthly fee of $7,500 to Chardan Capital, LLC, an affiliate of Li Zhang, chairman of our board of directors, for general and administrative services, including but not limited to office space, receptionist, secretarial and general office services. This agreement commences on the date of this prospectus and shall continue until the earliest to occur of: (i) the consummation of a business combination, (ii) February 11, 2011 and (iii) the date on which we cease our corporate existence in accordance with our amended and restated memorandum and articles of association. This arrangement is being agreed to by Chardan Capital, LLC for
our benefit and is not intended to provide Chardan Capital, LLC compensation in lieu of a management fee or other remuneration because it is anticipated that the expenses to be paid by Chardan Capital, LLC will approximate the monthly reimbursement. We believe that such fees are at least as favorable as we could have obtained from an unaffiliated entity. Upon consummation of a business combination or our liquidation, we will cease paying these monthly fees.
We will reimburse our officers and directors, subject to board approval, for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target acquisitions and business combinations. There is no limit on the amount of out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged. Accountable out-of-pocket expenses incurred by our officers and directors will not be repaid out of proceeds held in the trust account until these proceeds are released to us
upon the completion of a business combination, provided there are sufficient funds available for reimbursement after such consummation.
In order to fund our working capital (including expenses in seeking business combinations and, potentially, the costs of our liquidation and dissolution),we will initially have $100,000 outside of the trust account for our use and we will be permitted to draw, as earned, up to $2,900,000 of the cumulative interest earned on the funds held in the trust account, after taxes, at our discretion at anytime following the consummation of this offering. Other than these amounts and as provided for in our administrative services agreement and for the reimbursable out-of-pocket expenses payable to our existing shareholders, officers and directors, no
compensation or fees of any kind, including finders, consulting fees or other similar compensation, will be paid to our existing shareholders, officers or directors who owned our ordinary shares prior to this offering, or to any of their respective affiliates prior to or with respect to a business combination.
Our existing shareholders, officers and directors will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount held outside of the trust account unless the business combination is consummated and there are sufficient funds available for reimbursement after such consummation. The financial interest of such persons could influence their motivation in selecting a target business and thus, there may be a conflict of interest when determining whether a particular business combination is in the shareholders’ best interest.
After the consummation of a business combination, if any, to the extent our management remains as officers of the resulting business, some of our officers and directors may enter into employment agreements, the terms of which shall be negotiated and which we expect to be comparable to employment agreements with other similarly-situated companies. Further, after the consummation of a business combination, if any, to the extent our directors remain as directors of the resulting business, we anticipate that they will receive compensation comparable to directors at other similarly situated companies.
All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including loans by our officers and directors or their respective affiliates, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval by a majority of our disinterested “independent” directors or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into
any such transaction unless our disinterested “independent” directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties.
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DESCRIPTION OF SECURITIES
General
We are a British Virgin Islands company and our affairs are governed by our amended and restated memorandum and articles of association, the Companies Act and the common law of the British Virgin Islands. The following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies Act insofar as they relate to the material terms of our ordinary shares. We have filed copies of our amended and restated memorandum and articles of association as exhibits to our registration statement on Form F-1.
Our amended and restated memorandum and articles of association authorizes the issuance of up to 60,000,000 ordinary shares, par value $0.0001 per share, and 5,000,000 preferred shares, par value $0.0001 per share. Prior to the date of this prospectus, 2,291,666 ordinary shares and 2,291,666 insider warrants will be outstanding, held by our existing shareholders. No preferred shares have been issued.
Units
Each unit consists of one ordinary share and one warrant. Each warrant entitles the holder to purchase one ordinary share. The units will begin trading on or promptly after the date of this prospectus. The ordinary shares and warrants comprising the units will begin separate trading on the 10
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business day following the date of this prospectus. In no event will the ordinary shares and warrants begin to trade separately until we have filed a Form 6-K with the SEC containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file this Form 6-K promptly after the consummation of this offering.
Even if the component parts of the units are broken apart and traded separately, the units will continue to be listed as a separate security, and any security holder of our ordinary shares and warrants may elect to combine them together and trade them as a unit. Shareholders will have the ability to trade our securities as units until such time as the warrants expire or are redeemed. Although we will not distribute copies of the Form 6-K to individual unit holders, the Form 6-K will be available on the SEC’s website after filing. See the section appearing elsewhere in this prospectus entitled “Where You Can Find Additional Information.”
Ordinary Shares
Ordinary shareholders of record are entitled to one vote for each ordinary share held on all matters to be voted on by shareholders. Rights of shareholders may not be altered, except by a resolution of the shareholders requiring two-thirds shareholder approval. In connection with the shareholder vote required to approve any business combination, all of our existing shareholders have agreed to vote the ordinary shares owned by them prior to this offering in the same manner as a majority of the public shareholders who vote at the special or annual meeting called for the purpose of approving a business combination. Our existing shareholders have also
agreed that if they acquire ordinary shares in or following this offering, they will vote such acquired shares in favor of a business combination.
In connection with our requirement to present our initial business combination to our shareholders for their approval, we will only proceed with the business combination if a majority of the ordinary shares voted by the public shareholders are voted in favor of the business combination and public shareholders owning not more than one ordinary share less than 35% of the ordinary shares sold in this offering exercise their redemption rights discussed below. Voting against the business combination alone will not result in redemption of a shareholder’s ordinary shares into $7.89 per ordinary share from the trust account. Such shareholder must have
also exercised its redemption rights described below.
Our board of directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the ordinary shares voted for the election of directors can elect all of the directors. Directors may engage in transactions with us and vote on such transactions, provided the nature of the interest is disclosed.
If we automatically dissolve and liquidate the trust account prior to a business combination, our public shareholders are entitled to share ratably in the trust account, inclusive of any interest not used by us for working capital purposes (net of taxes payable, which taxes, if any, shall be paid from the trust account), and
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any net assets remaining available for distribution to them after payment of liabilities. Our existing shareholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those ordinary shares acquired by them prior to this offering. Additionally, upon a liquidation redemption, the underwriters have agreed to waive any right they may have to the $1,100,000 of deferred underwriting discount and $1,100,000 of deferred non-accountable expense allowance currently being held in the trust account, all of which shall be distributed
to the public shareholders.
Our shareholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally available. In the event of a liquidation, dissolution or winding up of the company after a business combination, our shareholders are entitled, subject to the rights of holders of preferred shares, if any, to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of shares, if any, having preference over the ordinary shares. Our shareholders have no conversion, preemptive or other subscription rights. There are no sinking fund or
redemption provisions applicable to the ordinary shares, except that public shareholders have the right to redeem their ordinary shares for an amount of cash equal to $7.89 per ordinary share from the trust account if they vote against the business combination and request redemption and if the business combination is approved and completed. Public shareholders who redeem their ordinary shares for their share of the trust account still have the right to exercise the warrants that they received as part of the units, provided they continue to hold any such warrants.
Preferred Shares
Our amended and restated memorandum and articles of association authorizes the issuance of 5,000,000 undesignated, or “blank check,” preferred shares with such designation, rights and preferences as may be determined from time to time by our board of directors. No preferred shares are being issued or registered in this offering. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of ordinary shares. However, the underwriting agreement prohibits us,
prior to a business combination, from issuing preferred shares which participate in any manner in the proceeds of the trust account, or which votes as a class with the ordinary shares on a business combination. We may issue some or all of the preferred shares to effect a business combination. In addition, the preferred shares could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any preferred shares, we cannot assure you that we will not do so in the future.
Warrants
Prior to the consummation of this offering, there will be 4,291,666 warrants outstanding representing 2,291,666 insider warrants and 2,000,000 private placement warrants. Each warrant entitles the registered holder to purchase one of our ordinary shares at a price of $5.00 per ordinary share, subject to adjustment as discussed below, at any time commencing on the later of:
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the completion of a business combination; and
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one year from the date of this prospectus.
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Subject to their prior exercise or redemption, or our liquidation, the warrants will expire four years from the date of this prospectus at 5:00 p.m., New York City time.
The warrants will begin separate trading on the 10
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business day following the date of this prospectus. In no event will the warrants begin to trade separately until we have filed a Form 6-K with the Securities and Exchange Commission, or SEC, containing an audited balance sheet reflecting our receipt of the gross proceeds of this offering. We will file this Form 6-K promptly after the consummation of this offering.
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We may redeem the outstanding warrants included in the units sold in this offering and the warrants issued upon exercise of the underwriters’ unit purchase option:
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in whole and not in part,
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at a price of $0.01 per warrant at any time after the warrants become exercisable,
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upon not less than 30 days’ prior written notice of redemption, and
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if, and only if, the last sales price of our ordinary shares equals or exceeds $10.00 per ordinary share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption.
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In addition, we may not redeem the warrants unless the warrants comprising the units sold in this offering and the ordinary shares underlying those warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for the redemption.
The redemption provisions for our warrants have been established at a price which is intended to provide warrant holders a premium to the initial exercise price. There can be no assurance, however, that the price of the ordinary shares will exceed either the trigger price of $10.00 or the warrant exercise price of $5.00 after we call the warrants for redemption.
We have established these criteria to provide warrant holders with a reasonable premium to the initial warrant exercise price as well as a degree of liquidity to cushion against a negative market reaction, if any, to our redemption call.
The warrants will be issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which has been filed as an exhibit to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants.
The exercise price and number of ordinary shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below their exercise price.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of ordinary shares and any voting rights until they exercise their warrants and receive ordinary shares. After the issuance of ordinary shares upon exercise of the warrants, each holder will be entitled to one
vote for each ordinary share held of record on all matters to be voted on by shareholders.
No warrants will be exercisable unless at the time of exercise a prospectus relating to the ordinary shares issuable upon exercise of the warrants is current and the ordinary shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to meet these conditions and use our best efforts to maintain a current prospectus relating to the ordinary shares issuable upon exercise of the warrants until the expiration of the warrants. If we are unable to maintain the effectiveness of such registration statement until the
expiration of the warrants, and therefore are unable to deliver registered ordinary shares, the warrants may become worthless and we will not be required to net-cash settle the warrants. In such a case, the purchasers of units will have paid the full purchase price of the units solely for the ordinary shares underlying such units. Additionally, the market for the warrants may be limited if the prospectus relating to the ordinary shares issuable upon the exercise of the warrants is not current or if the ordinary shares are not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside. In no event will the registered holders of a warrant be entitled to receive a net-cash settlement, ordinary shares, or other consideration in lieu of physical settlement in ordinary shares.
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In the event we elect to form a Foreign Subsidiary in connection with a proposed business combination, the Foreign Subsidiary will assume our obligations under the warrants in the event that we liquidate or merge into the Foreign Subsidiary, as provided in Section 4.5 of our warrant agreement, a form of which is filed as exhibit 4.6 to the registration statement of which this prospectus is a part, and a holder of warrants will have the right, under certain conditions, to exercise the warrant for shares in the Foreign Subsidiary.
Because the warrants sold in our private placement will originally be issued pursuant to an exemption from the registration requirements under the federal securities laws, the holders of such warrants will be able to exercise their warrants even if, at the time of exercise, a prospectus relating to the ordinary shares issuable upon exercise of such warrants is not current. As described above, the holders of the warrants purchased in this offering will not be able to exercise them unless we have a current registration statement covering the ordinary shares issuable upon their exercise.
No fractional ordinary shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in an ordinary share, we will, upon exercise, round up to the nearest whole number the number of ordinary shares to be issued to the warrant holder.
Certain of our officers, directors and initial shareholders have agreed to purchase 2,000,000 warrants from us at a price of $0.50 per warrant, in a private placement totaling $1,000,000, in accordance with Regulation D or Regulation S, as applicable, under the Securities Act of 1933, to be completed prior to the date of this prospectus. Such purchase price was the result of negotiations between our executive officers and the underwriters. The entire proceeds received from the sale of the private placement warrants will be placed in the trust account described in this prospectus. The private placement warrants will be identical to the warrants sold
in this offering but will be non-redeemable and may be exercised on a “cashless” basis at any time after the later to occur of a business combination or one year from the date of this prospectus, in each case if held by their initial holders or their permitted assigns. The holder of private placement warrants will not have any right to any liquidation distributions with respect to the ordinary shares underlying such private placement warrants in the event we fail to consummate a business combination, in which event the private placement warrants will expire worthless.
The price of the warrants has been arbitrarily established by us and the underwriters after giving consideration to numerous factors, including but not limited to, the pricing of units in this offering, the pricing associated with warrants in other blank-check financings in both the public after-market and any pre-offering private placement, and the warrant purchase obligations of managers in similar type transactions. No particular weighting was given to any one aspect of those factors considered. We have not performed any method of valuation of the warrants. As part of the negotiations between us and the officers and directors, the officers and
directors agreed to purchase the warrants directly from us and not in open market transactions. By making a direct investment in us, the amount held in the trust account pending a business combination has been increased.
The private placement warrants will become worthless if we do not consummate a business combination. The personal and financial interests of our affiliates may influence their motivation in identifying and selecting a target business and completing a business combination in a timely manner. Consequently, our officers’ and directors’ discretion in identifying and selecting a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of a particular business combination are appropriate and in our shareholders’ best interest.
Purchase Option
We have agreed to sell to the underwriters, for $100, an option to purchase up to a total of 137,500 units at $8.80 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. For a more complete description of the purchase option, including the registration rights afforded to the holders of such option, see the section appearing elsewhere in this prospectus entitled “Underwriting — Purchase Option.”
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Dividends
We have not paid any cash dividends on our ordinary shares to date and we do not intend to pay cash dividends prior to the completion of a business combination. The payment of cash dividends following consummation of a business combination, if any, will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business
operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future. In addition, our board is not currently contemplating and does not anticipate declaring any share dividends in the foreseeable future, except if we may increase the size of the offering pursuant to Rule 462(b) under the Securities Act, in which case we would likely declare a share dividend to our existing shareholders so that their ownership interest subsequent to the offering will remain at 25%. Further, our ability to declare dividends may be limited to restrictive covenants if we incur any indebtedness.
Changes in Capital
We may from time to time by resolution of our shareholders increase the authorized number of shares by such sum, to be divided into shares of such amount, as the resolution shall prescribe. The new shares shall be subject to the same provisions with reference to the payment of calls, lien, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. We may by resolution:
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consolidate and divide all or any of our unissued authorized shares into shares of larger amount than our existing shares;
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sub-divide our existing shares, or any of them into shares of smaller amount than is fixed by our amended and restated memorandum of association, subject nevertheless to the provisions of the BVI Business Companies Act; or
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cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person.
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Certain Reporting Obligations
As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934, as amended, prescribing the furnishing and content of proxy statements. Because of this exemption, at the time we seek approval from our shareholders of our initial business combination, we will not be required to file with the SEC preliminary proxy solicitation materials regarding our business combination, but rather will prepare and deliver proxy solicitation materials in accordance with: (i) British Virgin Islands law, which contains no specific proxy laws, rules or regulations, and (ii) the relevant provisions of our amended and restated
memorandum and articles of association, and, as required, file such materials with the SEC after mailing. Although we anticipate that such materials will contain many of the same disclosures as proxy materials prepared in conformance with U.S. proxy rules, investors are cautioned that such materials will not have been reviewed by the SEC and may not have all of the material disclosures required under U.S. proxy rules. We have agreed with the representatives of the underwriters that for the period commencing with the date of this prospectus and ending on the consummation of our initial business combination, we will timely file with the SEC via the Electronic Data Gathering, Analysis and Retrieval System such statements and reports as are required to be filed by a company registered under Section 12(b) of the Securities Exchange Act of 1934, as if we were a company incorporated in the United States and with respect to quarterly and annual financial information, we will furnish such
information on Form 6-K or Form 20-F, as the case may be.
Our Transfer Agent and Warrant Agent
The transfer agent for our securities and warrant agent for our warrants is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
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BRITISH VIRGIN ISLANDS COMPANY CONSIDERATIONS
Our corporate affairs are governed by our amended and restated memorandum and articles of association and the Companies Act of the British Virgin Islands. The Companies Act of the British Virgin Islands which replaced the now International Business Companies Act (which was modeled on Delaware law) does not follow recent English Law statutory enactments, and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of some significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States and their
shareholders. A brief discussion of the procedure for mergers and similar arrangements in the British Virgin Islands also follows. Further, although we anticipate that our proxy materials will contain many of the same disclosures as proxy materials prepared in accordance with the Securities Exchange Act of 1934, as amended, and the U.S. proxy rules promulgated thereunder, we have included a discussion highlighting the material protections provided by U.S. federal securities laws that we are not required to provide to our shareholders.
There have been few, if any, court cases interpreting the Companies Act in the British Virgin Islands, and we can not predict whether British Virgin Islands courts would reach the same conclusions as U.S. courts. Thus, you may have more difficulty in protecting your interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction which has developed a substantial body of case law. The following table provides a comparison between the statutory provisions of the Companies Act and the Delaware General Corporation Law relating to
shareholders’ rights.
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British Virgin Islands
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Delaware
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Shareholder Meetings
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Held at a time and place as designated in the articles of association
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May be held at such time or place as designated in the certificate of incorporation or the by-laws, or if not so designated, as determined by the board of directors
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May be held within or without the British Virgin Islands
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May be held within or without Delaware
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Notice:
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Notice:
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Whenever shareholders are required to take action at a meeting, written notice shall state the place, date and hour of the meeting and indicate that it is being issued by or at the direction of the person calling the meeting
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Whenever shareholders are required to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, and the means of remote communication, if any
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A copy of the notice of any meeting shall be given personally or sent by mail as designated in the articles of association
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Written notice shall be given not less than 10 nor more than 60 days before the meeting
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Notice of not less than 7 days before the meeting
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British Virgin Islands
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Delaware
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Shareholders’ Voting Rights
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Any action required to be taken by meeting of shareholders may be taken without meeting if consent is in writing and is signed by a majority of the shareholders entitled to vote if permitted by the articles of association
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Any action required to be taken by meeting of shareholders may be taken without meeting if consent is in writing and is signed by all the shareholders entitled to vote
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Any person authorized to vote may authorize another person or persons to act for him by proxy if permitted by the articles of association
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Any person authorized to vote may authorize another person or persons to act for him by proxy
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Quorum is as designated in the articles of association
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For stock corporations, certificate of incorporation or by-laws may specify the number to constitute a quorum but in no event shall a quorum consist of less than one-third of shares entitled to vote at a meeting. In the absence of such specifications, a majority of shares entitled to vote shall constitute a quorum
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The memorandum and articles of association may provide for cumulative voting in the election of directors
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For non-stock companies, certificate of incorporation or by-laws may specify the number of members to constitute a quorum. In the absence of this, one-third of the members shall constitute a quorum
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Changes in the rights of shareholders as set forth in the amended and restated memorandum and articles of association require approval of at least 75% of the shareholders
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Except as provided in the charter documents, changes in the rights of shareholders as set forth in the charter documents require approval of a majority of its shareholders
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The certificate of incorporation may provide for cumulative voting
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Directors
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Board must consist of at least one member
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Board must consist of at least one member
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Maximum number of directors can be changed by an amendment to the articles of association
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Number of board members shall be fixed by the by-laws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number shall be made only by amendment of the certificate
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If the board is authorized to change the number of directors actually appointed, provided that the number still falls within the maximum and the minimum number of directors as set out in the articles of association, it can do so provided that it complies with the procedure set out in the articles of association
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Fiduciary Duties
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In summary, directors and officers owe the following fiduciary duties:
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Directors and officers must act in good faith, with the care of a prudent person, and in the best interest of the corporation.
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Duty to act in good faith in what the directors believe to be in the best interests of the company as a whole;
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Directors and officers must refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits.
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British Virgin Islands
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Duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose;
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Decisions made by directors and officers on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the corporation will be protected by the “business judgment rule.”
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Directors should not improperly fetter the exercise of future discretion;
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Duty to exercise powers fairly as between different sections of shareholders;
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Duty not to put themselves in a position of conflict between their duty to the company and their personal interests; and
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Duty to exercise independent judgment
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In addition to the above, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as “a reasonably diligent person having both:
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the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
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the general knowledge, skill and experience that that director has.”
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As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of his position. However, in some instances a breach of this duty can be forgiven and/or authorized in advance by the shareholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by shareholder approval at general meetings.
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Shareholders’ Derivative Actions
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Generally speaking, the company is the proper plaintiff in any action. Derivative actions brought by one or more of the registered shareholders may only be brought with the leave of the High Court where the following circumstances apply:
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In any derivative suit instituted by a shareholder of a corporation, it shall be averred in the complaint that the plaintiff was a shareholder of the corporation at the time of the transaction of which he complains or that such shareholder’s stock thereafter devolved upon such shareholder by operation of law.
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Those who control the company have refused a request by the shareholders to move the company to bring the action;
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Complaint shall set forth with particularity the efforts of the plaintiff to obtain the action by the board or the reasons for not making such effort.
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Delaware
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Those who control the company have refused to do so for improper reasons such that they are perpetrating a “fraud on the minority” (this is a legal concept and is different to “fraud” in the sense of
dishonesty);
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Such action shall not be dismissed or
compromised without the approval of the
Chancery Court.
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a company is acting or proposing to act illegally or beyond the scope of its
authority;
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If we were a Delaware corporation, a shareholder that redeemed his, her or its shares of our ordinary shares, or whose shares were canceled in connection with our dissolution, would not be able to bring a derivative action against us after the ordinary shares have been redeemed or canceled.
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the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained;
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the individual rights of the plaintiff shareholder have been infringed or are about to be infringed.
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Once a shareholder has relinquished his, her or its ordinary shares (whether by redemption or otherwise), it is generally the case that they could no longer bring a derivative action as they would no longer be a registered shareholder.
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Certain Differences in Corporate Law
The BVI Business Companies Act of the British Virgin Islands, which Act’s predecessor, the International Business Companies Act (now repealed and which was modeled on Delaware law) does not follow recent English Law statutory enactments, and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of some significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements.
BVI law provides for mergers as that expression is understood under United States corporate law. The procedure for a merger between the company and another company (which need not be a BVI company, and which may be the company’s parent, but need not be) is set out in the Act. The directors of the company must approve a written plan of merger which must also be approved by a resolution of a majority of the shareholders. The company must then execute articles of merger, containing certain prescribed details. The plan and articles of merger are then filed at the Registry. Provided that the company
is in “good standing,” that is to say that it has paid all fees and penalties (if any) due to the BVI Financial Services Commission, and assuming that the board and shareholder approval is forthcoming it should be possible to effect the merger within five to ten business days. The Registrar will take a similar amount of time to issue the Certificate of Merger which should be dated as of the date on which the articles of merger are filed with the Registry.
As soon as a merger becomes effective: (a) the surviving company (so far as is consistent with its memorandum and articles, as amended or established by the articles of merger) has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies; (b) the memorandum and articles of the surviving company are automatically amended to the extent, if any, that changes to its memorandum and articles are contained in the articles of merger; (c) assets of every description, including choses in action and
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the business of each of the constituent companies, immediately vest in the surviving company; (d) the surviving company is liable for all claims, debts, liabilities and obligations of each of the constituent companies; (e) no conviction, judgement, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against a constituent company or against any member, director, officer or agent thereof, is released or impaired by the merger; and (f) no proceedings, whether civil or criminal, pending at the time of a merger by or against a constituent company, or against any member, director, officer or agent thereof, are
abated or discontinued by the merger; but: (i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company or against the member, director, officer or agent thereof; as the case may be; or (ii) the surviving company may be substituted in the proceedings for a constituent company.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies in certain circumstances, which may be tantamount to a merger, but we do not anticipate the use of such statutory provisions because a business combination can be achieved through other means, such as a merger (as described above), a share exchange, asset acquisition or control, through contractual arrangements, of an operating business. However, in the event that a business combination was sought pursuant to these statutory provisions, the arrangement in question must be approved by a majority in number of each class of shareholders and
creditors with whom the arrangement is to be made and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meeting summoned for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the High Court of the British Virgin Islands.
If the arrangement and reconstruction is thus approved, a shareholder would have rights comparable to appraisal rights, which would ordinarily be available to dissenting shareholders of United States corporations or under a BVI merger, providing rights to receive payment in cash for the judicially determined value of the ordinary shares.
Shareholders’ Suits.
Our British Virgin Islands counsel is not aware of any reported class action having been brought in a British Virgin Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder.
The Act has introduced a series of remedies available to shareholders. Where a company incorporated under the Act conducts some activity which breaches the Act or the company’s memorandum and articles of association, the court can issue a restraining or compliance order. Shareholders can now also bring derivative, personal and representative actions under certain circumstances. The traditional English basis for members’ remedies have also been incorporated into the Act — where a member of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive,
unfairly discriminating or unfairly prejudicial to him, such shareholder may now apply to the court for an order on such conduct. Any member of a company may apply to BVI court for the appointment of a liquidator for the company and the court may appoint a liquidator for the company if it is of the opinion that it is just and equitable to do so.
The Act provides that any shareholder of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a) a merger; (b) a consolidation; (c) any sale, transfer, lease, exchange or other disposition of more than 50 per cent in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including: (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the members in accordance with their
respective interest within one year after the date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; (d) a redemption of 10 per cent, or fewer of the issued shares of the company required by the holders of 90 percent, or more of the shares of the company pursuant to the terms of the Act; and (e) an arrangement, if permitted by the BVI court.
Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the British Virgin Islands or their individual rights as shareholders as established by the company’s memorandum and articles of association. There are common law rights for the protection of shareholders that may be invoked, largely dependent on English common law, since the common law of the British Virgin Islands for BVI business corporations is limited. Under the general rule pursuant to English
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company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts
may grant relief. Generally, the areas in which the courts will intervene are the following:
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a company is acting or proposing to act illegally or beyond the scope of its authority;
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the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained;
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the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or
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those who control the company are perpetrating a “fraud on the minority.”
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Under the law of Delaware, the rights of minority shareholders are similar to that which will be applicable to the shareholders of the company.
Certain Material Protections Provided by the Exchange Act with Respect to Proxy Solicitations That May Not be Afforded to Our Shareholders
The rights of our shareholders are primarily governed by British Virgin Islands law, the provisions of our amended and restated memorandum and articles of association and U.S. federal securities laws, however, there are no specific proxy laws, rules or regulations under British Virgin Islands law. Set forth below is a summary of material substantive and procedural protections afforded by the U.S. federal securities laws with respect to proxy solicitations which we are not required to comply with.
Proxy Solicitation Materials.
A proxy solicitation conducted in accordance with U.S. federal securities laws generally requires the preparation of a proxy statement and other proxy solicitation materials in conformity with the requirements of section 14 of the Securities Exchange Act of 1934, as amended, and the U.S. proxy rules promulgated thereunder. The U.S. proxy rules prescribe the form and content of a company’s proxy solicitation materials, requiring disclosure of, among other things:
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substantial interests of directors and executive officers in matters to be acted upon;
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the security ownership of officers, directors and greater than 5% beneficial shareholders;
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information concerning the backgrounds and compensation of directors and executive officers;
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corporate governance matters, such as director independence and related party transactions, meeting attendance and the policies and procedures of compensation, nominating and audit committees;
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financial information and financial statements; and
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with respect to any merger, consolidation, acquisition or similar transaction: (i) information regarding the transaction, such as its mechanics and effects on the constituent corporations, a chronological description of the facts and circumstances leading up to the proposed transaction and execution of the definitive agreement, the reasons the board of directors deems the transaction in the best interests of the company and its shareholders, the consideration offered, material differences in the rights of shareholders as a result of a transaction and U.S. federal income tax consequences, (ii) a description of the business of the target company, (iii) reports, opinions or appraisals related to the transaction, and (iv) financial information related to the target company.
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As a foreign private issuer, we are exempt from sections 14(a), (b), (c) and (f) of the Securities Exchange Act of 1934, as amended, and the U.S. proxy rules promulgated thereunder, and instead must prepare our proxy statement and other proxy solicitation materials in accordance with British Virgin Islands law, which contains no specific proxy laws, rules or regulations, and any relevant provisions of our amended and restated memorandum and articles of association, which only require that our proxy statement relating to the extended period and/or our initial business combination set forth the process by which public shareholders may redeem their
ordinary shares for cash if the business combination is approved and completed. Although we anticipate
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that our proxy statement and other proxy solicitation materials will contain many of the same disclosures as proxy materials prepared in conformance with U.S. proxy rules, investors are cautioned that such materials will not have been reviewed by the SEC and may not have all of the material disclosures required under U.S. proxy rules.
Filing Requirements.
Unless the subject of an annual or special meeting relates solely to certain routine matters (
e.g.
, the election of directors or approval or ratification of accountants), a proxy solicitation conducted in conformity with the requirements of U.S. proxy rules requires the preparation of a preliminary proxy statement and other proxy solicitation materials and the filing of such materials with the SEC for review at least 10 days in advance of their being delivered to a company’s shareholders.
As a foreign private issuer, we are exempt from the U.S. proxy rules requiring the filing of a preliminary proxy statement with the SEC for review, and, as required, will only file such materials with the SEC after delivering them to our shareholders. Although we anticipate that our proxy statement and other proxy solicitation materials will contain many of the same disclosures as proxy materials prepared in conformance with U.S. proxy rules, investors are cautioned that such materials will not have been reviewed by the SEC.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately after this offering, we will have 9,166,666 ordinary shares outstanding. Of these ordinary shares, the 6,875,000 ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any ordinary shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the remaining 2,291,666 ordinary shares are restricted securities under Rule 144, in that they were issued in private transactions not involving a public offering. Notwithstanding this restriction, these 2,291,666 ordinary shares have been placed in escrow and will not
be transferable until the earlier of one year from the consummation of a business combination or thirty months from the date of this prospectus (or thirty-six months if the extended period is approved) and will only be released prior to that date subject to certain limited exceptions, such as our liquidation prior to a business combination (in which case the certificate representing such ordinary shares will be destroyed), and the consummation of a liquidation, merger, share exchange, asset or share acquisition, exchangeable share transaction or other similar transaction that results in all of our shareholders having the right to exchange their ordinary shares for cash, securities or other property subsequent to our consummating a business combination with a target business.
Additionally, after this offering there will be 2,291,666 insider warrants outstanding and 2,000,000 private placement warrants outstanding, that upon full exercise will result in the issuance of 4,291,666 ordinary shares to the holders of the insider warrants and the private placement warrants. Such insider warrants and private placement warrants and the underlying ordinary shares are subject to registration as described below under “— Registration Rights.”
Rule 144
The SEC has recently adopted amendments to Rule 144 which became effective on February 15, 2008 and apply to securities acquired both before and after that date. Under Rule 144 as in effect on the date of this prospectus, a person who has beneficially owned restricted shares of our ordinary shares or warrants for at least six months is entitled to sell their securities provided that: (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to the Securities Exchange Act of 1934, as amended, periodic reporting requirements for at least three months
preceding the sale. Persons who have beneficially owned restricted shares of our ordinary shares for at least six months but who are our affiliates at the time of, or any time during the three months preceding, a sale, are subject to additional restrictions, by which such persons are entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:
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1% of the number of ordinary shares then outstanding, which will equal 91,666 ordinary shares immediately after this offering; and
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the average weekly trading volume of our ordinary shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale,
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provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least three months preceding the sale. Such sales must also comply with the manner of sale, current public information and notice provisions of Rule 144.
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies
Historically, the SEC has taken the position that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies, like us. The SEC has codified and expanded this position in the amendments discussed above by prohibiting the use of Rule 144 for resale of securities issued by any shell company (other than a business combination related shell company) or any issuer that has been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met:
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the issuer of the securities that was formerly a shell company has ceased to be a shell company;
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the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
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the issuer of the securities has filed all Exchange Act reports and materials required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and
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at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.
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As a result, it is likely that pursuant to Rule 144 our existing shareholders will be able to freely sell, without registration, their ordinary shares, subject to release from escrow on the earlier of one year from the business combination or February 11, 2011, and their insider warrants (and underlying ordinary shares), one year following the completion of our initial business combination.
Registration Rights
The holders of a majority of all of: (i) the 2,291,666 ordinary shares and insider warrants owned or held by the existing shareholders; and (ii) the 2,000,000 ordinary shares issuable upon exercise of the 2,000,000 private placement warrants will be entitled to make up to two demands that we register these securities pursuant to an agreement to be signed prior to or on the date of this prospectus. Such holder may elect to exercise these registration rights at any time commencing on or after the date on which these securities are released from escrow. In addition, these shareholders have certain “piggy-back” registration rights with respect
to registration statements filed subsequent to the date on which these securities are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements.
Although the unit purchase option and its underlying securities have been registered on the registration statement of which this prospectus forms a part, the option grants holders demand and “piggy back” registration rights for periods of five and seven years, respectively, from the date of this prospectus. These rights apply to all of the securities directly and indirectly issuable upon exercise of the option.
Amended and Restated Memorandum and Articles of Association
Our amended and restated memorandum and articles of association became effective under the laws of the British Virgin Islands on July 31, 2008. As set forth in the preamble to the amended and restated memorandum and articles of association, the objects for which are established are unrestricted and we shall have full power and authority to carry out any object not prohibited by the Companies Act or as the same may be revised from time to time, or any other law of the British Virgin Islands.
Article 11.2.2 of our amended and restated memorandum and articles of association bifurcates of our board of directors into two classes and establishes related procedures regarding the standing and election of such directors.
Article 24 of our amended and restated memorandum and articles of association contains provisions designed to provide certain rights and protections to our shareholders prior to the consummation of a business combination, including:
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a requirement that all proposed business combinations be presented to shareholders for approval regardless of whether or not the British Virgin Islands requires such a vote;
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a prohibition against completing a business combination if 35% or more of our shareholders, on a cumulative basis, exercise their redemption rights in lieu of approving a business combination or the extended period;
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the right of shareholders voting against a business combination to surrender their ordinary shares for $7.89 per ordinary share from the trust account in lieu of participating in a proposed business combination;
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a requirement that in the event we do not consummate a business combination within 18, 30 or 36months, as the case may be, after the consummation of this offering, as applicable, we will go into a voluntary liquidation procedure and we will distribute to our public shareholders the amount in our trust account (inclusive of interest) plus any remaining assets;
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limitation on shareholders’ rights to receive a portion of the trust account so that they may only receive a portion of the trust account upon our dissolution and subsequent liquidation of the trust account or upon the exercise of their redemption rights; and
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Our amended and restated memorandum and articles of association and the underwriting agreement that we will enter into with the underwriters in connection with this offering, prohibits the amendment or modification of any of the foregoing provisions prior to the consummation of a business combination, without the approval of 80% or more of our shareholders. These rights and protections have been established for the purchasers of units in this offering. Pursuant to the underwriting agreement we are prohibited from amending or modifying these rights and protections at any time prior to the consummation of the business combination without the approval
of 80% or more of our shareholders. We believe these provisions to be obligations of our company to its shareholders and that investors will make an investment in our company relying, at least in part, on the enforceability of the rights and obligations set forth in these provisions including, without limitation, the prohibition on any amendment or modification of such provisions without obtaining the requisite majority. As a result, the board of directors will not, and pursuant to section 7.4 of the underwriting agreement cannot, at any time prior to the consummation of a business combination, propose any amendment or modification of our amended and restated memorandum and articles of association relating to any of the foregoing provisions and will not support, directly or indirectly, or in any way endorse or recommend that shareholders approve an amendment or modification to such provisions without the approval of 80% or more of our shareholders.
Anti-Money Laundering — British Virgin Islands
In order to comply with legislation or regulations aimed at the prevention of money laundering we are required to adopt and maintain anti-money laundering procedures, and may require subscribers to provide evidence to verify their identity. Where permitted, and subject to certain conditions, we may also delegate the maintenance of our anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person.
We reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept the application, in which case any funds received will be returned without interest to the account from which they were originally debited. We also reserve the right to refuse to make any redemption payment to a shareholder if our directors or officers suspect or are advised that the payment of redemption proceeds to such shareholder might result in a breach of applicable anti-money laundering or
other laws or regulations by any person in any relevant jurisdiction, or if such refusal is considered necessary or appropriate to ensure our compliance with any such laws or regulations in any applicable jurisdiction.
If any person resident in the British Virgin Islands knows or suspects that another person is engaged in money laundering or is involved with terrorism or terrorist property and the information for that knowledge or suspicion came to their attention in the course of their business the person will be required to report h belief or suspicion to the Financial Services Commission of the British Virgin Islands, pursuant to the Proceeds of Criminal Conduct Act 1997 (as amended) if the disclosure relates to money laundering or to a police officer of the rank of constable or higher if the disclosure relates to involvement with terrorism or terrorist
property, pursuant to the Terrorism Law. Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.
Listing of Securities
Our units, ordinary shares and warrants have been approved for listing on the Nasdaq Capital Market under the symbols CACAU, CACA and CACAW, respectively. We anticipate that our units will be listed on the Nasdaq Capital Market on or promptly after the effective date of the registration statement. Following the date the ordinary shares and warrants are eligible to trade separately, we anticipate that the ordinary shares and warrants will be listed separately and as a unit on the Nasdaq Capital Market.
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TAXATION
The following summary of the material British Virgin Islands and United States federal income tax consequences of an investment in ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local and other tax laws.
British Virgin Islands Taxation
The Government of the British Virgin Islands, will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon the company or its shareholders. The British Virgin Islands are not party to any double taxation treaties.
The company and all distributions, interest and other amounts paid by the company to persons who are not persons resident in the British Virgin Islands are exempt from the provisions of the Income Tax Act in the British Virgin Islands and any capital gains realized with respect to any shares, debt obligations or other securities of the company by persons who are not resident in the British Virgin Islands are exempt from all forms of taxation in the British Virgin Islands. As of January 1, 2007, the Payroll Taxes Act, 2004 came into force. It will not apply to the company except to the extent the company has employees (and deemed employees) rendering
services to the company wholly or mainly in the British Virgin Islands. The company at present has no employees in the British Virgin Islands and has no intention of having any employees in the British Virgin Islands.
No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the British Virgin Islands with respect to any shares, debt obligations or other securities of the company.
All instruments relating to transactions in respect of the shares, debt obligations or other securities of the company and all instruments relating to other transactions relating to the business of the company are exempt from the payment of stamp duty in the British Virgin Islands.
There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to the company or its shareholders.
United States Federal Income Taxation
General
The following is a summary of the material U.S. federal income tax consequences of the acquisition, ownership, and disposition of our ordinary shares and warrants issued pursuant to this offering. The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply if you are a beneficial owner of ordinary shares or warrants and you are for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;
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an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if: (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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If you are not described as a U.S. Holder and are not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, you will be considered a “Non-U.S. Holder” for purposes of this discussion. The U.S. federal income tax consequences applicable to Non-U.S. Holders is described below under the heading “Non-U.S. Holders.”
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This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations, possibly on a retroactive basis.
This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a person’s decision to purchase our units, ordinary shares and warrants. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances, and this discussion addresses only persons that acquire our units, ordinary shares and warrants as part of units upon their original issuance pursuant to this offering and assumes that each of our ordinary shares and warrants trade separately. In particular, this discussion
considers only holders that will own our units, ordinary shares and warrants as capital assets within the meaning of Section 1221 of the Code and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:
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financial institutions or “financial services entities;”
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taxpayers who have elected mark-to-market accounting;
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regulated investment companies;
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certain expatriates or former long-term residents of the United States;
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persons that actually or constructively own 10% or more of our ordinary shares;
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persons that hold our units, ordinary shares or warrants as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; or
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persons whose functional currency is not the U.S. dollar.
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This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our units, ordinary shares and warrants through such entities. If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our units, ordinary shares and warrants, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of
the partnership.
We have not sought, and will not seek, a ruling from the Internal Revenue Service (“IRS”) as to any U.S. federal income tax consequence described below. The IRS may disagree with the description herein, and its determination may be upheld by a court.
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH ITS TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR UNITS, ORDINARY SHARES AND WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.
Allocation of Purchase Price Between Ordinary Shares and Warrants
For U.S. federal income tax purposes, each holder of a unit generally must allocate the purchase price of a unit between the ordinary share and the warrant that comprise the unit based on their respective relative fair market values at the time of the issuance. Of the purchase price for a unit offered hereunder, we intend to allocate U.S. $7.50 to the ordinary share and U.S. $0.50 to the warrant comprising part of such unit. The price
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allocated to the ordinary share and the warrant generally will be the holder’s initial tax basis in such ordinary share or warrant, as the case may be. While uncertain, the IRS, by analogy to the rules relating to the allocation of the purchase price to components of a unit consisting of debt and equity, may take the position that our allocation of the purchase price will be binding on a holder of a unit, unless the holder explicitly discloses in a statement attached to its timely filed U.S. federal income tax return for the taxable year that includes the acquisition date of the unit that the holder’s allocation of the purchase price between
the ordinary share and the warrant that comprise the unit is different than our allocation. Our allocation is not, however, binding on the IRS.
Each holder is advised to consult such holder’s own tax advisor with respect to the risks associated with an allocation of the purchase price between each ordinary share and the warrant that comprise a unit that is inconsistent with our allocation of the purchase price.
U.S. Holders
Tax Reporting
Certain U.S. Holders will be required to file an IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) to report a transfer of cash or other property to us. Substantial penalties may be imposed on a U.S. Holder that fails to comply with this reporting requirement. Each U.S. Holder is urged to consult with its own tax advisor regarding this reporting obligation.
Taxation of Distributions Paid on Ordinary Shares
Subject to the passive foreign investment company (“PFIC”) rules discussed below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any dividend paid on our ordinary shares. A distribution on our ordinary shares will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
Distributions in excess of such earnings and profits will be applied against and reduce the U.S. Holder’s basis in its ordinary shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such ordinary shares.
With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2011, dividends may be taxed at the lower applicable long-term capital gains rate (see “— Taxation on the Disposition of Ordinary Shares and Warrants” below) provided that: (1) our ordinary shares are readily tradable on an established securities market in the United States, (2) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. It is not entirely clear, however, whether a U.S. Holder’s holding period for our
ordinary shares would be suspended for purposes of clause (3) above for the period that such holder had a right to have such ordinary shares redeemed by us. In addition, under recently published IRS authority, ordinary shares are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges. U.S. Holders are advised to consult their own tax advisors regarding the availability of the lower rate for any dividends paid with respect to our ordinary shares.
Taxation on the Disposition of Ordinary Shares and Warrants
Upon a sale or other taxable disposition of our ordinary shares or warrants (which, in general, would include a redemption of ordinary shares or warrants), and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the applicable securities. See “— Exercise or Lapse of a Warrant” below for a discussion regarding a U.S. Holder’s basis in the ordinary shares acquired pursuant to the exercise of a warrant.
Capital gains recognized by U.S. Holders generally are subject to U.S. federal income tax at the same rate as ordinary income, except that long-term capital gains recognized by non-corporate U.S. Holders are generally subject to U.S. federal income tax at a maximum rate of 15% for taxable years beginning before
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January 1, 2011 (and 20% thereafter). Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for the ordinary shares or warrants exceeds one year. The deductibility of capital losses is subject to various limitations.
Exercise or Lapse of a Warrant
Subject to the discussion of the PFIC rules below, a U.S. Holder generally will not recognize gain or loss upon the exercise of a warrant. Ordinary shares acquired pursuant to the exercise of a warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax basis in the warrant, increased by the amount paid to exercise the warrant. The holding period of such ordinary shares generally would begin on the day after the date of exercise of the warrant. If the terms of a warrant provide for any adjustment to the number of ordinary shares for which the warrant may be exercised or to the exercise price of the warrants, such adjustment
may, under certain circumstances, result in constructive distributions that could be taxable to the U.S. Holder of the warrants. Conversely, the absence of an appropriate adjustment similarly may result in a constructive distribution that could be taxable to the U.S. Holders of the ordinary shares. See “— Taxation of Distributions Paid on Ordinary Shares,” above. If a warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the warrant.
Passive Foreign Investment Company Rules
A foreign corporation such as ours will be a passive foreign investment company, or PFIC, if at least 75% of its gross income in a taxable year, including its pro rata share of the gross income of any company in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any company in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce,
passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets.
Because we are a blank check company, with no current active business, we believe that it is likely that we will meet the PFIC asset or income test for the current taxable year. However, pursuant to a start-up exception, a corporation will not be a PFIC for the first taxable year the corporation has gross income, if: (1) no predecessor of the corporation was a PFIC; (2) the corporation satisfies the IRS that it will not be a PFIC for either of the first two taxable years following the start-up year; and (3) the corporation is not in fact a PFIC for either of those years. The applicability of the start-up exception to us is uncertain. After
acquisition of a company or assets in a business combination, we may still meet one of the PFIC tests depending on the timing of the acquisition and the amount of our passive income and assets and the passive income and assets of the acquired business. If the company that we acquire in a business combination is a PFIC, then we will likely not qualify for the start-up exception and will be a PFIC for the current taxable year. Our actual PFIC status for any taxable year will not be determinable until after the end of the taxable year, and accordingly there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year.
If we are a PFIC for any taxable year during which a U.S. Holder held our ordinary shares or warrants, and the U.S. Holder did not make a timely qualified electing fund (“QEF”) election for the first taxable year of its holding period for our ordinary shares or a mark-to-market election, as described below, such holder will be subject to special rules with respect to:
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any gain recognized by the U.S. Holder on the sale or other taxable disposition of its ordinary shares or warrants; and
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any excess distribution made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the applicable securities during the three preceding taxable years or, if shorter, such U.S. Holder’s holding period for the applicable securities).
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Under these rules,
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the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares or warrants;
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the amount allocated to the taxable year in which the U.S. Holder recognized the gain or excess distribution will be taxed as ordinary income;
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the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.
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In addition, if we are a PFIC, a U.S. Holder who acquires our ordinary shares or warrants from a deceased U.S. Holder who dies before January 1, 2010 generally will be denied the step-up of U.S. federal income tax basis in such ordinary shares or warrants to their fair market value at the date of the deceased holder’s death. Instead, such U.S. Holder would have a tax basis in such securities equal to the deceased holder’s tax basis, if lower.
In general, a U.S. Holder may avoid the PFIC tax consequences described above in respect of our ordinary shares acquired as part of a unit in this offering by making a timely QEF election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
A U.S. Holder may not make a QEF election with respect to its warrants. As a result, if a U.S. Holder sells or otherwise disposes of a warrant (other than upon exercise of a warrant), any gain recognized generally will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above, if we were a PFIC at any time during the period the U.S. Holder held the warrants. If a U.S. Holder that exercises such warrants properly makes a QEF election with respect to the newly acquired ordinary shares (or has previously made a QEF election with respect to our ordinary shares), the QEF election will apply to
the newly acquired ordinary shares, but the adverse tax consequences relating to PFIC shares will continue to apply with respect to such ordinary shares (which generally will be deemed to have a holding period for the purposes of the PFIC rules that includes the period the U.S. Holder held the warrants), unless the U.S. Holder makes a purging election. The purging election creates a deemed sale of such ordinary shares at their fair market value. The gain recognized by reason of the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder will have a new basis and holding period in the ordinary shares acquired upon the exercise of the warrants for purposes of the PFIC rules.
The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching an appropriately completed IRS Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for the tax year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of
the IRS.
In order to comply with the requirements of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has elected the application of the QEF rules to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because of a timely QEF election for the first tax year of the U.S. Holder’s holding period for our ordinary shares or a purge of the PFIC taint pursuant to a purging election), any gain recognized on the appreciation of our ordinary shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, U.S. Holders of a QEF are currently taxed on their pro rata shares of its earnings and profits, whether or not distributed. In such case, a
subsequent
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distribution of such earnings and profits that were previously included in income generally will not be taxable as a dividend. The tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning shares in a QEF.
Although a determination as to our PFIC status will be made annually, an initial determination that we are a PFIC will generally apply for subsequent years to a U.S. Holder who held ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those years. A U.S. Holder who makes the QEF election discussed above for our first tax year in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, however, will not be subject to the PFIC tax and interest charge rules (or the denial of basis step-up at death) discussed above in respect to such ordinary shares. In
addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to such ordinary shares for the tax years in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our tax years in which we are a PFIC and the U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules discussed above will continue to apply to such ordinary shares unless the holder makes a purging election and pays the tax and interest charge with respect to the gain inherent in such ordinary shares attributable to the pre-QEF election period.
Alternatively, if a U.S. Holder owns ordinary shares in a PFIC that is treated as marketable stock, the U.S. Holder may make a mark-to-market election. If the U.S. Holder makes a valid mark-to-market election, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary shares. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted basis in its ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted
basis of its ordinary shares over the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the ordinary shares will be treated as ordinary income. Currently, a mark-to-market election may not be made with respect to warrants.
The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission or on Nasdaq, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Since we expect that our ordinary shares will be listed and traded on the Nasdaq Capital Market, our ordinary shares may qualify as marketable stock for purposes of this election. U.S. Holders are advised to consult their own tax advisors regarding the availability and tax consequences of a
mark-to-market election in respect to our ordinary shares under their particular circumstances.
If we are a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election with respect to the lower-tier PFIC. U.S. Holders are urged to consult their
own tax advisors regarding the tax issues raised by lower-tier PFICs.
If a U.S. Holder owns (or is deemed to own) shares during any year in a PFIC, such holder may have to file an IRS Form 8621 (whether or not a QEF or mark-to-market election is made).
The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of our ordinary shares and warrants are advised to consult their own tax advisors concerning the application of the PFIC rules to their acquisition, ownership and disposition of our ordinary shares and warrants under their particular circumstances.
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Non-U.S. Holders
Dividends paid to a Non-U.S. Holder in respect to its ordinary shares generally will not be subject to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our ordinary shares or warrants unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case, such gain from
United States sources generally is subject to tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax in the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S. federal income tax purposes will apply to distributions made on our ordinary shares within the United States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of our ordinary shares or warrants to or through a U.S. office of a broker by a non-corporate U.S. Holder. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances.
In addition, backup withholding of United States federal income tax, currently at a rate of 28%, generally will apply to dividends paid on our ordinary shares to a non-corporate U.S. Holder and the proceeds from sales and other dispositions of ordinary shares or warrants by a non-corporate U.S. Holder, in each case who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that backup withholding is required; or
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in certain circumstances, fails to comply with applicable certification requirements.
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A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
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NOTE ON ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in the British Virgin Islands because of the following benefits found there:
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political and economic stability;
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an effective judicial system;
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a favorable tax system;
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the absence of exchange control or currency restrictions; and
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the availability of professional and support services.
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However, certain disadvantages accompany incorporation in the British Virgin Islands. These disadvantages include:
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the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and
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British Virgin Islands companies may not have standing to sue before the federal courts of the United States.
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Although there is no statutory enforcement in the British Virgin Islands of judgments obtained in the United States, the courts of the British Virgin Islands will recognize a foreign judgment as the basis for a claim at common law in the British Virgin Islands provided such judgment:
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the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;
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the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;
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in obtaining judgment there was no fraud on the part of the person in whose favour judgment was given or on the part of the court;
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recognition or enforcement of the judgment in the BVI would not be contrary to public policy; and
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the proceedings pursuant to which judgment was obtained were not contrary to natural justice.
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UNDERWRITING
Brean Murray, Carret & Co., LLC, Maxim Group LLC and Roth Capital Partners, LLC, are acting as the representatives of the underwriters named below. Subject to the terms and conditions in the underwriting agreement, each underwriter named below has agreed to purchase from us, on a firm commitment basis, the respective number of units shown opposite its name below, at the public offering price, less the underwriting discount set forth on the cover page of this prospectus:
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Underwriter
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Number of
Units
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Brean Murray, Carret & Co., LLC
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2,531,250
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Maxim Group LLC
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2,612,500
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Roth Capital Partners, LLC
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1,718,750
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Caris & Company
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12,500
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Total
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6,875,000
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The underwriting agreement provides that the underwriters are committed to purchase all of the units offered by this prospectus if they purchase any of the units. The underwriting agreement also provides that the obligations of the underwriters to pay for and accept delivery of the units are subject to the passing upon of certain legal matters by counsel and certain other conditions.
Underwriting Terms
The following table shows the public offering price, underwriting fees and expenses to be paid by us to the underwriters and the proceeds of the public offering, before expenses, to us.
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Per Unit
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Aggregate
Amount
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Public offering price
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$
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8.00
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$
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55,000,000
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Underwriting discount
(1)
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$
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0.16
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$
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1,100,000
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Deferred underwriting discount
(2)
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$
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0.16
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$
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1,100,000
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Deferred non-accountable expense allowance
(3)
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$
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0.16
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$
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1,100,000
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Proceeds before other expenses
(4)
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$
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7.52
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$
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51,700,000
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(1)
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Does not include an additional 2% of the gross proceeds, or $0.16 per unit ($1,100,000), payable to the underwriters from the sale of 6,875,000 units in this offering that will be paid to the underwriters only upon consummation of a business combination (and then only with respect to those units as to which the component ordinary shares have not been redeemed) which amounts are reflected in this table as deferred underwriting compensation. If a business combination is not consummated and we are liquidated, such amounts will not be paid to the underwriters, but rather will be distributed among our public shareholders. We have advanced $25,000 towards the payment of the underwriting discount to Brean Murray.
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(2)
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The per unit deferred underwriting compensation is $0.16 with respect to units sold in the offering. The underwriters have agreed to forego their deferred underwriting compensation with respect to each ordinary share that we redeem for cash upon the consummation of a business combination. The underwriters have agreed to forfeit their deferred underwriting compensation in the event a business combination is not consummated and our trust account is liquidated to our public shareholders as part of our plan of dissolution and liquidation.
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(3)
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The per unit deferred non-accountable expense allowance is $0.16 with respect to units sold in the offering. The underwriters have agreed to forego their deferred non-accountable expense allowance with respect to each ordinary share that we redeem for cash upon the consummation of a business combination. The underwriters have agreed to forfeit their deferred non-accountable expense allowance in the event a business combination is not consummated and our trust account is liquidated to our public shareholders as part of our plan of dissolution and liquidation.
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(4)
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Additional expenses attributable to this offering are estimated to be approximately $500,000.
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The distribution of our securities will end upon the underwriters’ cessation of selling efforts and stabilization activities.
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We have agreed to sell the units to the underwriters at the initial public offering price less the underwriting discount set forth on the cover page of this prospectus. The underwriting agreement also provides that the underwriters will be paid a non-accountable expense allowance equal to 2% of the gross proceeds from the sale of the units offered by this prospectus. All of the proceeds from the non-accountable expense allowance will be placed in our trust account and will be payable to the underwriters only upon consummation of a business combination. In the event the offering is terminated, Brean Murray will return to us the amount previously
advanced by us less the underwriters’ actual out-of-pocket expenses incurred in connection with the offering.
We estimate that the total expenses of the offering payable by us, not including underwriting discounts, commissions and the non-accountable expense allowance will be approximately $500,000. These expenses include, but are not limited to, SEC registration fees, FINRA filing fees, Nasdaq Capital Market filing fees, accounting fees and expenses, legal fees and expenses, printing and engraving expenses and transfer agent fees.
The underwriters will initially offer the units to be sold in this offering directly to the public at the initial public offering price set forth on the cover of this prospectus and to selected dealers at the initial public offering price less a selling concession not in excess of $0.1075 per unit. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $0.05 per unit on sales to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover of this
prospectus.
We have agreed to sell to the underwriters, for $100, an option to purchase up to 137,500 units at $8.80 per unit. The units issuable upon exercise of this option are identical to those offered by this prospectus. This option commences on the later of the consummation of a business combination or 180-days from the date of this prospectus and expiring five years from the date of this prospectus. The option and the 137,500 units, the 137,500 ordinary shares, the 137,500 warrants underlying such units, and the 137,500 ordinary shares underlying such warrants have been deemed compensation by the FINRA and are therefore subject to a 180-day lock-up
pursuant to Rule 2710(g)(1) of the FINRA Conduct Rules. Additionally, the option may not be sold, transferred, assigned, pledged or hypothecated for a 180-day period (including the foregoing 180 day period) following the date of this prospectus. However, the option may be transferred to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Thereafter, such units will be transferable provided such transfer is in accordance with the provisions of the Securities Act. Although the purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part, the option grants to holders demand and “piggy back” registration rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all
fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a share dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of ordinary shares at a price below its exercise price. We will set aside and at all times have available a sufficient number of ordinary shares to be issued upon exercise of such units.
Prior to this offering there has been no public market for any of our securities. The public offering price of the units and the terms of the warrants were negotiated between us and the representatives. Factors considered in determining the prices and terms of the units, including the ordinary shares and warrants underlying the units, include:
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the history and prospects of companies whose principal business is the acquisition of other companies;
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prior offerings of those companies;
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our prospects for acquiring an operating business or assets at attractive values;
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an assessment of our management and their experience in identifying operating companies and assets;
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general conditions of the securities markets at the time of the offering; and
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other factors as were deemed relevant.
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However, although these factors were considered, the determination of our offering price is more arbitrary than the pricing of securities for an operating company in a particular industry since the underwriters are unable to compare our financial results and prospects with those of public companies operating in the same industry.
In connection with this offering, the underwriters may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe .PDF format will be used in connection with this offering.
The underwriters have informed us that they do not expect to confirm sales of units offered by this prospectus to accounts over which they exercise discretionary authority without obtaining the specific approval of the account holder.
Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. The “Restricted Period” under Regulation M for this offering will have ended when: (i) all of the units have been sold, (ii) there are no more selling efforts, and (iii) there is no more stabilization. However, the underwriters may engage in the following activities in accordance with the rules:
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Stabilizing Transactions
. The underwriters may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities, so long as stabilizing bids do not exceed the maximum price specified in Regulation M, which generally requires, among other things, that no stabilizing bid shall be initiated at or increased to a price higher than the lower of the offering price or the highest independent bid for the security on the principal trading market for the security.
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Syndicate Coverage Transactions
. The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representatives may engage in syndicate covering transactions by purchasing our securities in the open market.
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Penalty Bids
. The representatives may reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
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Stabilization and syndicate covering transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of the securities if it discourages resales of the securities.
Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the Nasdaq Capital Market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.
Neither Brean Murray nor any other FINRA member firm participating in this offering has provided any services to us in connection with a potential business combination or additional capital raising activities. Although we are not under any contractual obligation to engage any of the underwriters to provide any services for us after this offering, and have no present intent to do so, any of the underwriters may, among other things, introduce us to potential target businesses or assist us in raising additional capital, as needs may arise in the future. If any of the underwriters provide services to us after this offering, we may pay such underwriter
fair and reasonable fees that would be determined at that time in arm’s length negotiations.
The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to
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payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification liabilities under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.
Foreign Regulatory Restrictions on Purchase of the Units
We have not taken any action to permit a public offering of the units outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of units and the distribution of the prospectus outside the United States.
British Virgin Islands
. No offer or invitation to subscribe for units in this offering may be made to public in the British Virgin Islands.
European Economic Area
. In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), an offer of our units described in this prospectus may not be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to our units which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of our units may be made to the public in that Relevant Member State at any time:
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|
•
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to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; or
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|
|
•
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to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or
|
|
|
•
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in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive.
|
Each purchaser of our units described in this prospectus located within a Relevant Member State will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of Article 2(1)(e) of the Prospectus Directive.
For the purpose of this provision, the expression an “offer of units to the public” in relation to any units in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the units to be offered so as to enable an investor to decide to purchase or subscribe for the units, as the expression may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member
State.
The sellers of the units have not authorized and do not authorize the making of any offer of units through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the units as contemplated in this prospectus. Accordingly, no purchaser of the units, other than the underwriters, is authorized to make any further offer of the units on behalf of the sellers or the underwriters.
Italy
. This offering of the units has not been cleared by Consob, the Italian Stock Exchanges regulatory agency of public companies, pursuant to Italian securities legislation and, accordingly, no units may be offered, sold or delivered, nor may copies of this prospectus or of any other document relating to the units be distributed in Italy, except (1) to professional investors (
operatori qualificati
); or (2) in circumstances which are exempted from the rules on solicitation of investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or
delivery of the units or distribution of copies of this prospectus or any other document relating to the units in Italy under (1) or (2) above must be: (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1,
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1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the issue or the offer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed with the Bank of Italy depending,
inter alia
, on the aggregate value of the securities issued or offered in Italy and their characteristics; and (iii) in compliance with any other applicable laws and regulations.
Germany
. The offering of the units is not a public offering in the Federal Republic of Germany. The units may only be acquired in accordance with the provisions of the Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz), as amended, and any other applicable German law. No application has been made under German law to publicly market the units in or out of the Federal Republic of Germany. The units are not registered or authorized for distribution under the Securities Sales Prospectus Act and accordingly may not be, and are not being, offered or advertised publicly or by public promotion. Therefore, this prospectus is strictly
for private use and the offering is only being made to recipients to whom the document is personally addressed and does not constitute an offer or advertisement to the public. The units will only be available to persons who, by profession, trade or business, buy or sell shares for their own or a third party’s account.
France
. The units offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorité des Marchés Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the units offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Monétaire et Financier and decree no. 98-880 dated October 1, 1998, provided they are “qualified investors” within
the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the shares offered by this prospectus may be effected only in compliance with the above mentioned regulations.
Switzerland
. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The units are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a public offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in
connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland.
United Kingdom
. In the United Kingdom, the units offered by this prospectus are directed to and will only be available for purchase to a person who is an exempt person as referred to at paragraph (c) below and who warrants, represents and agrees that: (a) it has not offered or sold, and will not offer or sell, any units offered by this prospectus to any person in the United Kingdom except in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of section 85 of the Financial Services and Markets Act 2000 (as amended) (“FSMA”); and (b) it has complied and will comply with all
applicable provisions of FSMA and the regulations made thereunder in respect of anything done by it in relation to the units offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it is a person who falls within the exemptions to Section 21 of the FSMA as set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“the Order”), being either an investment professional as described under Article 19 or any body corporate (which itself has or a group undertaking has a called up share capital or net assets of not less than £500,000 (if more than 20 members) or otherwise £5 million) or an unincorporated association or partnership (with net assets of not less than £5 million) or is a trustee of a high value trust or any person acting in the capacity of director, officer or employee of such entities as defined under Article 49(2)(a) to (d) of the Order, or a person to whom the invitation or inducement may
otherwise lawfully be communicated or cause to be communicated. The investment activity to which this document relates will only be available to and engaged in only with exempt persons referred to above. Persons who are not investment professionals and do not have professional experience in matters relating to investments or are not an exempt person as described above, should not review nor rely or act upon this document and should return this document immediately. It should be noted that this document is not a prospectus in the United Kingdom as defined in the Prospectus Regulations 2005 and has not been approved by the Financial Services Authority or any competent authority in the United Kingdom.
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Israel
. The units offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The units may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the units or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the units being offered. Any resale, directly or indirectly, to the public of the units offered by this prospectus is subject to restrictions on
transferability and must be effected only in compliance with the Israeli securities laws and regulations.
Sweden
. Neither this prospectus nor the units offered hereunder have been registered with or approved by the Swedish Financial Supervisory Authority under the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will such registration or approval be sought. Accordingly, this prospectus may not be made available nor may the units offered hereunder be marketed or offered for sale in Sweden other than in circumstances which are deemed not to be an offer to the public in Sweden under the Financial Instruments Trading Act. This prospectus may not be distributed to the public in Sweden and a Swedish recipient of the
prospectus may not in any way forward the prospectus to the public in Sweden.
Norway
. This prospectus has not been produced in accordance with the prospectus requirements laid down in the Norwegian Securities Trading Act 1997, as amended. This prospectus has not been approved or disapproved by, or registered with, either the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This prospectus may not, either directly or indirectly be distributed to Norwegian potential investors.
Denmark
. This prospectus has not been prepared in the context of a public offering of securities in Denmark within the meaning of the Danish Securities Trading Act No. 171 of 17 March 2005, as amended from time to time, or any Executive Orders issued on the basis thereof and has not been and will not be filed with or approved by the Danish Financial Supervisory Authority or any other public authority in Denmark. The offering of units will only be made to persons pursuant to one or more of the exemptions set out in Executive Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for Listing or Trade on a Regulated
Market and on the First Public Offer of Securities exceeding EUR 2,500,000 or Executive Order No. 307
of 28 April 2005 on Prospectuses for the First Public Offer of Certain Securities between EUR 100,000 and EUR 2,500,000, as applicable.
LEGAL MATTERS
Maples & Calder is passing on the validity of the securities offered in this prospectus. Richardson & Patel LLP, New York, New York, is acting as special United States securities counsel for us. Ellenoff Grossman & Schole LLP, New York, New York, is acting as counsel for the underwriters in this offering.
EXPERTS
The financial statements of Chardan 2008 China Acquisition Corp. as of March 31, 2008 and for the period from inception (February 19, 2008) to March 31, 2008, appearing in this prospectus and registration statement have been audited by Jewett, Schwartz, Wolfe & Associates, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with
the SEC, can be inspected and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at
http://www.sec.gov
which contains the Form F-1 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC.
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CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
F-1
TABLE OF CONTENTS
JEWETT, SCHWARTZ, WOLFE & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To the board of directors and shareholders of
Chardan 2008 China Acquisition Corp.
We have audited the accompanying balance sheet of Chardan 2008 China Acquisition Corp. (a Development Stage Company) as of March 31, 2008 and the related statements of operations, stockholders’ equity and cash flows for the period from February 19, 2008 (inception) to March 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express and opinion on these financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosers in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statement, the Company’s Certificate of Incorporation provides for mandatory liquidation of the Company in the event that the Company does not consummate a business combination within 18 months from the date of the consummation of the Offering (“Offering”) or 36 months from the consummation of the Offering if certain extension criteria have been satisfied.
In our opinion, the financial statement referred to above present fairly, in all material respects, the financial position of Chardan 2008 China Acquisition Corp. as of March 31, 2008, and the related statements of operations, stockholders’ equity and cash flows for the period from February 19, 2008 (inception) to March 31, 2008 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the Company would continue as a going concern. As discussed in Note 1 to the financial statements, the company is required to consummate a business combination within 18 months from the date of the consummation of the Offering. The possibility of such business combination not being consummated raises substantial doubt as to its ability to continue as a going concern, and the financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Jewett, Schwartz, Wolfe & Assoc CPA’s
/s/ Jewett, Schwartz, Wolfe & Associates
Hollywood, Florida
April 2, 2008
2514 HOLLYWOOD BOULEVARD, SUITE 508 • HOLLYWOOD, FLORIDA 33020 • TELEPHONE (954) 922-5885 • FAX (954) 922-5957
Member – American Institute of Certified Public Accountants • Florida Institute of Certified Public Accountants
Private Companies Practice Section of The AICPA • Registered With The Public Company Accounting Oversight Board Of The SEC
F-2
TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
BALANCE SHEET
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|
|
|
|
|
|
March 31,
2008
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
Total current assets
|
|
|
—
|
|
|
Deferred offering costs
|
|
|
105,148
|
|
|
Total assets
|
|
$
|
105,148
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accrued expenses
|
|
$
|
105,148
|
|
|
Loans from related parties
|
|
|
32,434
|
|
|
Total current liabilities
|
|
$
|
137,582
|
|
Commitments and contingencies
|
|
|
|
|
Shareholders’ deficit
|
|
|
|
|
Preferred shares, $0.0001 par value, 5,000,000 shares authorized, none issued and
outstanding
|
|
|
—
|
|
Ordinary shares, $0.0001 par value, 60,000,000 shares authorized, none issued and
outstanding
|
|
|
—
|
|
|
Additional paid-in capital
|
|
|
—
|
|
|
Accumulated deficit
|
|
|
(32,434
|
)
|
|
Total shareholders’ equity
|
|
|
—
|
|
|
Total liabilities and shareholders’ deficit
|
|
$
|
105,148
|
|
See accompanying notes to financial statements.
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
STATEMENT OF OPERATIONS
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|
|
|
|
|
|
From February 19,
2008 (Inception) to
March 31, 2008
|
|
Formation and operating costs
|
|
$
|
32,434
|
|
|
Net loss
|
|
$
|
(32,434
|
)
|
|
Net loss per share — basic and diluted
|
|
$
|
(0.00
|
)
|
|
Weighted average number of shares outstanding during the period — basic and diluted
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|
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0
|
|
See accompanying notes to financial statements.
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
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|
|
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Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(32,434
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Change in assets and liabilities
|
|
|
|
|
|
Increase in deferred offering costs
|
|
|
(105,148
|
)
|
|
Increase in accrued expenses
|
|
|
137,582
|
|
|
Net cash used in operating activities
|
|
|
—
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Capital contribution from related parties
|
|
|
—
|
|
|
Net cash provided by financing activities
|
|
|
—
|
|
|
Net increase in cash
|
|
|
—
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
—
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
—
|
|
Supplemental disclosure of non cash investing & financing activities:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
Cash paid for interest expense
|
|
$
|
—
|
|
|
Loans from related parties
|
|
$
|
32,434
|
|
See accompanying notes to financial statements.
F-5
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2008
Note 1 — Nature of Business
Chardan 2008 China Acquisition Corp. (the Company) is a newly organized British Virgin Islands exempted company. The Company is a blank check company formed for the purpose of acquiring, engaging in a merger, share capital exchange or contractual control arrangement with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination of an unidentified operating business. The Company intends to focus on identifying a prospective target business having its primary operations in the People’s Republic of China. Efforts in identifying a prospective target business will not be limited
to a particular industry within China. The Company does not have any specific merger, share capital exchange, contractual control arrangement, asset acquisition or other business combination under consideration or contemplated and has not, nor has anyone on the Company’s behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction with the Company.
As of March 31, 2008, the Company has not yet commenced operations. The Company’s ability to commence operations is contingent upon obtaining adequate financial resources from the proposed public offering and the sale of the private placement warrants as mentioned below.
The Company intends to fund acquisitions through an offering, which includes 6,875,000 units at $8.00 per unit. Each unit includes one ordinary share and one warrant. Of the proceeds received, 98.7% of the total amount received will be deposited into a trust account, less $100,000 to be used for working capital.
Pursuant to the amended and restated memorandum and articles of association and applicable provisions of British Virgin Islands, referred to herein as BVI, law, the Company anticipates that its liquidator will instruct its trustee to promptly liquidate the trust account and distribute to its public shareholders all of the funds held in such trust account as part of the Company’s voluntary liquidation if the Company:
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|
(a)
|
Does not effect a business combination within 18 months after consummation of its initial public offering, or
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|
|
(b)
|
Does not effect a business combination within 30 months from the consummation of its initial public offering if a letter of intent, agreement in principle or definitive agreement has been executed within 18 months after consummation of its initial public offering and the business combination has not yet been consummated within such 18 month period, or
|
|
|
(c)
|
Does not effect a business combination within 36 months from the consummation of its initial public offering if the extended period is approved by the Company’s shareholders.
|
Note 2 — Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and are expressed in United States (US) dollars. The Company has not produced any revenue from its principal business and is a development stage company as defined by the Statement of Financial Accounting Standards (SFAS) No. 7 “Accounting and Reporting by Development Stage Enterprises.”
Note 3 — Summary of Significant Accounting Policies
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results will differ from those estimates.
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2008
Note 3 — Summary of Significant Accounting Policies – (continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Restricted Cash
In accordance with Accounting Review Board (ARB) No. 43, Chapter 3A “Current Assets and Current Liabilities”, cash which is restricted as to withdrawal is considered a noncurrent asset. Restricted cash consists of trust funds held in escrow until provisions for release have been met. There are no amounts recorded as restricted cash as of March 31, 2008.
Deferred Offering Costs
Deferred offering costs consist principally of legal, audit and underwriting fees incurred through the balance sheet date that will be charged to capital upon receipt of the proceeds. The Company has not commenced operations, therefore costs incurred represent the cost of capital. As of March 31, 2008, the Company incurred $105,148 of deferred offering costs, which will be charged against capital upon completion of its initial public offering.
Deferred Acquisition Costs
Costs related to proposed acquisitions costs are capitalized. Should an acquisition not occur, all related costs will be expensed. As of March 31, 2008, there were no such costs incurred.
Income Taxes
The Company uses the liability method for income taxes as required by SFAS No. 109 “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when it is more likely than not that the deferred tax assets will not be realized.
Income (Loss) per Share
The Company presents basic income (loss) per share and diluted earnings per share in accordance with the provisions of SFAS No. 128 “Earnings per Share.”
Under SFAS No. 128, basic net loss per share is computed by dividing the net loss for the year by the weighted average number of ordinary shares outstanding during the year. Diluted net loss per share is computed by dividing the net loss for the year by the weighted average number of ordinary shares and ordinary share equivalents outstanding during the year.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents. The Company maintains accounts with financial institutions, which may exceed the insured Federal Deposit Insurance Corporation limit of $100,000 in the future. The Company minimizes its credit risks associated with cash by periodically evaluating the credit quality of its primary financial institutions.
Recent Accounting Pronouncements
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 addresses the requests from
F-8
TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2008
Note 3 — Summary of Significant Accounting Policies – (continued)
investors for expanded disclosure about the extent to which companies’ measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will be adopted by the Company in the first quarter of fiscal year 2008. The Company does not expect that its adoption of SFAS 157 will have a
material effect on its results of operations or financial position.
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption.
FIN 48 is effective for fiscal years beginning after December 15, 2006, and the Company is required to adopt it in the first quarter of fiscal year 2008. The Company does not anticipate that its adoption of FIN 48 will have a material effect on its results of operations or financial position.
Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each on a company’s balance sheet and statement of operations and the related financial statement disclosures. Early application of the guidance in
SAB 108 is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006, and has been adopted by the Company at inception. The Company does not expect SAB 108 to have a material impact on its results of operations and financial condition.
FSP FAS 123(R)-5
FSP FAS 123(R)-5 was issued on October 10, 2006. The FSP provides that instruments that were originally issued as employee compensation and then modified, and that modification is made to the terms of the instrument solely to reflect an equity restructuring that occurs when the holders are no longer employees, then no change in the recognition or the measurement (due to a change in classification) of those instruments will result if both of the following conditions are met: (a) there is no increase in fair value of the award (or the ratio of intrinsic value to the exercise price of the award is preserved, that is, the holder is made whole), or the
antidilution provision is not added to the terms of the award in contemplation of an equity restructuring; and (b) All holders of the same class of equity instruments (for example, stock options) are treated in the same manner. The provisions in this FSP have been applied by the Company since its inception. The Company does not expect that its adoption of FSP FAS 123(R)-5 will have a material effect on its results of operations and financial condition.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which provides companies with an option to report selected financial assets and liabilities at fair value with the changes in fair value recognized in earnings at each subsequent reporting date. SFAS 159 provides an opportunity to mitigate potential volatility in earnings caused by measuring
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2008
Note 3 — Summary of Significant Accounting Policies – (continued)
related assets and liabilities differently, and it may reduce the need for applying complex hedge accounting provisions. If elected, SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that this statement may have on the Company results of operations and financial position, and has yet to make a decision on the elective adoption of SFAS 159.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160), which amends ARB No. 51, “Consolidated Financial Statements”, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 also changes the way the consolidated income statement is presented by requiring consolidated net
income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 to have a material impact on its financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)). This Statement replaces SFAS No. 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS No. 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS No. 141(R)). In addition, SFAS No. 141(R)’s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer.
SFAS No. 141(R) amends SFAS No. 109, “Accounting for Income Taxes”, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS No. 142, “Goodwill and Other Intangible Assets”, to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the potential impact that the adoption of SFAS No. 141(R) could have on its financial statements.
SAB No. 110
On December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (SAB No. 110), which, effective January 1, 2008, amends and replaces SAB No. 107, “Share-Based Payment.” SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of expected
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2008
Note 3 — Summary of Significant Accounting Policies – (continued)
term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), “Share-Based Payment.” Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB No. 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when
sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. The Company is currently evaluating the potential impact that the adoption of SAB No. 110 could have on its financial statements.
Note 4 — Equity
Issuable Units
On March 12, 2008, the Company entered into an agreement to issue 2,291,666 insider units at a purchase price of $.01091 per unit, for total proceeds of $25,000. Each unit consists of one ordinary share and one warrant. These units will be issued to officers, directors and existing shareholders. As of March 31, 2008, these units have not been issued and proceeds have not been received.
Note 5 — Agreements
The Company has entered into an agreement to pay a monthly fee of $7,500 to a related entity for general and administrative services. This agreement will commence on the date of the prospectus and will continue until the consummation of a business combination, 30 months from the date of the prospectus, or the date in which the Company ceases corporate existence, whichever occurs first.
Note 6 — Loans From Related Parties
Certain related parties advanced the Company a total of $32,434 to cover capital costs related to its initial public offering. The loans are payable without interest on the earlier of September 30, 2008 or upon the consummation of the offering.
Note 7 — Proposed Public Offering
The proposed offering calls for the Company to offer for public sale 6,875,000 units at $8.00 per unit. Each unit includes one ordinary share and one warrant. Each warrant is exercisable for one ordinary share at $5.00 per share. The exercise price and number of ordinary shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation.
None of the warrants may be exercised until after the consummation of the Company’s business combination and, thus, after the funds in the trust account have been disbursed. Accordingly, the warrant exercise price will be paid directly to the Company and not placed in the trust account.
Certain of the Company’s officers and directors, and their affiliates, have agreed to purchase 2,000,000 warrants, which we refer to as the private placement warrants, from the Company at a price of $0.50 per warrant, in a private placement totaling $1,000,000, in accordance with Regulation D or Regulation S, as applicable, under the Securities Act of 1933, as amended.
The Company calculated the fair value of the warrants based on a review of the trading prices of the public warrants of 24 blank check companies that are comparable to the Company (i) each having completed an initial public offering of $100 million or less, (ii) each currently seeking an acquisition, and (iii) collectively with a median average closing price for their public warrants of approximately $0.50 over a six month
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TABLE OF CONTENTS
CHARDAN 2008 CHINA ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2008
Note 7 — Proposed Public Offering – (continued)
period the Company has determined that the purchase price of $0.50 per private placement warrant would not be less than the approximate fair value of such private placement warrants on the date of issuance.
The Company has also agreed to sell to the underwriters for $100, as additional compensation, an option to purchase up to a total of 137,500 units. The units issuable upon exercise of this option are identical to the other units offered in the Company’s initial public offering. This option is exercisable at $8.80 per unit, commencing on the later of the consummation of a business combination and one year from the effective date of the registration statement and expiring five years from the effective date of the registration statement. The exercise price and the number of units issuable upon exercise of the option may be adjusted in certain
circumstances.
The Company calculated the fair value of the option by using the Black-Scholes option-pricing model with the following weighted average assumptions: no dividend yield for all the years; expected volatility of 30.87%; risk-free interest rate of 2.5% and an expected life of four years. At the date of issuance, the Company will record the value of this option at $268,616 based on the assumptions above.
Note 8 — Subsequent Events
On July 30, 2008, the Company issued an aggregate of 2,291,666 units in exchange for $25,000. These units were issued to the Company’s officers, directors and existing shareholders.
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Until September 5, 2008, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful. The information
contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our securities.
$55,000,000
CHARDAN 2008 CHINA ACQUISITION CORP.
6,875,000 Units
PROSPECTUS
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Brean Murray, Carret & Co.
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Maxim Group LLC
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Roth Capital Partners
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Co-Bookrunners
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Caris Company
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August 11, 2008