*Retread* Why Sunrise Investors Should Read the Fine Print of Kevin Halter's 'Mini' Tender Offers

Herb revisits an earlier column in light of some new developments.
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Usually I don't reprint a story, especially so soon after it was published. But given the ruckus late yesterday regarding

Sunrise Technologies

(SNRS)

, which recommended that shareholders reject a $12.50 per share tender offer for the company's stock by Kevin Halter's

Growth Capital

, I can't resist because either memories are short, nobody put two and two together -- or nobody read the column the first time around.

Either way, it's timely and is yet another sign of how wacky this market has become. So, who is Kevin Halter? What is Growth Capital? And why shouldn't they be taken seriously? Never mind that his

modus operandi

is to go after the story stocks of broken, somewhat controversial companies like

Sunrise

. Here's my Oct. 25 column's original (and ever-so-slightly altered) take:

Several months ago, in a little-watched case, the

SEC

sued

IG Holdings

for failing to consistently provide investors with adequate information in hundreds of "mini-tender" offers. These are offers to buy up less than 5% of a company's securities. Five percent or more is the level at which the offeror hits the SEC's radar and has to adhere to its tender-offer rules.

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In bringing the case, the SEC said it was warning investors "to monitor their investments carefully. Because the success of mini-tender offers depends on the offeror's ability to catch investors off guard, investors should take special care to scrutinize any offers for their securities .... Do your homework and ask questions to find out whether the offer is a good deal or a rip-off."

IG Holdings agreed to stop what it was doing.

Which brings us to Kevin Halter Sr. and his Growth Capital, a small Dallas-based investment firm in the business of making mini-tenders. Unlike IG Holdings, whose offers were for less than the market price of the stock, Growth Capital's offers are for a small premium.

Still, Growth Capital is in the mini-tender business. Halter's mini-tenders allow him to select whose tendered shares he accepts or rejects "regardless of the date tendered" by the shareholder to Halter. Once you've tendered your shares, you can't get them back until the offer expires, even if the offer has been extended. That means while the shares are under his control, you lose the right to sell them if they start falling -- or transfer them to another bidder if another (better) tender is made. After you've tendered your shares, there's no guarantee Halter will ever buy them.

SEC rules require those who make tender offers to allow shareholders to withdraw their shares before the tender offer expires (e.g. to take advantage of a better offer), and to treat all tendering shareholders equally.

So how does Halter get away with what he does? Like IG Holdings, he operates beneath the SEC radar. SEC Regulation 14D says those tender offer rules only apply to bidders who would own 5% or more of a company after a tender. Halter's Growth Capital (surprise, surprise) never tenders for more than 5%. Which means that what he does is legal.

"We are like any other guy -- we are trying to benefit from the stock market," Halter told my associate,

Mark Martinez

. "We want to make money."

Nothing wrong with making money. But people considering these offers should know just what they're getting into. It's all laid out on the firm's Web site,

www.growthcapital.org

. Martinez talked with Halter about his approach.

Has Halter ever used a tender offer as a way to take over a company?

Martinez:

"You aren't actually going out there trying to buy the company, are you?"

Halter:

"That is correct."

And that pretty much sets the tone for Martinez's interview with Halter, which is worth the read:

Martinez

: "Growth Capital, which you own, is actually making a bet against the folks who tender their shares to you, right?"

Halter

: "I haven't heard it put that way before, but, yes, I guess that is true. We are betting against people who tender shares to us. We believe that the stock is going to appreciate in value."

Martinez

: "What happens if a person who pledges their shares to you wants to get them back? Since the deal is irrevocable during the offer period, does this mean that you actually have the right to keep them?"

Halter

: "Yes. That is correct."

Martinez

: "So let's get this straight: If share prices plummet while Growth Capital has control of a shareholder's stock, that shareholder cannot get out of his or her position?"

Halter

: "That is absolutely correct. This should not be a surprise to anybody."

Martinez

: "And there is absolutely no downside for you in these tender offers, right?"

Halter

: "That is absolutely correct."

Martinez

: "And if share prices appreciate greatly from where the tender offer is made, you will buy shares in the tender and pocket the difference between the tender offer price and the higher current market price?"

Halter

: "That is correct."

Martinez

: "In doing our research, we were surprised to find that so many investors out there didn't understand that these offers were so restrictive -- that they didn't realize what kinds of rights they were giving up when they decided to tender their shares to you."

Halter

: "You would be surprised at how ignorant people can be. You would be surprised at how many people do not realize that when you sell a stock short, your broker has to borrow those shares from someone else."

Martinez

: "We notice that Growth Capital never triggers the rule, after making a tender offer, that says if you have over 5% of the company's shares after the offer, you must conform to the clear rules that are laid out in SEC Regulation 14D -- the regulation that spells out the rules regarding tender offers."

Halter

: "That is correct."

Martinez

: "So basically, the little investor out there is not benefiting from the rules that the SEC has set up for traditional tender offers, correct?"

Halter

: "We do not like the rules of the SEC. But you are correct that we do not break the law with these offerings. It is legal and I firmly believe in my heart that it is ethical. We are not trying to rip people off."

An SEC spokesman declined to comment on Halter's business, but referred Martinez to the news release on IG Holdings that was quoted above.

Martinez

: "So Growth Capital doesn't want to be associated with those companies that were making below-market tenders over the past year?"

Halter

: "I was very happy to see the SEC cracking down on companies that were doing illegal things

with those tender offers during the summer, the ones that were below-market. But we do not do that. Every tender offer that we have made has always included a premium."

Martinez

: "The typical offer made by Growth Capital is usually 50 cents above-market. Growth Capital does not violate the letter of the law, but the spirit of the law sure seems to be getting nicked."

Halter

: "The fact remains that we conform to the full disclosure rules; we very, very clearly state

the terms in the tender offer."

Halter adds

: "Anything that you can do on behalf of shareholders we certainly applaud your efforts. We do not have anything to be ashamed of. We adhere to all of the rules and regulations."

However, controversy is nothing new to Halter. On Sept. 14, 1998, in a filing with Little Rock's

U.S. District Court

, Halter -- without admitting any wrongdoing or guilt -- settled a case in which he and his then-associates were accused of fraud, making false and misleading statements in news releases and securities filings and misrepresenting and omitting information that reflected the actual condition of the company. As part of the settlement, Halter had to pay $100,000. The allegations were made when he served as an adviser for

Builders Warehouse

, then a publicly traded company.

He is also being sued by shareholders of

S.O.I. Industries

, which was renamed

Millennia

(MENA)

. (Halter was chairman of S.O.I.) The suit alleges that Halter and his affiliates, including

Securities Transfer Corp.

, which is run by his son, Kevin B. Halter Jr., breached their fiduciary duties, violated securities laws and committed fraud. The case is still being litigated some three and a half years later.

In addition to S.O.I./Millennia, Halter also was the chairman of

Digital Communications Technology

(DGCTE)

. Digital Communications shareholders also sued Halter on the same day for the same allegations as those made in the S.O.I. suit.

Halter acknowledged to Martinez that both of those companies are history. "They are completely out of business," he said, without commenting further on past or pending suits. Which, of course, should go down as a warning to investors if he ever decides to change his mind and do a tender offer with the idea of making an acquisition or running a company.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.