Let's start here
with the basics: Reverse
used to go public and get publicly trading stock in a fast,
be used in connection with or without other reverse
merger financing. Because reverse mergers provide an exit
strategy for investors, they can facilitate access to the capital
markets and make it easier to raise money, either in connection
with the reverse merger transaction or after the merger
In a reverse
merger, a private company merges with an inactive public
company, usually called a public shell. The public shell may or
may not have cash.
generally a less expensive way to go
public than a conventional IPO.
What is a
mergers are done so a private company can avoid the time-consuming
SEC registration process to go public.
two entities in a reverse merger are a private operating company
and a public shell company. While the private operating company
has a valuable business, the public shell company generally has
little or no business although it is publicly traded.
the owners of the private company that wants to go public buy
enough stock in the public shell company to get control of the
public shell company. They then merge their private operating
company into the public shell for stock in the public shell.
the public shell is an SEC registered company, SEC rules require
the public shell to make an 8-K filing with the SEC in short
order. This disclosure, known as a Super 8-K, must contain audited
financial statements and full information on the operating
the public shell is in the Pink Sheets, disclosure should be made
there. Audited financial statements are not required.
reverse merger can be done in weeks, even days, depending on the
state of preparation of the companies involved.
to the private company usually cited for a reverse merger are
increased ability to raise money, ability to pay for employees and
assets with stock, and more control over the going public process
as the company, not an underwriter, controls the process. The
company may have investors who want to buy the stock, but only if
it is publicly traded and the company wants to save the expense of
paying underwriting commissions.
in reverse takeovers include buying a shell with hidden
liabilities or other defects and the dumping of stock on the
market by the shell merchants. In addition, considerable expertise
is needed to successfully run a public company. Small companies
going public with reverse mergers will need an expensive investor
relations program to interest people in their securities.
Securities compliance and audits increase the cost of operating
transactions and reverse mergers can be done for many reasons
beyond access to capital. They may be done to solve estate tax
problems. They may be done to allow the owners of the operating
company to liquidate part of the their stock. They may be done to
increase the price the company can command when it is acquired.
to reverse mergers should be considered. The company may go public
in a self-registration, saving the cost and risk of purchasing a
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