Reverse Merger into a public shell 

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Definition: What is a Reverse Merger

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Reverse Merger Disadvantages and Risks

Reverse Merger Funding

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Reverse Merger Defined

Let's start here with the basics: Reverse Mergers are used to go public and get publicly trading stock  in a fast, inexpensive way.

Reverse mergers may 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 transaction.

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.

Reverse mergers are generally a less expensive way to go public than a conventional IPO.

What is a Reverse Merger

Reverse mergers are done so a private company can avoid the time-consuming SEC registration process to go public.

The 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.

Typically, 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.

If 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 company.

If the public shell is in the Pink Sheets, disclosure should be made there. Audited financial statements are not required.

The reverse merger can be done in weeks, even days, depending on the state of preparation of the companies involved.

Advantages 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.

Risks 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 the company.

IPO 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.

Alternatives to reverse mergers should be considered. The company may go public in a self-registration, saving the cost and risk of purchasing a public shell.

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  • Learn how others have used OTC shells to do reverse mergers.

  • Analyses of public shells and specific merger deals

  • Discover how these stocks traded in the aftermarket.

  • Dirty tricks of shell merchants

  • Special information on supply and demand in the aftermarket

  • How to research reverse merger OTC shells

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About Us John Lux

John Lux, has been an OTC market maker in new issues, shells and other companies, a security analyst, an investment banker, and attorney. He is an investor in venture and public companies.

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The Venture Capital Process or Why VCs Lose Money

Why Go Public?

Why Go Public, Make an Initial Public Offering, or IPO, or Reverse Merger

What Types of Companies Should Go Public, Make an Initial Public Offering or IPO

How to Sell the Underwriter on Your Initial Public Offering or IPO

The SEC Process for Initial Public Offerings or IPO

Reverse mergers and other ways to get your stock trading in the public market

Problems with Venture Capital and Venture Funding

Marketing Stock -- Reverse Merger -- Public Offering

Need for Audited Financials When Doing an IPO or Reverse Merger to Go Public

Traps for the Unwary When Doing an Initial Public Offering, IPO, or Private Placement

Stops on Going Public, Making an Initial Public Offering, IPO, or Reverse Merger

The Rocket Ride -- Going from Start Up, through Seed Money, Venture Capital, IPO

SEC Rules and a Reverse Merger instead of an IPO

Public Shells or OTC Shells for a Reverse Merger

Problems with using a Public Shell or OTC Shell to Go Public with a Reverse Merger

New Venture Funding

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OTC Shells and Reverse Mergers -- The Aftermarket is the Key

Rules For Securities Offerings and Private Placements

Registration Instead of a Reverse Merger to Go Public

Venture Capital Rocket Ride

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