Is a Reverse Merger Right for You?


Why do a Reverse Merger vs. an Initial Public Offering?

In general, companies that file initial public offerings with the SEC may have better investor reception than reverse merger companies. This is because the scrutiny of reverse merger companies is not as intense as with an IPO. Company credibility and investor trust are reduced in a reverse merger.

Reverse merger abuse, most notoriously with Chinese companies, has created a bad reputation for reverse mergers. Reverse mergers have also been used in “pump and dump” scams.


Why then do a Reverse Merger?

Here are the advantages we know of for doing a Reverse Merger over an IPO:

  • If you are in an extreme hurry to have publicly trading stock, do a reverse merger.

  • If you cannot get the audited financial statements necessary to file an IPO with the SEC, you can do a reverse merger into the Pink Sheets.

  • If you want to be in more control of the process of going public, instead of being at the mercy of an underwriter, you can do a reverse merger.

  • You can decide when the stock is going to hit the market. If you want to be more assured that you will be publicly traded and not dependent upon approval by the SEC, FINRA, and DTC, you may want to merger into a company that is already trading and DTC eligible.

  • If you want to reduce costs associated with securities regulation compliance, you may want a reverse merger.


The Process

In a reverse takeover, shareholders of a private company purchase control of a public company. The public company then acquires the private company. The publicly traded corporation is called a “shell” since often the public company has no assets or operations.

A public shell may have some existing business operations but generally these will not be substantial in relation to the private company. In the acquisition, the private company shareholders receive a substantial majority of the shares of the public company and control of the public company’s board of directors. The transaction can be accomplished within weeks. If the public company is already registered with the SEC, a full disclosure document, called a “Super 8-K” must be filed with the SEC within four days of closing the acquisition.


Benefits of Being Public

The reverse merger company has the advantages of public trading status. These advantages include a higher price for the company’s stock, an exit strategy for investors seeking to buy stock privately in the company, and a market for a later offering of the company’s securities.

The process for a conventional IPO can last for a year or more. Much management time and energy can be soaked up by an IPO. This can stunt the progress of a small company. Also, stock market conditions may weaken, reducing the terms of the offering or causing its cancellation altogether. By contrast, a reverse takeover can be completed in as little as thirty days if the required financial statements are there.


Reverse Merger Disadvantages

There is always the risk that the public company that you merge with has some sort of hidden agenda, unknown history, hostile stock holders, or undisclosed liabilities.

The public vehicle may have some shareholders. Reverse merger shareholders tend to be disloyal and sell at the first opportunity. You can of course provide that the existing shareholders lock up their stock for some period of time.

The SEC has issued an investor bulletin cautioning investors about investing in reverse mergers, stating that they may be prone to fraud and other abuses.


Get the Expertise You Need

In general, a little reflection will tell you that while all company executives are expert in their business, few venture CEOs are expert in marketing stock to investors, running a public company, or engaging in such interesting challenges as fighting off short sellers. Moreover, marketing your products while you are marketing stock to investors, will lead to both your business and your financing being adversely affected.

Many skills are required of the successful public company CEO, including such obscure arts as fighting off short sellers, placating dissident shareholders, answering questions of shareholders, holding annual meetings, cultivating securities analysts and market makers, pricing and managing securities offerings both private and public, and selling stock to institutions and individual investors.

We find that most CEOs are not experienced in these new matters. The reward for properly executing these functions is that the stock market may become a virtual ATM for the company, allowing the company to access expansion capital with ease. Further, the company can enhance key employee loyalty by offering stock options, and use stock instead of cash to buy other companies.

Being public is a powerful tool for rapid expansion and the reverse merger may be the path that is right for you.

Consult with us on your path to being a public company.