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How Do Companies Go Public With a Reverse Merger?

What is Reverse Merger?

Today, going public with a company has seemed to become a hot commodity, with many private companies now venturing into the public markets to aid in the raising of capital. Most companies interested in going public often file a direct registration with SEC (S-1 filing) to register their companies as public, once public, the initial funding phase (IPO) can begin.

Aside from using the initial public offering (IPO) approach, several firms have now found an alternate method to going public by using reverse mergers.

Reverse Mergers provide a less costly and simpler approach to going public as compared to having a fully-fledged initial public offering which requires the hiring of an underwriting firm to help with the sale of stock.

Take note that with the reverse merger, the legal acquirer is not the surviving company. For instance, if a private firm does a reverse merger with a public shell and the public firm acquires the private company, but, the private firm survives, it becomes public much faster as compared to the IPO process.

The Role of the Public Shell?

The initial step in any reverse merger is to select the appropriate public shell. The public shell is public entity that has no active business operations. It is kept alive simply because it is searching for a business that it can acquire or start. Such companies hope that they would be a company interested in a reverse merger. It is typical for most corporations to be dormant, with hardly any on-going business operations or assets. Their main value is the public traded company registered status that they possess.

Stock Trade

With the reverse merger detailed on paper, the shell that is dormant acquires all the assets and stocks of the private firm. On the other hand, the public company issues out stock to the previous owners of the private firm. The new shares can then be traded in different exchanges and utilized to raise the operating capital.

The Benefits and Drawbacks of the Reverse Merger

The benefits of the reverse merger are impervious to the current market conditions. The modern IPO's are usually risky for firms to undertake simply because the deal is dependent on the market conditions that are not controlled by the senior management. This means that in case the market is down, the underwriter may opt to pull out the offering. However, with the reverse merger, the deal is dependent on whether those who control the shell are impressed by the private company or not. In this case, the market conditions have got zero bearing.

The IPO's can drag for more than a year from the time the idea is conceived until the point where it is executed. With the IPO's, a lot of time is spent in endless meetings as well as drafting sessions. However, the scenario is different with the reverse mergers since the process is quite fast and hassle free.

Evidently, there are benefits and setbacks of the reverse merger approach. The fact that the reverse merger is fast and inexpensive in comparisons to the initial public offering is a major plus. However, the ease that this approach comes with can make it be considered a shady dealing. This means that any business that is thinking of going public through a reverse merger should ensure that it makes a careful selection of its shell. Also, all the state incorporation laws should be taken into account.

This page was created for user generated content, a place for the public to upload articles on various topics related to going public, reverse mergers, public shells, raising capital and other financial matters. These articles are posted as basic information for the public. Various authors have written these articles and as the Tiber Creek Corporation has not verified the authenticity of the content, they make no claims or assume any responsibility for the information therein. The statements and opinions expressed here are those of the authors and/or contributors and not necessarily those of the Tiber Creek Corporation.

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