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 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.
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.