A reverse merger, also known as a reverse takeover is one of the
quickest ways for a private company to go public.
Reverse Mergers is the
process in which
a private company takes over an existing public company and thus accelerates
the sometimes lengthy and time-consuming process of going public.
How does it work?
The head or controlling interests of the private company take over the purchase
control of the public company to merge it with the private company. The new corporation
is called a shell since only the organizational structure exists from the original company.
Shareholders of the private company acquire a substantial amount of shares of
the public company as well as control of the board of directors.
Go Public Faster
A reverse merger helps to save time since
the whole process can be completed within a few weeks. The private company
does not have to undergo the normal review of federal and state regulators
as this was already completed by the public company. However, the Securities
and Exchange Commission requires a disclosure instrument that includes
legal disclosures and audited financial statements. The disclosure needs
to be filed by the company on form 8-K immediately after the reverse merger.
What does the reverse merger involve?
The procedure involves the shell and the private
company exchanging information between each other and signing the share exchange
agreement. The merger terms are also negotiated and agreed upon. The control over
board of directors and substantial amount of shares are passed on to the
private company. Shareholders of the private company contribute their shares
to the shell company in order to gain control of the same. Hence, the former
private company is now transformed in a publicly held company.
What are the benefits of a reverse takeover?
The new company can now command a higher price for
the offering of company securities. The private company can become public with
a minimum of transactions and lesser costs. There is also less stock dilution
through the initial public offering. However, the processes of going public and
raising capital through an IPO are two distinct actions. Things may be a lot
easier when these two processes are separated.
Is a reverse takeover susceptible to market conditions?
A reverse takeover is less susceptible in the
light of different marketing conditions as it can be completed in less than
thirty days. However, conventional IPOs can be risky to undertake as the deal
relies on market conditions. The deal is solely between the private company
and those controlling the public one; hence, performance is not affected by
Are there any drawbacks of reverse mergers?
Every coin has two sides and this principle
applies to reverse takeovers as well. Sometimes the shareholders of the
public shell company could be bad with pending lawsuits, unforeseen
liabilities and sloppy records. The shells could encounter deceitful or
angry shareholders. One method to solve this problem is to enact a lockup
on the shares (after the reverse merger) owned by the group whom the shares
are bought. Better yet, only use a perfectly clean shell company that has
not housed an operating business at any time. That helps eliminate many of
the risks that can be associated with a reverse merger.