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Reverse Merger as a Going Public Method

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 market conditions.

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.

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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