The Definition of a Reverse Merger:
A Reverse merger - at times also
referred to as a reverse takeover (RTO) - is a way by which a
private company can become a public company
and take advantage of the greater financing options available to
public companies. The reverse merger is an alternative to the traditional IPO (Initial
Public Offering) as a method for going public. Reverse mergers
have historically been used by businesses that wish to start
trading in a very short time; however, resent SEC (Securities and Exchange
Commission) regulations have severely impacted the usefulness of
reverse mergers as a way for a company to start trading
quickly.
A reverse merger is a complex method that a private company uses
to become a publicly traded corporation. Reverse mergers happen
when a public company that is no longer actively involved in
business and has limited assets - that's why it's called a shell
company or shell corporation - joins, or merges, with a private
company. The private company buys most of the outstanding shares
of the shell company, gaining control and seating its own board
of directors. The resulting merged business entity becomes a new
operating company and may change its name to better reflect the
newly merged company's business purpose.
Reverse mergers, as part of the going public
process, are attractive to businesses because after becoming a
publicly traded company, the business can use its stock as
currency to buy assets, other businesses (M&A), to draw quality
administration, and to trade for advertising, as well. Raising
capital becomes easier to accomplish as a public company because
investors now have a clear exit strategy and company directors
can receive extensive wealth if the company's stock performs
well. Yet
and still, as mentioned in the first paragraph, using a reverse merger as a shortcut to start trading
quickly may no longer be the going public solution it once
was!
A reverse merger, the joining together of a public company
and a private company, was once done to allow the private company
to become a publicly traded corporation quickly, without the need
to provide immediate financial information (the newly merged
company was allowed a greater period of time to do so. This was done to
expedite the requirements needed for the merged company to start
trading in the stock market, since the shell company or
corporation had already gone through the SEC review process.
However, to provide better information to the investing public,
new SEC (Securities and Exchange Commission) rules now require the company wishing to do the
reverse merger to provide much of
the documentation that would be required for a registration
statement in only 4 days after the merger!
The new shorter time limit has had the effect of making reverse
mergers useless as a way to start trading quickly! Sadly, many
company directors and officers don’t recognize there are plentiful other ways for a private company to become publicly traded, outside of doing a
traditional IPO (Initial Public Offering) or a reverse merger.
Although reverse mergers may present unforeseen issues with
lawsuits and financial liabilities, these items may not come up
for consideration by CEO's, directors, and officers of private
companies that are lacking experience in running a public
company. These liabilities can include the following:
• The shell
corporation or shell company may have a less-than-desirable
business history
leading to the aforementioned
liabilities.
• Unhappy or
dissatisfied shareholders that could sell their stock at the
least opportune time
for the company.
• Obstacle to funding
negotiation. If the investment capital source perceives the
shell
structure to be of questionable
soundness, and perhaps leading to future litigation, it could
kill the deal.
As a strategy to go public it is not necessary to do a reverse
merger with a public shell company or shell corporation; you can
do a direct registration of your company and avoid the need for
a reverse merger with a public shell corporation. Needless to say, many of the benefits
bestowed upon public companies also apply to companies created
through a direct registration, to
include:
• The greater choice
of financial opportunities available to public companies.
• An exit strategy for the company
directors and founders.
• Investors
are more compelled to invest in a company with a clear exit
strategy.
• The ability to use the company stock as
currency to acquire other businesses (M&A).
Let Our Many Years Of Experience Guide Your Public
Company Creation:
The president of our firm is a very experienced securities
attorney. Please contact us if you would like to take your
company public. We are ready to assist you with free reports and
other information that explain in detail the going public
process and reverse mergers.
Of special note: Tcc5 is not associated with oil and gas,
oil and natural gas exploration, gas stations, petroleum
products marketing, or the Shell Corporation.
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