Why do companies pursue a reverse merger?
On behalf of Law Office of Clifford J. Hunt, P.A. on Sunday, June 3, 2018.
A reverse merger can be a relatively easy way for a company to transition from privately-owned to publicly-owned and providing liquidity to its shareholders.
This liquidity and public market access provides the private company’s shareholders with an “exit strategy” to sell their equity interests.
In a reverse merger, a private company absorbs a public company. The public company is typically a “shell” company with almost no ongoing operations. The private company usually gains control of the public company’s voting power, board of directors and management operations.
A reverse merger can be a cheaper, faster method of going public than an Initial Public Offering (“IPO”). There are a few reasons to consider this alternative to become a publicly traded company:
It’s cheaper. The cost for an accountant, legal fees and general process is all cheaper for a reverse merger than an IPO. Reverse mergers don’t require companies to raise the amount of capital usually needed for an IPO.
An easy way to access new capital. Investors can be an influx of new capital for any company. Private companies looking to expand may view the public sector as untapped potential. A reverse merger can be a quick way to access this resource.
The advantages of going public. Shareholders and owners enjoy more avenues to increase growth and direct their company when it’s public. Public companies maintain a liquidity that private companies cannot match. Reverse mergers can help private companies gain these advantages.
It’s a relatively fast process. Unlike IPOs, which can stretch on for months, reverse mergers can be completed in a matter of weeks. This allows energy to be directed towards running operations instead of preparing for an Initial Public Offering.
Reverse mergers carry a lot of benefits for a company trying to go public without undertaking an IPO. This transition is often cheaper and moves much faster than the traditional process.
Companies that are considering this avenue to become public must have financial statements that have been audited by an independent accounting firm that is certified by the Public Company Accounting Oversight Board (“PCAOB”).
This requirement is generally the element that causes significant delays in the process.
The reverse merger must be reported in a comprehensive filing with the Securities Exchange Commission on its Form 8-K that must be filed in the SEC EDGAR system. The Form 8-K must contain SEC Form 10 registration statement information regarding the private company and combined entity.
However, like anything in business, there are still risks associated with reverse mergers. Performance of thorough due diligence regarding the existing shareholders and capital structure of the target shell is of paramount importance.
If you have any questions around reverse mergers or business law in general, an experienced attorney can help.