Reverse mergers are considered as a goal by many company directors and they start planning for the day when their closely held private company can claim its place of the capital markets as a public business.
Nonetheless, there are many methods that a private business can use to enter into the public capital markets and raise capital. The most common is the IPO (Initial Public Offering). An IPO is when a previously closely held private company initially offers its shares to the investing public.
When a closely held private business contemplates a reverse merger – oftentimes called a reverse takeover – with a public shell company, it is as a way for entering the capital markets quickly and perhaps offering theprivate company directors an exit strategy.
In the case above, the publicly traded company is called a “shell,” because all that remains of the original business is the corporate organization and trading structure.
In reverse mergers, the shareholders of a private business buy control of the corporate shell company, and then merge it with the private business. The private company’s shareholders get the biggest part of the shares of the shell company, in that way keeping control of the board of directors.
Obviously, the finer nuances involved with a reverse merger are numerous, and perhaps an overview of the aspects of a reverse merger with a shell corporation is an item that should be broached with a corporate financial consultant with a firm grasp of all the pertinent Securities and Exchange Commission (SEC) rules.
When contemplating a reverse merger with a corporate shell company, an important mass of questions command an explanation. Essential ideas come to the forefront, including: Direct Public Offering (DPO) regulations, filing registration statements SB-1 and SB-2, rule 15c211, market makers, form 10 shells, mergers and acquisitions (M&A), registered shares, accredited investors, SEC accounting practices, strategic planning, global depositary receipt, investment banking, NASD broker/dealers, and the Securities and Exchange Commission (SEC).
Professional consulting is a requirement before entertaining a reverse merger, since many CEO’s are lacking in experience and not aware of the dangers of going public via a reverse merger with a public shell company.
A few of the benefits as the result of taking a private company public with a reverse merger are better ways to raise capital, since the multiple sources of capitalization are more available versus what a private company can attract. Furthermore, if there is a high enough interest from the investing public, investment attention about the business increases, and it could provide a secondary market for the company’s stock issue. The company can also attract key personnel by offering stock incentives. The merged corporation’s securities can also be used as currency for acquiring other businesses (Mergers and Acquisitions).
The innumerable rewards of taking a private company public far offset the option of remaining a private business. The cachet associated with a public corporation is a plus; the enhanced circumstances for raising capital for corporate expansion are very good reasons for becoming a publicly traded company. A reversemerger with a public shell corporation has its place within the alternative go public procedures.
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