The reverse merger is a process where a smaller company acquires a larger company. The private company merges with the shell company in order to achieve liquidity. Once the merger process is completed, the new company operates as the private company did prior to the merger.
Why companies go public
There are opportunities for expansion that are more difficult to achieve without broad access to capital. A reverse merger gives the company the opportunity to increase liquidity and further expansion efforts. A private company that goes public has improved liquidity and more access to capital. These things make expansion easier to accomplish.
What is a reverse merger shell?
The reverse merger shell is the public company that is acquired by the private company. This shell company is usually inactive and has limited operational activities. The public company is usually recommended by a broker. It can even be discreetly advertised in a publication. The shell company can have a stellar history or have a mixed history. Once the reverse shell is identified, it is audited and researched to ensure that is the proper fit for the merger.
What happens to the shares after the merger is complete?
There are several outcomes for shares once the merge is complete. The private company may trade its shares in exchange for shares of the shell company. Investors of the private company can choose to liquidate their shares if they have decided to discontinue involvement with the new public company. There are scenarios where the shares have to be canceled in order to complete the reverse merger transaction. The number of shares may have to be reduced to raise the value of the shares.
What are some of the issues that arise during a reverse merger?
There are issues that can occur with any type of merger. Investors can prematurely dump their shares and decrease the overall value of the shares. The company can also receive a lukewarm response once it has been introduced to the public. This response may mean it is difficult for companies to attract investors because of the means used for the company to go public. Additionally, the company may have liabilities it could be responsible for if the shell company wasn’t properly vetted. The liabilities from the shell company then become the responsibility of the private company.
How do companies choose a shell?
A shell company should be thoroughly researched prior to selection. Brokers often help guide the selection process. During the research process, the company is evaluating the shell to make sure that it has a successful track record. For example, the company should have consecutive years of millions in revenue posted. The financial track record of the company is one of the single most important factors used in evaluating a shell company.
How long does the process take?
The entire process can be completed in a matter of months. In some scenarios, a reverse merger can be completed in several weeks. Simple mergers can be completed in only 30 days. The company doesn’t have to worry about raising capital to aid in going public, so the process takes less time to complete. There isn’t as much time put into creating value for the stock in comparison to the IPO process. This is another factor that reduces the time it takes to make a company public.
Leadership during transition
The leadership from the public company usually changes during the merger. The leadership from the private company replaces the old management team at the shell company when the merger occurs. In the Form 8-K, the new leadership is outlined.
The reverse merger can be completed in several weeks. Carefully vetted shell companies reduce risks for the private company pursuing a merger. Once the merger is complete and all of the necessary paperwork is filed, the company’s stock can now be traded publicly on the exchange.