What Is A Reverse Merger?

A reverse merger is a transaction in which an existing public reporting company, with few or no operations, acquires a private operating company — usually one that is seeking access 
to funding in the U.S.capital markets. Typically, the shareholders of the private operating company exchange their shares for a large majority of the shares
 of the public company. Although the public company survives the merger, the private operating company’s shareholders gain a controlling interest in the voting power and outstanding shares of stock of the public company. Also typically, the private operating company’s management takes over the Board of Directors and management of the public company. The assets and business operations of the post-merger surviving public company are primarily, if not solely, those of the former private operating company.

Why A Reverse Merger?

A private operating company may pursue a reverse merger in order to facilitate its access to the capital markets, including the liquidity that comes with having its stock quoted on a market or listed on an exchange. Private operating companies generally have access only to private forms of equity, while public companies potentially have access to funding from a broader pool of investors.
A reverse merger often is perceived to be a quicker and cheaper method of “going public” than an initial public offering (IPO). The legal and accounting fees associated with a reverse merger tend to be lower than for an IPO; there are no registration requirements under the Securities Act of 1933 as there would be for an IPO and being public may give a company increased value in the eyes of potential acquirers.

What Are Some Advantages Of A Reverse Merger?

A reverse merger offers numerous advantages including (1) initial costs are much lower than an IPO; (2) reduced time for becoming a public company; (3) no significant regulatory review or approval for the transaction: (4) the company can now use its stock as part of its capital acquisition strategy or to finance acquisitions; and, (5) capital may be easier to raise as investors now have a clearly defined liquidity (exit) strategy through the public markets.

Can I Trade Stock In A Company Following A Reverse Merger?

Shares of reverse merger companies may be traded in exchange markets (ex., NASDAQ) or over-the-counter (OTC). If the reverse merger company’s securities are listed and traded on an exchange, the listed company must meet the exchange’s initial listing standards to be eligible for listing. The listed company must also satisfy the exchange’s maintenance or continued listing standards to remain listed and must comply with the rules of the exchange, the federal securities laws and other applicable provisions of the law. When certain market or company events occur, an exchange may halt trading in the securities of a listed company. Also, if a listed company fails to meet the exchange’s continued listing standards, the exchange may initiate proceedings to delist that company’s securities from its marketplace. There is no assurance that a security listed on an exchange will remain so and trade on that exchange indefinitely.

Can You Help With The Financing Of A Reverse Merger?

If your company either doesn’t have or doesn’t want to spend its cash to buy a public company, we have several funds that are interested in investing in private companies interested in going public through a reverse merger transaction. As long as your company agrees to reverse merge with a public company, one or more of the funds we work with can pay for the cost of buying the public company, and more.  These funds will invest up to $1M per deal and possibly can arrange for follow-up capital raises. Approximately $400K will be used for the purchase of the public vehicle and reverse merger; the balance can be retained by the company for working capital. The investor fund(s) will get whatever is negotiated, depending on valuation, and it can be structured as equity or debt, or a combination of equity and debt.

One caveat: the funds will not do startup (pre-revenue) companies.

What Is Your Experience With Reverse Mergers?

Our team has over 75 years of combined experience with reverse merger (RM) transactions having successfully completed over 100 RM transactions with many companies listed on the OTC or NASDAQ exchanges.


If you’re interested in becoming a public company, be sure to contact us.


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