A reverse merger describes the transaction where a private company purchases a public “shell” company. The company can do this for a number of reasons; it could be growth or liquidity motivating the transaction. The reverse merger shell functions as the private entity once the process is completed.
Ways a company can go public
Companies can go public in several ways. They can go through an investment banking firm. The forms can be filed through a lawyer. Finally, the process can be completed using a shell company. The process is considered to be one of the most efficient means of completing the process of becoming a public company. IPOs are usually an expensive process, but the reverse merger process eliminates many of the costs associated with completing the merger.
What is a reverse merger shell?
The reverse merger shell is usually a company that isn’t operating. The company usually has no normal operations. The shell company could be in any condition. The shell could be in distress, making it a perfect opportunity to change its identity. The shell company could be in amazing condition with no liabilities and minimal risks connected to the brand. This type of company can hold assets in cash and may be used solely for the purpose of holding funds until the transaction is complete.
Overview of the process
First, the public shell will be thoroughly reviewed. Once the review is completed, the shell company is acquired by the private company. The public shell company becomes the private company. The leadership from the private company may resign over the course of the process. The form 8-K is filed outlining the new leadership over the company. The internal structure of the shell company is changed to resemble that of the private company. Once the transaction is completed, it is traded publicly under a new symbol on the exchange.
Advantages and disadvantages of becoming a public company
A reverse merger facilitates a company’s transition from private to public. The process expedites the process and reduces costs associated with becoming a public company. The strategic process improves the liquidity of a company. It’s easier to secure flexible financing when the merger is complete. As a result of the merger, the compliance requirements become more difficult to meet. The responsibility of the leadership is to build the value of the stock, making it more attractive to investors.
Ways the reverse merger process saves time
A reverse merger can be completed in a matter of weeks. If the public shell company has already been registered with the SEC, then the private company can avoid the required, in-depth review. The private company developed through a reverse merger doesn’t require as much time because the underwriting process isn’t required. With so much of the attention in a merger being directed toward enhancing the value of the company in an IPO process, the preparation stages may take longer. The public company’s latent state and its lack of assets also simplifies the merger process.
How is the value of the shares are protected?
The agreement can set forth guidelines for when the shares can be liquidated. There may be a set time in the future in which the company permits the shares to be sold. In restricting when shares can be sold, the stock’s value is protected. If the shares could be freely sold after the merger occurred, then the stocks could be dumped quickly, devaluing the stock.
Leadership during transition
The leadership of the private company may be required to resign before the process is completed. The controlling interest of the private company can also be retained during the process. Shareholders can purchase additional shares of the new company once the merger is complete. Owners typically retain the controlling interest of the new company, which gives investors company in the brand.
A reverse merger consists of a shell company and a smaller company merging into one entity. The merger is completed in less time than an IPO. The less expensive process allows owners to complete the process with fewer fees and cost. Post-merger, the stock’s value increases and the public company takes the identity of the private company. Once the merger is complete, the public company can now be publicly traded.
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