A "reverse
merger" is a method by which a private company goes public. In a reverse merger, a private company merges with a public
listed company with no assets or liabilities. (The public company is also called a "shell" corporation). The publicly traded
corporation is called a "shell" since all that exists of the original company is its corporate shell structure. By merging
into such an entity, a private company becomes public.
The private
company merges into a public company and obtains the majority of its stock (usually 90%). The private company normally will
change the name of the public corporation (often to its own name) and will appoint and elect its management and Board of Directors.
The new public corporation has a base of shareholders sufficient to meet the 300 shareholder requirement for admission to
quotation on the NASDAQ SmallCap Market.
The advantages
of public trading status, which are outlined in greater detail below, notably include the possibility of commanding a higher
price for a later offering of the company's securities. Going public through a reverse merger allows a private company to
go public typically at a lesser cost and with less stock dilution than through an initial public offering (IPO). While the
process of going public and raising capital is combined in an IPO, in a reverse merger (also know as a "blind pool" merger)
these two functions are unbundled; a company can go public without raising additional capital. Through this unbundling operation,
the process of going public is simplified greatly.
The private
company which has gone public obtains the benefits of public trading of its securities, namely:
- Increased
liquidity of the ownership shares of the company
- Higher
share price and thus higher company valuation
- Greater
access to the capital markets through the possibilities of a future stock offering
- The
ability of the company to make acquisitions of other companies using the company's stock
- The
ability to use stock incentive plans to attract and retain key employees
- Going
public can be part of a retirement strategy for business owners
The benefits of going public through a reverse merger, as opposed to an IPO, are the
following:
- The
costs are significantly less than the costs required for an initial public offering
- The
time required is considerably less than for an IPO
- Additional
risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the up-front
costs have been expended
- IPOs
generaly require greater attention from top management
- While
an IPO requires a relatively long and stable earning history, the lack of an earning history does not normally keep a privately-held
company from completing a reverse merger
- The
company does not require an underwriter
- There
is less dilution of ownership control
- You
will receive a higher valuation for your company
Requirements prior to entering
into a reverse merger are the following:
- A
private company will require approval of the majority of its stockholders for a merger with a public corporation
Once a company is taken public through a reverse merger the financial markets hold the following
future prospects in the capital markets for the newly public corporation:
- The
market value of a public company is often substantially higher than a private company with the
same structure in the same industry
- Capital
is easier to raise for public companies because the stock has market value and can be traded
- The
public trading price of the public company's securities serves as a benchmark for the offer price of a subsequent public or
private securities offering
- Acquisitions can be made with stock since publicly
traded stock is viewed as currency for mergers and acquisitions
- Form
S-8 stock can be issued for officers, directors and consultants
- If the stock dividend distribution included warrants, the new company can receive proceeds from the exercise
of those warrants if the trading price of its common stock exceeds the exercise (strike) price of warrants.