A reverse merger is a process wherein a private company buys a dormant/shell public company. This allows the private company to step into the public market domain without issuing any stock or share offerings. Additionally, the private company is now able access a wider range of capital investments and appeal to a variety of investors including individuals, other corporations and financial institutions.
However, it is important to note that reverse mergers as a strategy for growth or going public are a much-debated move. And it’s certainly not the best route if you’re looking for a quick injection of capital! Listed below are some important guidelines and helpful tips on how to do a reverse merger and what you can expect along the way!
Nuts and bolts… how a reverse merger works
- Expenses on fees, due diligence, etc. can range between $100,000 and $500,000.
- Be prepared to give away as little as 10% or as much as 20% of the private company’s equity.
- In return shareholders of the private company can receive 85%-90% or even more of the public company’s shares.
- A reverse merger does not need to undergo a regulatory review, as the public company you’re buying would have already gone through the process.
- The two companies come to an agreement on merging the two entities and agree on the amount of stock or equity to be exchanged.
- The name and stock symbol of the public company are changed to reflect the new merger, and the new management is required to file an information statement – the 8-K – within four days of closing the deal.
- The 8-K contains all information on the newly-formed entity, details of management and board of directors, exchange of stock, business description and all financial documentation that should be audited as per GAAP standards applicable in the US.
- In order to trade the public shares received as part of the reverse merger, the company should file a Registration Statement with the Securities & Exchange Commission (SEC), as per the relevant regulations (SB-1 or SB-2).
- If the old public company does not have a stock symbol, the new company can make the necessary application to the NASDAQ Bulletin Board. This involves getting a member of the NASD to file a Form 211 and answering satisfactorily all queries posed by NASDAQ.
This, in essence, is the procedure involved in doing a reverse merger. Of course, there are several formalities to be completed before and after the reverse merger, but these are more on the lines of preparing your company for a reverse merger (before) and then getting on with business with the newly-merged entity (after). The Internet provides numerous resources on starting and completing a reverse merger, and you can always get specialist advice from lawyers or accountants who specialize in securities’ trading. All that is left for you to do now is to start looking for a shell public company to start the reverse merger!