A reverse merger is a method of getting listed on a public stock exchange through purchasing another already public company—usually a shell company. Traditionally, options like IPOs were considered the best—and perhaps only—solution. Recently, however, reverse mergers have a gained ground as a viable alternative.
Reverse mergers can have real benefits, but they can also be a very risky choice, especially if compliance issues are not properly taken care of. The corporate attorneys in the Priori network are experienced in all types of financing and can help you decide if a reverse merger might be the right way for your company to raise capital, while mitigating your risk.
How Reverse Mergers Work
In reverse mergers, investors in a private company acquire a majority of the shares of the public shell company and merge it with the purchasing entity. Once the public shell company and the purchasing private company are merged into one legal entity, the private company can trade shares publicly.
Benefits of a Reverse Merger
A reverse merger is attractive to most companies for the same reasons as an IPO. By becoming publicly traded, a company gains greater liquidity and access to capital markets. Although they sometimes get less publicity than an IPO, these types of mergers get a company media attention that can help sell shares once the merger is complete. In addition, a public company is required to be more transparent. While this may require additional regulatory compliance, it can attract investors who may otherwise hesitated to invest. These benefits usually lead to the ultimate benefit of a higher valuation than would be possible as a private entity.
Reverse Merger VS. IPO
So what benefits do reverse mergers have that IPOs do not? In general, a reverse merger is simpler, shorter and less expensive than an IPO. The following are some major benefits for a private company that chooses to go public through a reverse merger as opposed to an IPO:
- Lower Cost. The due diligence and regulatory constraints required for any merger are generally much less than that of an IPO, which means that your company can save money creating the appropriate documentation.
- Faster Process. An average IPO takes about six to 12 months to complete, while a reverse merger can be pulled together in as little time as 30 days.
- Less Up-front Risk. Although IPOs may fall apart in response to adverse market conditions, such as slowed equity markets or unfavorable publicity, reverse mergers are less likely to be canceled or put on hold under the same constraints. This makes a reverse merger less subject to sudden unexpected changes in the economic climate.
- More Access to Capital. Reverse mergers can provide you more access to capital than an IPO, as they offer a greater number of financing options. Some of these include an issuance of additional shares in a secondary offering and private offerings.
Potential Downsides of Reverse Mergers
Reverse mergers aren’t without downsides, however. The following are some of the most common pitfalls companies face with reverse mergers:
- Unexpected liabilities. There may be liabilities in the shell company that are not uncovered during due diligence. This is an especially big risk if the deal is not properly vetted by a corporate lawyer ahead of time.
- Disappointing returns. Reverse mergers are not subject to the public scrutiny that an IPO would be, which means that sometimes the offering does not attract investors as expected.
- Penalties associated with failing to meet regulatory and compliance requirements. Sometimes startups that choose to go public through a reverse merger fail to take into account the regulatory and compliance requirements that must be met as a public company. If compliance issues are not dealt with in a timely manner, there can be serious financial and legal problems.
Put in a request to speak to a Priori lawyer about whether a reverse merger is a viable option for your company.
The cost of a reverse merger can vary significantly, depending on a variety of factors. Priori lawyers can guide you through the process from approximately $225 to $600 per hour. Priori clients enjoy a net-15% discount on standard hourly rates. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and free price quote from one of our lawyers.
What’s the difference between a reverse merger and an IPO?
Both reverse mergers and IPOs accomplish the same goal: raising capital on a public exchange; however, they go about the process in very different ways. The main difference between a reverse merger and an IPO is the way that a company becomes public. A reverse merger makes your company public by merging it with another currently listed company, so that you can make an offering as a part of the company already on the exchange, while an IPO allows you to go public by meeting certain criteria and then issuing your own securities. Each has its own advantages and disadvantages that you can talk over with a securities attorney.
How can I decide if a reverse merger is the right choice for my company?
This is a big decision that should not be take lightly. Talking over your options with an experienced securities attorney can help you decide if a reverse merger will meet your financial goals and serve your company in its current state of development.