A reverse merger is a method by which a private company that has restricted access to capital may seek better funding by gaining access to U.S. capital markets. They do this by merging with a company that is publicly traded in the U.S. This method is typically employed by wholly privately owned companies or companies that operate in foreign countries and thus are outside the United States. Another name that transactions of this type may go by is “reverse takeover.”
Typically when a reverse merger transaction is executed, an existing public reporting company acquires a wholly owned private company. The public company, which is called a shell company, will have few if any operations. During the course of the transaction, the private company’s shareholders will typically swap shares of the private company for shares of the publicly traded company in large enough amounts to give them a controlling majority of the publicly traded company.
At the conclusion of the transaction, the public shell company will still exist, but the shareholders of the private company will end up with the controlling interest in it. Not surprisingly, the shell company’s board of directors, and indeed the management of the shell company, are also taken over by the private company’s management team and leadership. Essentially, though the public company will still exist post-merger, it does so in name only. and all assets and business operations are subsumed by the private company.
Reverse mergers are normally used to facilitate a private company’s access to public funding, because it is typically quicker to do a reverse merger transaction than going the traditional route of offering an initial public offering, typically referred to as an “IPO.”
These are some risks associated with reverse mergers. Companies interested in exploring this option may benefit from contacting a business law firm for more information about the process.
Source: SEC, “Investor Bulletin: Reverse Mergers,” Accessed November 18, 2014