First and foremost it is important to have a basic understanding of what a reverse merge is. The U.S. Securities and Exchange Commission defines reverse mergers as an option generally utilized by foreign based companies or companies that are privately owned who want to gain access to U.S. markets. In order to do that, the company must merge with an existing publicly traded company. This is known as reverse merger.
The main reason that a company may elect to perform a reverse merger is to gain immediate access to capital markets. Another reason is that a reverse merger is generally regarded as a quicker and less costly alternative to getting listed on a stock exchange. However, as with any business transaction or investment there are risks associated with reverse mergers.
According to the SEC many companies have a hard time starting viable after a reverse merger has gone through. Thus, companies should enter any reverse merger transactions with caution. Additionally, there have been instances of fraud and other financial abuses reported with reverse mergers.
Furthermore, reverse merger transactions may have issues with accounting audits and may not be in compliance with existing accounting standards. In fact, the SEC’s enforcement division suspended trading for a number of reverse merger companies because of inaccuracies in companies financial statements such as accounting, cash balances and accounts receivables.
Companies that have become public through reverse mergers are required to disclose the risks of those interested in investing in their stocks. Reverse mergers, regulatory compliance associated with such mergers is a complex matter that should not be taken lightly. Working with a law firm familiar with such mergers will help alleviate some of stresses associated with such transactions and help one ensure that all financial statements are in compliance.
Source: U.S. Securities and Exchange Commission, “Investor Bulletin: Reverse Mergers,” Accessed Feb. 16, 2015