A reverse merger is an agreement between two companies that were not originally intended to merge. The process involves finding a public shell company willing to merge with a larger company. Usually, two steps are involved in the process: finding a public shell company willing to merge, and commissioning a mass buy of the public company’s shares. The goal of the transaction is to gain control of the target company. Most buyers aim to control at least 80% of the target company’s shares.
To start the process of a reverse merger, the private company should first evaluate the public entity. The public entity should conduct due diligence on the private company to ensure that it is a solid, well-organized business with no pending lawsuits. The reverse merger process will also allow the private company to start trading its shares on the stock exchange. Once the transaction has been finalized, the private company will become the public company’s wholly owned subsidiary.
A reverse merger transaction involves a private company purchasing a smaller, existing public company. To be eligible, the private company must acquire more than 50% of the public company’s stock. Once the private company controls the public company, it can begin merging its operations. However, the public company is often referred to as a “shell company” because it has few operations. This allows the private company to access the public market without putting itself at risk.
A reverse merger is typically less expensive than an IPO. The private company isn’t required to hire investment bankers. Additionally, the transaction requires less work than an IPO. Since there are no additional securities, it may cost less than an IPO. However, a reverse merger does not always come with a low risk of failure. The downside is that the company has less time to raise capital and will be more difficult to trade in the long term.
The most common reason for a reverse merger is a private company wanting to go public quickly. While this is a viable option, the lengthy registration process with the Securities and Exchange Commission (SEC) could make the acquisition risky. In the worst case scenario, a reverse merger would result in a large number of shareholders with fewer than ten shares. The goal of this process is to get control of the target company.
As with any deal, there are risks and benefits to reverse mergers. Many reverse mergers are unsuccessful, and there are a number of companies that have suffered a shareholder revolt. Whether a reverse merger is right for you depends on your specific circumstances and risk appetite. You should consult with your financial adviser and conduct proper research before investing. When investing, you should look for a company that can generate profits quickly. Ultimately, reverse mergers are beneficial for investors, but be cautious.
While the process is simplified and straightforward, it still involves extensive due diligence. Unlike a normal merger, reverse mergers may involve a private company looking to go public. Both private and public companies need to thoroughly vet the motives of the acquirer and investigate any pending liabilities. This is especially important if the acquisition is taking place between public shell companies with looming issues. These companies will often be more difficult to deal with than companies that were previously public.
While IPO preparation can take anywhere from six months to a year, a reverse merger can take as little as a few weeks. Reverse mergers also carry an increased fraud risk. For example, the documentary “The China Hustle” highlighted the fraudulent reverse merger of a Chinese company with a U.S. company. The acquiring companies were fronts for non-existent business activities, such as reverse mortgages.
The most common type of reverse merger involves the creation of a SPAC, or Special Purpose Acquisition Company. The SPAC raises capital to create a shell company. It then becomes public. It can be purchased by investors who can sell or buy its shares. Once public, the SPAC acquires a minority stake in a private company, usually a smaller one. The SPAC may change its name to reflect the acquired company.
When a company merges with another company, the newly formed company has to face many regulatory and compliance requirements. The new ownership must also prepare for ongoing regulatory compliance, which usually includes analysis of the insurance coverage of the company. In some cases, the SEC will delist the new entity if it fails to meet reporting requirements. In Jordan’s case, the reverse merger didn’t work out, but the process was worth the risk.