Basic Info regarding Shells and Reverse Mergers
A "reverse merger" is a method by which a private company goes public. In a
reverse merger, a private company merges with a public listed company with no
assets or liabilities. (The public company is also called a "shell" corporation). The
publicly traded corporation is called a "shell" since all that exists of the original
company is its corporate shell structure. By merging into such an entity, a private
company becomes public.
The private company merges into a public company and obtains the majority of its
stock (usually 90%). The private company normally will change the name of the
public corporation (often to its own name) and will appoint and elect its
management and Board of Directors. The new public corporation has a base of
shareholders sufficient to meet the 300 shareholder requirement for admission to
quotation on the NASDAQ SmallCap Market.
The advantages of public trading status, which are outlined in greater detail below,
notably include the possibility of commanding a higher price for a later offering of
the company's securities. Going public through a reverse merger allows a private
company to go public typically at a lesser cost and with less stock dilution than
through an initial public offering (IPO). While the process of going public and
raising capital is combined in an IPO, in a reverse merger (also know as a "blind
pool" merger) these two functions are unbundled; a company can go public without
raising additional capital. Through this unbundling operation, the process of going
public is simplified greatly.
The private company which has gone public obtains the benefits of public trading
of its securities, namely:
Increased liquidity of the ownership shares of the company
Higher share price and thus higher company valuation
Greater access to the capital markets through the possibilities of a future
stock offering
The ability of the company to make acquisitions of other companies using
the company's stock
The ability to use stock incentive plans to attract and retain key employees
Going public can be part of a retirement strategy for business owners
The benefits of going public through a reverse merger, as opposed to an IPO, are
the following:
The costs are significantly less than the costs required for an initial public
offering
The time required is considerably less than for an IPO
Additional risk is involved in an IPO in that the IPO may be withdrawn due
to an unstable market condition even after most of the up-front costs have
been expended
IPOs generaly require greater attention from top management
While an IPO requires a relatively long and stable earning history, the lack
of an earning history does not normally keep a privately-held company from
completing a reverse merger
The company does not require an underwriter
There is less dilution of ownership control
You will receive a higher valuation for your company
Requirements prior to entering into a reverse merger are the following:
A private company will require approval of the majority of its stockholders
for a merger with a public corporation
Once a company is taken public through a reverse merger the financial markets
hold the following future prospects in the capital markets for the newly public
corporation:
The market value of a public company is often substantially higher than a
private company with the same structure in the same industry
Capital is easier to raise for public companies because the stock has market
value and can be traded
The public trading price of the public company's securities serves as a
benchmark for the offer price of a subsequent public or private securities
offering
Acquisitions can be made with stock since publicly traded stock is viewed as
currency for mergers and acquisitions
Form S-8 stock can be issued for officers, directors and consultants
If the stock dividend distribution included warrants, the new company can
receive proceeds from the exercise of those warrants if the trading price of
its common stock exceeds the exercise (strike) price of warrants.
Reverse Merger With a Public Shell:
A "reverse merger" is a method by which a private company goes
public. In a reverse merger, a private company merges with a public
company with no assets or liabilities. The publicly traded corporation
is called a "public shell" since all that exists is its corporate structure.
By merging into such an entity, a private company becomes public.
The Private company merges into a public company and obtains the
majority of its stock (usually 90% or more). The private company
normally will change the name of the public corporation (often to its
own name) and will appoint and elect its management and board
directors.
The advantages of public trading status, which are outlined in greater
detail below, include the possibility of commanding a higher price for
a later offering of the company's securities. Going public through
either a reverse merger or a registered spin-off (described below)
allows a private company to go public, typically at a lesser cost and
with less stock dilution than through an initial public offering (IPO).
In an IPO, the process of going public and raising capital is
combined. In a registered spin-off or reverse merger, these two
functions are unbundled - a company can go public without raising
additional captial. Through this unbundling operation, the process of
going public is simplified greatly.
The Private Company which has gone public obtains the benefits of public
trading of its securities, namely:
Increased liquidity of the ownership shares of the company.
Higher share price and thus higher company valuation.
Greater access to the capital markets through the possibility of future
stock offerings.
The ability of the company to make acquisitions of other companies
using the company's stock.
The ability to use stock incentive plans to attract and retain key
employees.
Going public can be a part of a retirement strategy for business owners.
Simply by merging into a public company, a private corporation can
increase its value by three to five times.
Considerable tax advantages are available through the reverse
mergers, and proper exit strategies.
The newly created value can become part of an estate providing
value not only for the founders, but for generations to come.
The Benefits of going public through a reverse merger, as apposed to an
IPO:
The costs are signifigantly less than the costs required for an IPO.
The time is considerably less than that for an IPO.
Additional risk is involved in an IPO in that the IPO may be
withdrawn due to an unstable market condition, even after most of
the up-front-costs have been expended.
IPO's generally require greater attention from top management.
An IPO requires a relatively long and stable earnings history.
There is less dilution of ownership control.
The company does not require an underwriter.
You will receive a higher valuation for your company.
Once a company is taken public through a reverse merger, or a registered
spin-off, the financial markets hold the following future prospects in the
capital markets for the newly public corporation:
The market value of a public company is often substantially higher
than a private company with the same structure in the same
industry.
Capital is easier to raise for public companies because the stock has
market value and can be traded.
The public corporation may be used for special purposes, such as
qualifying as a category two company for overseas offerings pursuant
to Regulation S.
The trading price of the public company's securities serves as a
benchmark for the offer price of a subsequent public or private
securities offering.
Acquisitions can be made with the stock since publicly traded stock is
viewed as currency for mergers and acquisitions.
Form S-8 stock can be issued for consultants.
It is essential that public companies, especially newly public companies,
actively maintain and manage a financial communications program.
A newly formed public company would be well-advised to invest in
consulting services, to plan and execute a strategy for building and
maintaining an active interest in your company within the financial
community.
Consultants are available to assist the public corporation in providing
corporate relations services intended to increase awareness of your
company on Wall Street.
For most people, recapitalization and stock value appreciation would seem reasons
enough to be publicly owned, but there are other advantages that a company can
gain. A public company has a broader equity base, thus increasing it's
opportunities for obtaining financing for future projects. Increasing the bottom line
net worth of a company, as well as its debt to equity ratio, enables it to borrow at
lower interest rates from traditional institutions.
