What is a Reverse Merger with a Public Shell?
A Reverse Merger is a transaction where by the private company shareholders may gain control of a public company by merging it in with their private company. The private company shareholders receive a substantial majority of the shares of the public company (normally 85% to 90% or more) and the control of the board of directors. The transaction can be accomplished in as little as two weeks, resulting in the private company becoming a public company. The transaction does not go through a review process with state and federal regulators because the public company has already completed the process. The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing the public shell company issues a substantial majority of its shares and the board control to the shareholders of the private company. The private company shareholders pay for the shell and contribute their private company shares to the shell company and the private company is now public.
Upon completion of the reverse merger, the name of the shell company is usually changed to the name of the private company. If the shell company has a trading symbol it is changed to reflect the name change. An information statement, called an 8-K, must be filed within 4 days of the closing. The 8-K describes the newly combined company, stock issued, information of new officers and directors, a full description of the business, and financial statements audited to US GAAP standards. The 8-K must disclose the same type of information that it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934.
(See Sec Final Rule 33-8587, pdf file)
If the shell company is listed on the Bulletin board, the registered or “free trade” shares can continue to trade. The company can do a private placement immediately. To trade new shares offered by the public the newly combined public company must first register the shares with the SEC. This process takes three to four months and normally requires filing a Registration statement with the SEC under Reg. SB-2 or SB-1.
If the shell company does not have a symbol, an application for a symbol is usually made to the NASDAQ Bulletin Board. The application for a symbol requires filing a Form 211 by a market maker that is a member of the NASD. The Bulletin Board has no financial requirements. A listing will be granted if the affairs of the company are in order and the company answers the questions posed by NASDAQ.
Advantages of Going Public Through a Reverse Merger or a Public Shell Purchase
Increased Valuation: Typically publicly traded companies enjoy substantially higher valuations than private companies.
Capital Formation: Raising capital is usually easier because of the added liquidity for the investors, and it often takes less time and expense to complete an offering.
Acquisitions: Making acquisitions with public stock is often easier and less expensive.
Incentives: Stock options or stock incentives can be useful in attracting management and retaining valuable employees.
Financial Planning: Public company stock is often easier to use in estate planning for the principals. Public stock can provide a long term exit strategy for the founders.
Reduced Costs: The costs are significantly less than the costs required for an initial public offering.
Reduced Time: The time frame requisite to securing public listing is considerably less than that for an IPO.
Reduced Risk: 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.
Reduced Management Time: Traditional IPOs generally require greater attention from senior management.
Reduced Business Requirements: While an IPO requires a relatively long and stable earnings history, the lack of an earnings history does not normally keep a privately held company from completing a reverse merger.
Reduced Dilution: There is less dilution of ownership control, compared to a traditional IPO.
Reduced Underwriter Requirements: No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering.)
