How Common Is a Reverse Merger?
Actually, reverse mergers have become quite common and they no longer carry the stigma that they once did. Not too many years ago, a company that went public through a reverse merger was regarded as being somewhat "tainted." Some investors would keep away from buying the stock of a company that became public through a reverse merger.
One of the reasons for this is that the stock of the newly merged, public company was commonly traded for less than US$1. Therefore, it garnered the reputation as just another penny stock.
Today, however, some very reputable operating companies have become public in this fashion and their stock is traded in a quite respectable range -- certainly well over $1. Therefore, I think that we will see more of this type of transaction and the resulting entity.
What to Be Cautious About
I always tell our clients who are considering a reverse merger that their main concern should be that the shell they intend to use to create a publicly traded vehicle for their operating company is "clean."
There should be a thorough investigation about any contingent liabilities and left over regulatory issues that the shell might have. The only way to do this is by a thorough due diligence process of the prospective shell corporation.
This process should focus on the existence of hidden liabilities that the shell may have. It should also look at contingent liabilities, such as possible lawsuits or unsettled claims.
