Reverse mergers defined
Texas entrepreneurs may have heard of the concept of the reverse merger before but might be confused on the details. A reverse merger is the acquisition by a privately held company of a publicly traded one that is currently dormant in most situations. This public company is known as a shell company, due to the largely technical purpose that it serves. Such a merger is generally initiated as a means of catapulting the private company into the realm of public trading.
Until recently, the reverse merger was considered a risky move due to the frequency of shareholder fraud in the acquired dormant companies. Private companies must still take steps to ensure that their new shells are liability-free to avoid future headaches. Minimizing the power of new shareholders is also important for establishing a stable quote.
For a company whose strategy involves going public very quickly, this business move may be beneficial. While a traditional IPO can take months or even years, a reverse merger can bring a company from private to public in a matter of weeks. A reverse merger is often cheaper than an IPO, as well, rarely costing more than half a million and sometimes as little as $150,000.
Those considering such a process may wish to approach a law firm that includes a securities practice. Lawyers in such a firm may have the knowledge available to assist any business owner in a merger. A mergers and acquisitions lawyer may also guide a company through the regulatory process required, as well as the final filing of the SEC Form 8-K required to complete the merger.
Source: Entrepreneur, “A First Take on Reverse Mergers“, December 21, 2014