Public Reverse Merger

In a public reverse merger, a private company becomes public through merging with a public company. Under the best conditions, the process can be completed within weeks.

The speed in which a private company can become public is the reason that a public reverse merger is considered as an alternative to a normal initial public offering ("IPO").

The transaction involves the private and public companies signing non-disclosure agreements, exchanging information on each other ("due diligence"), negotiating the terms, and signing a merger agreement. Usually an escrow is involved. At the closing of the transaction, the private company shareholders generally receive a substantial majority of the shares of the public company, gain control of its board of directors, and the operating business of the private company continues within the public company. The surviving or parent company is the public company and it continues to be publicly traded.

if, prior to the merger, the public company has minimal operations, assets and equity, it is considered a "shell" corporation. If the public company is a reporting company, i.e., filing periodic reports with the U.S. Securities and Exchange Commission, the public company will be required to provide details about the merger transaction in the normal reporting system, not the full registration process.

Besides the quickness of becoming public, the public reverse merger normally costs less than an IPO in terms of money and dilution of shares.

Often times the reason to be public is to raise additional capital on better terms than available to a private company. It should be remembered that, unlike an IPO, a public reverse merger is not a capital raising transaction.

When concurrent financing is involved the public reverse merger transaction becomes an "alternative public offering" or "APO." The usual form of this type of financing is called a "private investment in public equity" or "PIPE transaction" because it involves a private unregistered purchase of newly issued public company stock of the same class that is already issued and publicly tradable.

Perhaps the greatest danger to a private company in doing a public reverse merger is the adverse history or baggage that might be attached to the public company and the  likelihood of the existing public company shareholders to sell or "dump" their stock after the merger is completed. Thorough due diligence and adequate contractual agreements are tools to mitigate these issues.

If you would like more information about reverse mergers or would like to schedule a consultation, please contact one of our San Diego Securities Lawyers at 858-488-4433.