One of the many ways for a small or medium size privately held company to go public and raise additional capital or even acquisitions is through a Reverse Merger. A Reverse Merger is a simple and fast method by which a private company can become a public company. To do this transaction, a private company merges with a public listed company that has no business and with no assets or liabilities (meaning it’s not functional).
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By merging in such a company the private company becomes public. This publicly traded corporation is called a “Shell” corporation. This is so because all that will remain of the original company is its structure. The Reverse Merger was established as an alternative to the famous Initial Public Offering (IPO), for companies who want the benefit of becoming public without the complications and expense that the IPO process has. A Reverse Merger is also known as takeovers or RTO’s (Reverse Take Over). It is often suggested that the Reverse Mergers is the best option in providing greater access into capital markets, offering the opportunity to utilize its stocks to make acquisitions and even improve the way the company is seen in the eyes of the investment community. There are two types of shell companies used in reverse mergers. Firstly, a public company that has failed which exists just to be sold in order to recoup some of the costs that causes the business to fail. And secondly, there are companies that are created directly for the purpose of being sold as a shell in a reverse merger process. These are of less risk because of the unknown liabilities. When the Private Company merges into a public company it gains the majority of stocks, which is usually 90%. This company must first get approval from the majority of it’s stockholders for a merger with a public corporation. Then the company will proceed to change the name of the public corporation which is usually a dominant one, sometimes to its own name and restructure its management board of directors. This new public corporation will now need a base of shareholders that is enough to meet the 300 shareholder requirement to be admitted on the NASDAQ Small Cap Market. The SEC also recently stated that if you will want to go public with a shell, you will need financials that are audited and the equivalent of registration statement within 4 days of the merger. Thus there may be no need for public shells, and it will now take longer if you use it. A process of adopting the New Securities Act Rule Reform and trading on the Pink Sheets is suggested for using to go public. It is said to be less expensive. However, I think that this just means that there are other new alternatives of going public in the making.
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