Reverse mergers, also known as reverse takeovers, are when a private company goes public. This has been a trend that many private companies in California have adopted. During the merging process, a private company becomes the controller of a shell company with fewer assets. The merger works by the private company shareholders purchasing the shares of the public company and then merging the two firms, so investors enjoy higher liquidity. The financing alternatives offered in reverse mergers enable the investors to enjoy increased flexibility.
Advantages of reverse mergers
While IPOs are expensive, reverse mergers are the exact opposite. They are less time consuming and are cheaper. If the public company is already registered, the merger can take place in weeks. Small private companies often adopt reverse mergers to join the United States market since they raise no money.
Once a reverse merger is complete, the private company will gain the benefits of a public company. Apart from greater liquidity, the investors also get the option of buying their shares. According to business and contract law, if the stockholders have warrants, they can infuse more capital to the firm.
While IPOs involves the firm going public and raising capital, reverse mergers don’t depend on market conditions. Thus, the merger is just a mechanism of converting a private firm to a public company. The role of the merger is for the firm to enjoy the benefits of a public firm.
Disadvantages of reverse mergers
Reverse mergers require thorough vetting of the public company. The motivations of the merger should be well-known to ensure that the shell company is not tainted. Both parties should provide transparent disclosure of all documents.
Are you interested in a reverse merger of your private firm? You may want to contact a business attorney for further guidance.