Going public through a reverse merger transaction

A reverse merger transaction is where a private company merges into a publicly listed company and ends up with control of the public entity.

A reverse merger transaction is one of three ways a company can go public

A reverse merger transaction is where a private company merges into a publicly listed company and ends up with control of the public entity. Usually, the public entity has little to no operating business and is generally referred to as a "shell" company. At the end of a reverse merger transaction, the private company becomes the surviving entity and inherits all of the financial and contingent liabilities of the public entity. Sounds like a great idea, right? While you can go public via reverse merger within a few weeks, the risks associated with such transactions can't be overstated.

Before considering a reverse merger transaction, you should become familiar with what a shell company even is. A shell company can be either publicly listed or privately held. When a private company is seeking to merge into a publicly traded shell and thereby go public itself, it must file many legal and accounting details with the Securities and Exchange Commission (SEC). Alternatively, non-trading shell companies can also be used to become publicly traded, but the costs and time involved are extensive and thus provide little benefit.

Nonetheless, a reverse merger often looks like an attractive option at first glance: the process is much faster than an initial public offering and direct public offering, so it is often used by companies in a rush to capitalize on favorable market conditions.

Aside from the direct costs of completing a reverse merger, most companies end up paying substantially more for several reasons that are important to understand: 

Stock overhang

The shareholders of the original public entity retain some of the outstanding shares and will generally sell their shares as soon as they can, making it very difficult for the stock price to remain stable or increase. This can make it very difficult to raise investment capital or complete acquisitions.

Uprfont cash costs

Acquiring control of a “clean shell” can cost about $400,000 (depending on market conditions).

Management certifications

The legal and accounting history of the public company must be incorporated into the private company documents filed with the Securities and Exchange Commission, a process prone to inaccuracy, incompleteness, and unavailability of information. How can management confidently certify that all financial statements presented are truthful if there's a level of uncertainty associated with the historical operations of the 'shell' company?

Contingent liabilities

The surviving entity inherits all of the financial and contingent liabilities of the original public company. While the public company balance sheet might be accurate, it would not reflect unknown liabilities that stem from historical operations of the public entity.

Is a reverse merger transaction a good way to go public?

We generally recommend that private companies go public through an initial public offering if they can secure the services of a reputable investment banking firm. If not, we recommend our direct public offering, or direct listing process. A reverse merger transaction is almost never advisable and even when recommended, only when there's absolute certainty the public entity has no contingent liabilities.

We take companies public through a direct listing so entrepreneurs can acquire private companies, raise capital, attract the best talent, close more deals and significantly increase their valuation.

Who do we serve?

This is for CEOs who want to build a larger and more valuable business. The best candidates are CEOs who are smart, growth-minded and likeable, who run a business that is already profitable. However, we can represent any size company when there are compelling mitigating factors.

How do we help?

We plan every aspect of the direct listing, reverse merger, or IPO process. We leverage our professional network to bring in accountants, auditors, corporate lawyers, securities lawyers, filing agents, transfer agent, market maker, investment banker (for IPOs) and others, and manage all third parties to hit the timeline within budget. We also provide strategic advice on business growth, acquisitions, financing, communications, and more.

Who are we?

Our founder is Joel Arberman who was an analyst for two multi-billion-dollar asset management firms, a top-ranked technology analyst, and partner of a large investment banking firm. Joel has taken four of his early-stage companies public, has facilitated numerous acquisitions and has helped more than a dozen companies go public. His clients have gained more than $11 billion in valuation.

What are the benefits?

Consider going public to more effectively use shares, options and warrants to significantly scale your business. Think of it as a tool that provides for the best growth-hack ever. Here's a few ways smart entrepreneurs can use a public listing to build a significantly more valuable business:

Acquire profitable private companies.

Going public to acquire private companies that are already profitable is the fastest and most reliable way to build a large and valuable business. As a public company, it is easier to source more acquisition opportunities, structure better favorable transaction terms, raise capital to finance the purchase and growth of acquired businesses, and easier to attract the best talent.

Attract, motivate and reward results.

As a public company, it is easier to attract, motivate and reward people through the use of stock options and warrants. This is particularly valuable for industries that rely on building a large independent or commissioned sales force, or for industries where there's strong competition for talent. In addition to the use of stock options for employees, the use of warrants can be extremely valuable when issued as part of a growth strategy to sales, marketing, distribution and business development partners.

Raise capital more efficiently.

When a company has a clear path and timeline to go public by direct listing, reverse merger or IPO, it is faster, easier and less dilutive to raise capital. After a company is publicly traded, it is even faster, easier and less dilutive to raise capital from a larger audience of public debt and equity investors who have interest in wider array of investment structures.

What should I do next?

Contact us to schedule a zoom meeting if you'd like to learn more about the public listing process, how to use the advantages to accelerate the growth of your business and discuss your specific situation. We love to speak with smart entrepreneurs, and we don't charge anything for our consultation and strategy sessions until we agree to work together.