Established private companies that are wishing to go public can often same significant time by using a reverse merger as opposed to making an initial public offering. An IPO can take months or years, while going public through a reverse merger can take as little as a few weeks.
In a reverse merger, a private company acquires a shell company that is already publicly traded. Companies that already have millions of dollars in annual revenue and whose accounting methods will allow an easy transition to the requirements of the Securities and Exchange Commission are those in the best position to benefit by using a reverse merger.
Upon completing the regulatory requirements of a reverse merger, the transaction is publicly disclosed through filing of a Form 8-K with the Commission. Prior to pursuing a reverse merger, it is important for the acquiring company to diligently investigate the shell company to make certain the shell company does not have any outstanding liabilities that will need to be addressed. Reverse mergers can be significantly less expensive than an IPO, but are still costly, a fact for which planning should be undertaken.
A reverse merger can be a good alternative to an IPO for a private company that is wishing to go public. By going public, additional equity can be obtained for business expansion and other needs. As it is important to make certain a reverse merger is completed correctly, businesses considering them as an option often choose to seek the help of business and commercial law attorneys as well as accountants. Legal and accounting professionals may have experience with assisting businesses with a number of such acquisitions and may thus be able to provide appropriate guidance and advice in navigating the regulatory requirements. Going public is an important step for many businesses, and if done correctly, can make the company even more successful.
Source: Entrepreneur, “A First Take on Reverse Mergers“, December 21, 2014