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Many publicly traded companies have invested a sufficient amount of time, money and effort into preparing their companies to go public. This includes the marketing, financing and compliance nuances that are associated with regulatory requirements as set forth by the government. Although part of the process has been known for raising startup capital, it’s often a long and tedious process. However, there are alternative methods to raising funds a lot faster than the traditional IPO or initial public offering process through reverse merger shell, which is explained in more detail below.
What is a Reverse Merger Using a Shell Corporation?
A reverse merger shell involves two primary components, the use of the shell and the reverse merger itself. A company that already has a publicly traded status becomes merged with a new company looking to become a publicly traded company. Let’s start by first discussing the shell and what it is.
The Shell: The way the shell works is that it is a public company that has previously been established but is no longer active from an operational standpoint. Although it is already a public company it may have experienced very little or short-lived success. Primarily due to areas such as poor marketing, offering a product that is no longer relevant that may have become obsolete or for other reasons. None-the-less, it did go through the proper channels as it relates to the initial public offering to raise the funds needed to get the business off the ground. Although the company may not have experienced the success that it hoped for, it is still active with shareholders and may still be quoted on the stock exchange as either the OTCBB or the Pink Sheets.
Some shell companies may still have assets that the company such as operating equipment, office furniture or even cash. However, there are other shells that may not have any assets at all.
Some shells have been inactive and around for quite some time, whereas others are relatively new.
The Reverse Merger: The reverse merger involves a privately owned company that acquires the controlling interest of the publicly traded company. After that point, the merger takes place whereby the publicly traded company remains, which is often referred to as the surviving company. However, the shell company usually relinquishes its name and the name of the privately company is used.
When a reverse merger takes place there are certain SEC compliance based rules and regulations that kick in and must be met when the reverse merger is complete - and properly naming the surviving company is one of them, along with a change in the trading symbol that should reflect the name change accordingly. Additionally, merger stock splits also take place whereby additional shares are issued to the new shareholders who are now on board. They are the new principles from the acquiring company which allows them to have more controlling interest in the newly merged company.
Fifteen days after the completion of the reverse merger - upon its closing, an 8-K, which is an information statement, must be filed. This filing provides a description of the company after its merger and provides information such as additional stock that has been issued, information concerning the addition of the new directors and officers, audited financial statements that must be in compliance with GAAP standards and so forth.
In many cases upon the completion of the reverse merger, the current directors and officers resign and the new directors and officers are appointed as the new owners of the company.
Advantages and Disadvantages
Like other ventures, there are a wide variety of advance and disadvantages from going public through reverse merger shell. From saving time compared to going public through an initial public offering, to saving money, and raising money relatively quickly, the advantages are certainly worth the effort. However, some of the disadvantages include those typically associated with being a publicly traded company. For example, there is typically no venture capital raised, when the merger takes place, and locating a public shell corporation can also be somewhat challenging.
To conclude, if a reverse merger using a shell corporation sounds right for you, you may consider seeking the guidance of a professional who can assist you with this process as you may find the end result very lucrative and rewarding for your company.