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Defining a reverse merger

On Behalf of | Jul 23, 2021 | Uncategorized |

Mergers often become big news. Connecticut residents largely understand the process of two companies coming together to form one. But fewer people know what’s meant by a reverse merger. This is a strategy that’s usually pursued for a very specific reason. Reverse mergers are one way for private companies to go public without going through a lengthy IPO process.

Why choose a reverse merger

Most companies go public through a process known as an initial public offering. The term refers to the shares of stock that the company is making available to the public. IPOs are tightly regulated by the Securities and Exchange Commission. They can take over a year to come to fruition because of all the SEC requirements.

Reverse mergers are quicker and face less regulation. In a reverse merger, a private company purchases a public one. The transaction can be completed in as little as a month. They’re also sometimes known as a reverse takeover or reverse IPO. Reverse mergers allow private companies to raise funds quickly.

Some of the consequences of a reverse merger for existing shareholders can include reverse stock splits, where many shares will be consolidated into one. The price per share will go up, but shareholders will find that they own fewer shares. The already-public companies involved in reverse mergers are often facing challenges and a change in leadership may benefit them. These transactions can be a complex area of business law.

Challenges for reverse mergers include the fact that private companies may have less stringent record-keeping than public ones. It can sometimes take the new lead company time to find its footing. However, there have been some very successful transactions over the years. Ted Turner founded his broadcast network by using this maneuver, for example.

If you’re interested in participating in a reverse merger, it’s a good idea to consult with an attorney who understands business law. Good signs when looking at a reverse takeover include proper capitalization and healthy sales numbers of about $20 million or more.