16 Mar 5 Reasons Reverse Mergers are Still Attractive

Like the rise and fall of some Hollywood stars, the reverse merger has faced both criticism and popularity over the decades. Through the 2000s many of us successfully showed the market how these combinations into non-operating public vehicles (including special purpose acquisition companies, or SPACs), could be completed very successfully, legitimately and with maximum transparency. In the late 2000s another black eye when dozens of offshore companies, many of which went public through reverse mergers, faced fraud accusations (many of these were ultimately dismissed). As a result of these problems, in 2011 the SEC passed new so-called “seasoning” rules making it harder for former reversed companies to uplist onto national exchanges.

In the last several years reverse mergers have resurfaced once again as an appropriate alternative for companies either not qualifying for a traditional IPO or preferring to avoid the time, cost and risk even if an IPO is possible. Others have chosen additional alternatives such as “self-filings,” which are also gaining popularity for those not wanting to be burdened by the new SEC rules.  So here’s why this technique used by thousands of companies remains viable and attractive:

1. Fast. If your company needs to raise capital within the next several months, and your source of capital requires that you be public for them to write the check, there remains no faster way to go public than a reverse merger with a public “shell” company.

2. Cost-Effective. A reverse merger remains much cheaper than a traditional IPO, even including the cost of purchasing a shell. Some shells, especially so-called Form 10 shells, formed from scratch and very clean but not trading initially, can be quite inexpensive relative to shells trading over-the-counter.

3. Seasoning is OK or Bypassed. In a reverse merger the SEC “seasoning” rules don’t matter if you are willing to trade over-the-counter for a year while adjusting to public status or can raise a public offering of at least $40 million following the merger, and many have chosen one or the other. The large public offering option has become popular in particular in the biotech space.

4. Transparent. The SEC requires a full disclosure document be filed after a combination with an SEC reporting shell company, something that was optional before 2005. This ensures that investors have the same information as in an IPO registration statement almost immediately after a reverse merger is completed. The SEC does often review these filings, ensuring even more accuracy, but this review does not occur until after you complete the combination.

5. Less Dilution of Ownership. In a reverse merger typically a small percentage of the company is provided to former owners of the shell (although in some cases all the shell’s equity is purchased for cash). In an IPO often more money is raised than is even requested, and at a price the company hopes is the lowest at which is will raise money for quite some time. Thus the owners of the company face more percentage dilution in a typical IPO.

Self-filings remain a strong option, especially for those who can wait a few more months before completing the going public process. If you want to learn more, just call me! Or take a look at my book on the subject: http://amzn.to/1AMYEaG.