Friday, August 23, 2013

Taking a Company Public Without an IPO: Is the Reverse Merger The Way to Go?

Going public does not entail an IPO for all companies. Very successful companies such as Berkshire Hathaway, Turner Broadcasting System, and Texas Instruments have gone public through a reverse merger.

Simply put, a reverse merger is where a private company purchases a public company and installed new management, a new business model, and essencially replaces the old publicly traded company. This is done by purchasing what they call a shell company, a company with no activity or revenues which was set up for the sole purpose of a reverse merger.

But is a reverse merger right for your company?
Manny penny stocks and Michael cab companies have become publicly traded, or micro cap company traded over the counter via a reverse merger. The advantages of the reverse merger vs an IPO are lower cost, speedier processed, no IPO 'window' necessary, no risk of underwriters withdrawal, much less management attention required, less dilution, and no need for an underwriter. The disadvantages of a reverse merger vs an IPO all are less funding and market support is harder to obtain.

One key thing to remember is that any form of funding whether it is an IPO or a reverse merger is extremely difficult during hard economic times such as today.  Need to raise financing is not the reason alone to go public on the market. The cost of a reverse merger is still significant and will range between $100,000 and $250,000.  One should be wary of consultants willing to take a company public for less.  If you do decide to purchase a shell company there are some considerations you must keep in mind. 
  • Whether it has revenues and or liabilities?
  • Whether it is a trading or a non trading shell?
  • Whether it is reporting or non reporting shell company?
  • The size of its shareholder base?
  • Whether it is a clean or non clean shell?
Regardless of what you are searching for in the over-the-counter markets, you should consult with an attorney prior to purchasing any publicly traded company. Legal affairs and SEC reporting regulations are usually the pitfalls of shell company purchasers. In addition many companies purchasing public shell companies or going to a reverse merger underestimate the total amount of expenses necessary for running an operating a publicly traded company.

Liquidity is also an issue which most purchasers of a public shell company are misconceived. The over-the-counter market only tolerate accredited investors which are harder to find than the average retail investor which is allowed to invest in Fortune 100 companies such as Disney or Coca Cola.
If a smaller company looking for a reverse merger is well backed financially, then they have a higher likelihood of success since the liquidity and the demand or their stock is already in place.

If you have had prior experience in purchasing a shell company, or providing investor relations for a shell company, or consulting on a reverse merger deal, please feel free to comment below an ad discussion to this article.

The MicroCapCompany Team
Posted By: Nicholas Coriano 
Follow Nicholas Coriano on Twitter

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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The MicroCapCompany.com a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on PushYourRank.com

About MicroCapCompany.COM: MicroCapCompany.COM (The Blog) is a blog focused on providing articles, news and information on the micro cap sector and start-ups.  The Blog is a free service offered by Cervitude™ Investor Relations (a micro cap investor relations firm) and offers compensated research reports and business plan writing services for micro cap companies and penny stocks.  If there is a particular topic you would like to see covered on The Blog, email CervitudeNetwork@gmail.com, If you would like to advertise on The Blog, click here

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