Monday, November 11, 2013

Reverse Merger Steps, Tips and Advice

In a reverse merger transaction, an existing public “shell company,” which is a public reporting company  with few or no operations, acquires a private operating company-usually one that is seeking access to funding in the US Capital Markets.

In a PowerPoint titled "Alternative Public Offerings: What Companies Need to Know" by Barry I. Grossman, Esq. of Ellenoff Grossman & Schole LLP, the steps for a reverse merger are laid out in the following manner
  1. Public Shell creates a wholly-owned subsidiary
  2. Stockholders of Private Company A negotiate with the controlling shareholders of the Public Shell in order to merge with the subsidiary
  3. Private Company A merges into the subsidiary, with the Private Company surviving and shares of Public Shell issued to shareholders of Private Company A 
  • Simultaneously with this transaction, the Public Shell can also conduct a PIPE (private placement)
  • A financing occurring simultaneously with (or immediately subsequent to) a reverse merger is referred to as an Alternative Public Offering
     4. Private Company A becomes a wholly-owned subsidiary of the Public Shell with the controlling       stockholders of Private Company A (and the PIPE investors collectively) usually owning 90% or more of the Public Shell and the shareholders of the Public Shell owning the remainder

  • Private Company A’s management team becomes the directors and officers of the public company

If you are working with a company that is offering to help you go public, hopefully you will insist on a variety of references. In prior posts we talked about meeting the last three CEOs that this advisor helped. This gives you a sense of whether they can show that they really achieve the things they claim that they can.

Equally important is assessing the advisor’s reputation in the business and finance community. To that end you should ask for at least 3-4 non-client business references such as attorneys or accountants the advisor has worked with. Hopefully the references themselves have solid reputations and are from well-known firms.

There are many sources of information on reverse mergers, the best being a good standing lawyer and the SEC.  While many advisers exists, you should be sure they are well vetted.

-The MicroCapCompany Team
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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 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

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