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

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

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