The basics of reverse mergers

On Behalf of | Nov 29, 2021 | Business Law

In Washington, there are many transactions that happen on a daily basis that profit companies in different ways. If you own a business, you may want your company to bypass the lengthy process of going public and avoid the costs of an initial public offering (IPO). That’s where the reverse merger concept comes in. Read on to learn more.

What is a reverse merger?

If a private business wants to go public, the typical process is to file for an initial public offering (IPO). This can be a lengthy and costly process that involves, among other things, bank selection, due diligence, legal costs, and securities filings. A reverse merger offers a business an alternative route for going public by merging with a publicly-traded company instead of filing for an IPO.

This practice can be beneficial because there are no bank or legal expenses. The business can also test the market before going public, which allows them to determine whether they will be able to raise enough capital and if their business model has commercial potential.

How does a reverse merger work?

In many cases, privately-held companies look for publicly-traded “shell” corporations that have few business operations and assets for such business transactions. A business can acquire a shell company through a reverse merger in which the business’ shareholders purchase a majority of the shell company’s business operations and assets. After the merger, the business becomes a publicly-traded entity with little or no need to file additional securities documents with regulatory agencies.

In general, a reverse merger benefits both the private business and the business that is publicly traded. For private companies, a reverse merger can help them secure fresh markets. Public companies benefit because they can acquire new business operations through the merger while gaining financial safety. That’s why many business owners are considering it.