When companies in Washington and around the country become publicly listed, they are able to raise capital by selling shares. However, few businesses actually “go public” because the initial public offering process can take as long as two years to complete, and only companies that can withstand the close scrutiny of the Securities and Exchange Commission emerge from it with their plans intact. Acquiring a company that is already publicly listed eliminates the need for an IPO, and that is often accomplished with a reverse merger.
The companies acquired in reverse mergers are usually businesses that were publicly listed decades ago but are no longer actively engaged in commerce. They submit the paperwork required to maintain their public listing, but they have few or no assets and their shares are rarely traded. When they become the target of a reverse merger, their share price usually soars. This is why reverse mergers are often associated with pump-and-dump stock fraud schemes.
Forming a special purpose acquisition company is another way to avoid the regulatory challenges of an IPO. SPACs are shell companies that are created to raise the money needed to complete a merger or acquisition. The money is raised through an IPO, but the process is simplified because SPACs have no business operations. The people who form a SPAC are usually respected investors with experience in business transactions, and they are not suspected of being involved in a pump-and-dump scheme because they do not identify the company they plan to acquire.
A SPAC or reverse merger only provides access to capital if investors are willing to purchase shares in the acquired company, but that does not always happen. Dormant companies are inactive for a reason, and investing time and money to pursue them aggressively because they were once successful enough to issue an IPO can be risky.