SEC describes the reverse merger shell company as a company with no existing operations. The company can either have no actual assets or have assets but only in cash. This type of company is required to register under the Securities Exchange Act of 1933 or the Securities Exchange of 1934. Often used as a fundraising mechanism, companies usually are weighing the option of going public.
What is it?
A reverse merger occurs when controlling interest of a private company is shifted to a public company. The process involves a public company serving as a shell to the private company. Eventually, the private company assumes the identity of the shell company.
What’s required for a reverse merger to happen?
The SEC requires that the smaller company change its name prior to the merger happening. The name of the company acting as the shell must be changed to the private company’s name. The symbol for the shell company is also changed to reflect its new identity. Shares must then be issued to give the new owner controlling interest in the company. An information statement is filed within two weeks of the scheduled closing. The statement, called the 8-K, discloses information on the new leadership, the distribution of the stocks, and audits. Once the reverse merger is complete, the leadership from the private company steps down.
Why would a private company be interested in this?
This option is an attractive option for a private company. This is because the private company desires to go public. The company has the opportunity to be traded publicly on the exchange with its new trade symbol. Availability of the stock on the exchange provides liquidity for the newly formed company, which gives it greater access to cash for use. Those who previously own the company have the option of dumping their shares. The company even has the option of creating more stock through secondary offerings if desired. The stockholders that have the privilege to buy more stock at a set price, and this gives the company greater access to additional capital.
How is value affected?
The value of the stock can either decrease or increase. If investors elect to sell their shares after the merger is complete, then the value will decrease. There may be a lack of confidence in the company or a failure to handle fiduciary matters in a satisfactory manner that is motivating the investors to sell their shares. Low demand for the stock reduces the value of the company’s shares. The private company can preserve the value of their company’s shares by preventing investors from being able to sell their shares before a certain date. In restricting this activity, the stock value cannot dip below a certain level, and investors feel confident in the company. This increase demand in the investor stock.
How long does it take?
Completing the reverse merger process can take up to four months. In some cases, the entire process can be completed in just a few short weeks. The size of the company can impact the speed of the process. If the structure of the company is complex, the process could take longer to complete.
The reverse merger process requires a shell company and a private company to take place. Once the shell company and the private company merge, the newly formed public company has more liquidity and controlling interest in the new entity. A new trade symbol is assigned to the new company. The company’s old leadership is removed and replaced by newly appointed leadership. If the new company can raise the money it needs to remain competitive, then it will remain in business.
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