In a Reverse Merger, the private company shareholders purchase control of the public shell company and then merge it with their private company. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors.

The transaction can be accomplished within weeks, resulting in the private company becoming a public company. If the shell is a Reporting SEC registered Company, the private company does not go through an expensive and time consuming review process with state and federal regulators because the public company has already completed the process.

The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company who pay for the shell and contribute their private company shares to the shell company they now control. This share exchange and change of control completes the Reverse Merger and the private company is now public.

There are however advantages and disadvantages from initiating a Reverse Merger:

Advantages of Going Public Through a Reverse Merger:

• Increased Valuation: Typically publicly traded companies enjoy substantially higher valuations than private companies.
• Capital Formation: Raising capital is usually easier because of the added liquidity for the investors, and it often takes less time and expense to complete an offering.
• Acquisitions: Making acquisitions with public stock is often easier and less expensive.
• Incentives: Stock options or stock incentives can be useful in attracting management and retaining valuable employees.
• Financial Planning: Public company stock is often easier to use in estate planning for the principals.  Public stock can provide a long term exit strategy for the founders.
• Reduced Costs: The costs are significantly less than the costs required for an initial public offering.
• Reduced Time: The time frame requisite to securing public listing is considerably less than that for an IPO.
• Reduced Risk: Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the up front costs have been expended.
• Reduced Management Time: Traditional IPOs generally require greater attention from senior management. 
• Reduced Business Requirements: While an IPO requires a relatively long and stable earnings history, the lack of an earnings history does not normally keep a privately held company from completing a reverse merger.
• Reduced Dilution: There is less dilution of ownership control, compared to a traditional IPO.
• Reduced Underwriter Requirements:  No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering.)

And now some possible disadvantages:

• Less Confidentiality – complete financial disclosure is required to become publicly held.
• More Public Reporting – Reporting expense is greater because of the need for full disclosure.
• Ownership Dilution – Owners give up some equity percent.
• Greater Time Involvement – Management must devote additional time to public company operations.
• Greater Liability – More company visibility brings a higher level of liability exposure.
• Increased Expense – Higher costs of regulatory compliance for audit, legal and investor relations.

At Gold Coast Professional Services we’ll discuss each side of Reverse Mergers with you, and assist you in making an educated decision that will best suit your needs. Remember, your success is our success!