The concept of a reverse merger may arise in different contexts. By definition, a reverse merger is the acquisition of a company that is already public. This process helps a merging company avoid an initial public offering, or IPO, process. It also allows start-up companies, for instance, access to a public exchange which provides opportunities for fundraising and selling the company's stock. It can provide additional benefits as well such as stock option opportunities for employees; liquid shares to purchase other companies; and credibility to attract both customers and suppliers.
A reverse merger is an option for start-up companies to raise funds, however, there may be challenges to be aware of when venturing into the process. According to an advisor for startup companies, and contributor to Forbes, it is important to thoroughly research the shell company that will be used in a reverse merger; the company used for the reverse merger is often referred to as the "dormant shell" company. Additionally, the process of correctly approaching a reverse merger can be costly so it may not be an option for all entrepreneurs seeking to raise funds for their company.
The reverse merger process can also present ongoing costs that entrepreneurs should be aware of and prepared for. The process can create new regulatory and compliance concerns it is important to be familiar with. It is also important to thoroughly understand the process, if it will meet with the entrepreneur's and company's goals and what changes the reverse merger process may bring. On the plus side, the process may increase shareholder visibility for the company as well as increase visibility to those that might seek to acquire the company.
As is true of most business opportunities, business goals should always be taken into account before taking advantage of potential opportunities. Understanding the broader implications of a business decision can be essential to achieving the business goals a company has outlined.
Source: Forbes, "Is A Reverse Merger The Way To Fund Your Startup?" Mark Zwilling, May 2, 2014