One flashy, headline-grabbing way for a company to get investment capital is to go public with an initial public offering. Many companies have done this to great success. Lately, however, many small companies see the drawbacks of the IPO and are hesitant to use it to attract capital for business operations, the launching of products, and the fueling of research and development. Many small businesses in Louisiana may instead benefit from an alternative that has become increasingly popular among small businesses. That alternative is the reverse merger.
In a reverse merger, a private company merges with an already-existing publicly traded shell company. After the merger, the surviving company is publicly traded and is controlled by the private company’s management. Investors can then invest in the publicly traded company in exchange for shares in the company.
Reverse mergers used to suffer from a bad reputation as a result of “pump and dump” schemes from the 1980s and 1990s. These days, reverse mergers are regarded as safe due to rules established for them by the U.S. Securities and Exchange Commission. Reverse-merged publicly traded companies are required to file Forms 10-K and 10-Q and audited financial statements with the SEC, just like most other publicly traded companies. This provides potential investors with some transparency as to the company’s operations, debt and profitability before they invest.
A reverse merger legally is a sale of a business, so private company owners will want to be sure of what they are doing before jumping in. Many business and commercial litigation attorneys have the background to help clients with a reverse merger.