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The advantages and disadvantages of reverse mergers

On Behalf of | Nov 10, 2020 | Business Transactions |

Private companies in California and around the country usually announce an initial public offering when they want to go public, but they can also achieve this goal by entering into a reverse merger. During reverse mergers, private companies acquire businesses that are already publicly traded. This allows them to enjoy the benefits of being publicly traded, such as easier access to capital and new markets, without the cost and scrutiny associated with IPOs.

Speed and simplicity

While traditional mergers usually involve complex negotiations and can last for months or even years, reverse mergers can be completed very quickly because no discussions are needed. The private company simply takes a controlling position in a publicly traded company by purchasing more than half of its stock. The private company can then appoint its own board of directors and run the merged entity as it sees fit. The acquired business is often called a shell company.

Pros and cons

The benefits of reverse mergers include the speed with which they can be completed and the simplicity of the process. The major disadvantage is that reverse mergers do not raise any capital for the company going public. Investors tend to be wary of reverse mergers even though they are quite legal because they have been used in the past by companies engaging in fraud.

Due diligence

Attorneys with business law experience could help investors to make informed and prudent decisions about reverse merger opportunities by conducting thorough due diligence on both of the companies involved. During this process, attorneys could seek to find out if the private company involved is using a reverse merger to save time and money or avoid regulatory oversight. They may also assess the financial strength of the companies involved and the talent and experience of their management teams.