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What is Reverse Merger Process

Charlie S
Reverse mergers can help private company promoters increase their company's total valuation by acquiring controlling stake in a public shell company. In this story, we shall know what is the reverse merger process in detail.
By making a privately held company public, the company can use the shareholder's equity to complete its projects and earn higher revenues and profits. A privately owned company can be made public by two ways.
  • Through an Initial Public Offering (IPO) of shares
  • Through the reverse merger process
In the IPO process, the privately held company promoters sell their stake to the common public through an issue which is brought at a price range. Interested investors can apply and get shares of the company when the listing process is complete. With such a listing, the promoters can raise money for business operations. Though most people know about the IPO process, very few of them might be aware of the meaning of a reverse merger and its advantages.

The Process

As mentioned above, reverse merger is a process which helps a company which is held privately, become a publicly held one.
The original privately held company consists of a few shareholders/business partners and the company has good amount of assets, liabilities and ongoing business operations. The reverse merger of this process will be with a 'public shell' company which has no assets, liabilities and business operations, but has individual shareholders.
A formal agreement is made between the private company and the public company, and by the end of the entire process, the private company promoters end up getting a majority (85-90%) stake in the public company.
The reverse merger process involves the private company shareholders selling all 100% of their stock to the public company and at the same time, the public company issues stock which is equivalent to ninety percent of the total equity to the private company shareholders. The remaining ten percent will be held by the shareholders of the public shell company.
This process not just makes the promoters of the private company majority shareholders of the public company, but also helps them obtain entire control of the board of directors of the public shell company. So, the senior management executives of the private company will now be the head of the new reverse merged entity.
This can help them wield a lot of power when it comes to taking business decisions for the economic prosperity of the new company. For completing this process successfully, it is necessary to find suitable shell company and this will require the private company directors to do a detail study of the fundamentals of the company.

After the Reverse Merger

  • The management of the new merged company can file the C211 form and submit the application to NASDAQ in case the shell company is devoid of a symbol
  • Most of the time, the name of the shell company is changed to that of the private company which acquires it by the private company founders. This helps the private company integrate its business completely and make their brand even stronger
  • Once the reverse merger is done, the management has to file the 8-K information statement within a period of fifteen days which has details about the audited financial statements, new directors of the merged company and the stock issued
  • By filing a registration statement with the Securities Exchange Commission under the Reg. SB-2 or SB-1. the new company can trade new stocks of the public company


There are several advantages of the reverse merger process over the IPO's. Firstly, this process can help the private company become public at a much lesser cost as compared to the cost for issuing shares to the public through an IPO. The process also is not affected by prevalent stock market conditions which is not true in case of the IPO's.
An IPO can receive poor response from the investors in times of a bear market scene and total lack of confidence in equities. To add to this, a reverse merger is a quick and easy process and can get over in thirty days if done perfectly whereas an IPO process can take around a year or even more.
The valuation of the new company becomes much higher with this process and this is definitely an advantage for the private company promoters. Also, the dilution of owners stake is less in the reverse merger process as compared to that in the IPO.
The disadvantage is that a private company may suffer financially if the public shell company it has identified has cases filed against it, or has some hidden liabilities. So, it is always better to be careful when considering a reverse merger to protect the interests of the company. From the explanation given above, it is clear that such deals can help companies improve their financial condition if executed properly.