Raising capital is perhaps one of the most difficult processes in business development. On the one hand, capital formation projects can be hard to manage. What makes them doubly difficult is the fact that they often pull owners and managers away from the requisite day-to-day operations of the business itself, which for most investors is a negative.
Certainly having expert outside help in marketing securities is helpful, but it can often fall far short of the required funds needed to help the business grow. Even newly touted crowdfunding options may take time to percolate and ultimately could not end up being all they’re cracked up to be.
Other time-tested options for raising capital have been extremely efficient and proven helpful in wealth accumulation over time. One such method is the reverse merger.
What is a Reverse Merger?
A reverse merger is performed when an existing public shell corporation listed on a primary, or even secondary stock exchange is acquired or merged with a private company with existing operations. The private company’s operations, management and business become the operating arm of the existing public entity. While typically the public entity remains intact, it’s name and ticker symbol may change to reflect the new, acquiring business and management.
Benefits of Going Public with a Reverse Merger
Performing this type of creative financial engineering is usually inexpensive compared to traditional Initial Public Offerings (IPOs) and is performed much more rapidly. A typical reverse triangular merger can be done in just a few months, while other IPO scenarios can take years. Moreover, it can even be more cost effective. Quality, existing shell corporations will often run in the hundreds of thousands of dollars US. Some will even have existing cash assets and some small cash flows to tap–which makes the acquisition of them very enticive.
Reverse mergers also have less regulatory oversight, which means the IPO skids can be greased more efficiently. Finally, reverse mergers require the sacrifice of less equity than other more shark-infested waters like venture capital and private equity.
Downsides of Reverse Mergers
Reverse mergers have had a bad rap in recent years as a string of Chinese and other foreign firms used the U.S. public market to “front-run” securities for their own benefit–a process wherein securities marketers would build-up massive demand for a run-up in prices, only to dump the stock at a peak. The perpetrators would, in turn, reap all the spoils, leaving the unassuming investors with nothing but worthless penny stock.
Luckily, regulators have helped to quell such activities with increased regulation, but the taint still remains on the industry at large. It may be difficult to overcome for some, but there are many a small cap stock trading on the Over The Counter exchange that can see massive growth–and thus massive wealth creation by performing a reverse merger.
When funds are needed for growth and needed fast, one of the best ways to expand an existing footprint is by performing a reverse merger into an existing public shell corporation. Thousands of firms have done so with wild success including both Tony Robbins and Ted Turner. While not appropriate for all scenarios, it can be helpful for existing companies looking to use an alternative method for taking a private company to the public marketplace.
About the Author: Nate Nead is a Partner with Mergers.com–a Partner network that performs reverse merger, acquisition and corporate divestiture solutions for companies around the world. He resides in Seattle, Washington.