A reverse merger is a process by which a private company becomes a public company without going through the traditional initial public offering (IPO) process. In a reverse merger, a private company merges with a publicly traded company that usually has few or no operations (referred to as a “shell” company), but does have public trading status.
Here’s how it typically works:
- Selection of a Shell Company: The private company identifies a suitable public shell company that is already listed on a stock exchange but may not be actively conducting business operations.
- Merger Agreement: The private company enters into a merger agreement with the shell company. The terms of the merger agreement outline the exchange ratio for the shares of the private company that will be issued to the shareholders of the shell company.
- Approval and Shareholder Vote: The merger agreement is subject to approval by the board of directors and shareholders of both companies. Once approved, the shareholders of the shell company vote to approve the merger.
- Completion of Merger: After obtaining shareholder approval, the merger is completed, and the private company’s assets and operations are merged into the shell company. As a result, the private company becomes a subsidiary of the public company, and its shares are issued to the shareholders of the shell company.
- Public Trading Status: Following the merger, the private company’s shares are now publicly traded on the stock exchange under the ticker symbol of the shell company.
Reverse mergers are often pursued as an alternative to the traditional IPO process due to their shorter timeline, lower costs, and reduced regulatory requirements. However, they may also carry certain risks and complexities, such as potential regulatory scrutiny and the need to integrate the operations of the merged entities effectively.
