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Going Public Using a Shell Company
By James Beck - August 14, 2017
GOING PUBLIC USING A SHELL COMPANY
Owners of privately held companies that desire greater access to capital markets or increase liquidity for their stock should consider entering into a “reverse merger” transaction with a publicly traded shell company. For purposes of this discussion, we only consider shell companies that have an established shareholder base and file reports with the SEC on a periodic basis, but have no significant assets or business operations.
The advantage of a reverse merger with a shell company is that it allows the private company to become public more quickly and usually at less expense than completing an initial public offering (either through an underwriter or on a self-underwritten basis). There is also no certainty of success for an initial public offering.
The disadvantages to shell company transactions include the fact that owners must give up a portion of their equity interest (usually 10 to 20 percent) and incur expenses for conducting due diligence on the shell company, negotiating and completing the merger and in some cases pay cash to shell company insiders. In addition, SEC rules impose restrictions on the trading of the stock of the post-merger company for one year. There is also a one year waiting period before a post-merger company can become listed on an exchange (such as Nasdaq).
The SEC also requires that, within four business days of the closing of the reverse merger, the company file a “jumbo” Form 8-K with complete disclosures regarding the transaction and the change of control, including all information required in a Form 10, such as disclosures regarding the company’s business, material agreements, risk factors, directors and officers, MD&A, and two years of audited financial statements.
Becoming a public company via a reverse merger likely offers a company many benefits, including access to capital and a higher profile. However, care must be taken in structuring and implementing these types of transactions in order to obtain the benefits. A private company that is considering going public through such a structure must carefully weigh the advantages and disadvantages and take steps to reduce the risks
Please contact us to discuss the possibility of a shell company transaction for your company if you are considering a reverse merger.
Owners of privately held companies that desire greater access to capital markets or increase liquidity for their stock should consider entering into a “reverse merger” transaction with a publicly traded shell company. For purposes of this discussion, we only consider shell companies that have an established shareholder base and file reports with the SEC on a periodic basis, but have no significant assets or business operations.
The advantage of a reverse merger with a shell company is that it allows the private company to become public more quickly and usually at less expense than completing an initial public offering (either through an underwriter or on a self-underwritten basis). There is also no certainty of success for an initial public offering.
The disadvantages to shell company transactions include the fact that owners must give up a portion of their equity interest (usually 10 to 20 percent) and incur expenses for conducting due diligence on the shell company, negotiating and completing the merger and in some cases pay cash to shell company insiders. In addition, SEC rules impose restrictions on the trading of the stock of the post-merger company for one year. There is also a one year waiting period before a post-merger company can become listed on an exchange (such as Nasdaq).
The SEC also requires that, within four business days of the closing of the reverse merger, the company file a “jumbo” Form 8-K with complete disclosures regarding the transaction and the change of control, including all information required in a Form 10, such as disclosures regarding the company’s business, material agreements, risk factors, directors and officers, MD&A, and two years of audited financial statements.
Becoming a public company via a reverse merger likely offers a company many benefits, including access to capital and a higher profile. However, care must be taken in structuring and implementing these types of transactions in order to obtain the benefits. A private company that is considering going public through such a structure must carefully weigh the advantages and disadvantages and take steps to reduce the risks
Please contact us to discuss the possibility of a shell company transaction for your company if you are considering a reverse merger.