What is a Reverse Merger with a Public Shell?
A Reverse Merger is a transaction where by the private
company shareholders may gain control of a public company by merging it in
their private company. The
private company shareholders receive a substantial majority of the shares
of the public company (normally 85% to 90% or more) and the control of the
board of directors. The transaction can be accomplished in as little as two weeks, resulting in
the private company becoming a public company. The transaction does not go
through a review process with state and federal regulators because the
public company has already completed the process. The transaction involves
the private and shell company exchanging information on each other,
negotiating the merger terms, and signing a share exchange agreement.
At the closing the public shell company issues a substantial
majority of its shares and the board control to the shareholders of the
The private company shareholders pay for the shell and
contribute their private company shares to the shell company and the private company is now public.
Upon completion of the reverse merger, the name of
the shell company is usually changed to the name of the private company.
If the shell company has a trading symbol it is changed to reflect
the name change. An
information statement, called an 8-K, must be filed within 15 days of the
closing. The 8-K describes
the newly combined company, stock issued, information of new officers and
directors, and financial statements audited to US GAAP, standards. The 8-K
must disclose the same type of information that it would be required to
provide in registering a class of securities under the Securities Exchange
Act of 1934.
Final Rule33-8587, pdf file)
If the shell company is listed on the Bulletin board,
the registered or “free trade” shares can continue to trade.
The company can do a private placement immediately.
To trade new shares offered by the public the newly combined public
company must first register the shares with the SEC.
This process takes three to four months and normally requires
filing a Registration statement with the SEC under Reg. SB-2 or SB-1.
If the shell company does not have a symbol, an
application for a symbol is usually made to the NASDAQ Bulletin Board. The
application for a symbol requires filing a Form C211 by a market maker
that is a member of the NASD. The Bulletin Board has no financial
requirements. A listing will
be granted if the affairs of the company are in order and the company
answers the questions posed by NASDAQ.
Top of page.
Advantages of Going Public Through a
Merger or a Public Shell Purchase
- Increased Valuation: Typically publicly traded companies enjoy substantially higher
valuations than private companies.
- Capital Formation: Raising
capital is usually easier because of the added liquidity for the
investors, and it often takes less time and expense to complete an
- Acquisitions: Making acquisitions
with public stock is often easier and less expensive.
- Incentives: Stock options or
stock incentives can be useful in attracting management and retaining
- Financial Planning: Public
company stock is often easier to use in estate planning for the
principals. Public stock can provide a long term exit strategy for
- Reduced Costs: The costs are significantly less than the costs required for an initial
- Reduced Time: The time frame requisite to securing public listing is considerably less
than that for an IPO.
- Reduced Risk: Additional risk is involved in an IPO in that the IPO may be withdrawn due to an
unstable market condition even after most of the up front costs have
- Reduced Management Time: Traditional IPOs generally require greater attention from senior management.
- Reduced Business Requirements: While an IPO requires a relatively long and stable earnings history, the
lack of an earnings history does not normally keep a privately held
company from completing a reverse merger.
- Reduced Dilution: There is less dilution of ownership
control, compared to a traditional IPO.
- Reduced Underwriter Requirements: No underwriter is needed: (a significant factor to consider given the
difficulty companies face in attracting an investment banking firm to
commit to an offering.)
Top of page
either via a Reverse Merger or an IPO
- Less Confidentiality – complete financial disclosure is
required to become publicly held.
- More Public Reporting – Reporting expense is greater
because of the need for full disclosure.
- Ownership Dilution – Owners give up some equity percent.
- Greater Time Involvement – Management must devote
additional time to public company operations.
- Greater Liability – More company visibility brings a higher
level of liability exposure.
- Increased Expense – Higher costs of regulatory compliance for
audit, legal and investor relations.
Top of page
Preparation for a
Reverse Merger or
Public Shell Merger
It has been our experience that
the private company's ability to deal with all these issues is
instrumental in determining the timing in closing the merger, and the
long term success after closing a reverse merger
or public shell purchase.
- Locate a Suitable Public Shell - Public shells
can often be found by consulting with securities law firms or CPA -
Audit firms that deal with public companies. Flex Financial Group
also maintains an inventory of public
shells available for merger. Please contact
us for more information.
- It is important to start with a
clean shell - Due
diligence on the public shell cannot be over emphasized, advice from your
securities counsel, auditors, and a financial consultant should be
utilized. As was mentioned, many shells are created for the express
purpose of merging with a private company. These shells have no
predecessor entities, and, as a result, little baggage in the way of a
business failure or other skeletons in the closets.
- Comprehensive Business Plan – Potential
investors, public shareholders, auditors, securities counsel, brokers
and market makers will want to see a well documented business plan.
- Strong Management Team – Public investors demand
strong management teams.
- Convincing Marketing Plan – Public companies
need the ability to show good sales and earning growth.
- Product or Service – Public companies should
be able to develop strong or dominant position in their business
- Financial Audits –
SEC qualified audited financial
statements for your last two fiscal years.
- Experienced Securities Counsel –
Your attorney must be qualified to deal with regulatory
compliance, and the ongoing reporting requirements of all public
- Have Public Company Experience
- Your company should
have at least one person in senior management that has significant
public company experience. Financing consultants such as Flex
Financial Group, can often assist management in the complex issues
of being a public company and maintaining a good relationship with the financial
community. In fact, many actually have a couple of shell
corporations and, upon request, can manufacture a clean public
shell. A made-to-order shell without the baggage of a business
failure in its background can sometimes be the way to go, but
there's often a cost involved. You will most likely end
up with the financing consultants as minority shareholders in the new
company, holding between 2 percent and 5 percent. However, in almost
any reverse merger transaction, the principals of the shell company keep
a small equity position in the company going forward. Therefore,
this surrender of equity is simply a cost of doing business.
your financing strategy - A
reverse merger is an indirect route to raising capital.
Entrepreneurs must first consider how additional capital will
be raised after the deal is done. An experienced financial
consultant, like Flex Financial Group, can be very beneficial in this area.
Top of page
Close a Reverse Merger or Public Shell Merger
plan of merger partner. Sufficient information to complete and
file the required 8-K with the SEC.
- Management information, including completion of the "Officer and Director
Questionnaire," for all Officers and Directors designated by the
private company merger partner.
on structure and terms of merger.
of intent with escrow payment made to public company or its principal
shareholders. (This must happen for the public company to cease
negotiations with other merger prospects.)
Financial Statement, conformed to US, GAAP for the private merger
partner. The audit statements of the private company have to be
consolidated with the public company's financial statements.
merger fee in escrow with the securities attorney representing the
- Consent from the majority, preferably 100%, of existing shareholders of the private
company to merge or exchange their shares for shares of the public company.
- Agreement for the Officers and
Directors of the public shell to be replaced with the Officers and
directors designated by the private company merger partner.
of all shareholders in the private company that will make the share
- Post Merger Structure. Number
of shares to be outstanding “post merger”, and a complete
breakdown of share ownership post merger. Note: It is often
necessary for the public shell to do a reverse split and/or cancel
shares owned by the affiliates of the public share prior to completing
- Domicile Agreement. Agreement on state the company will be domiciled in post merger.
of warranties and representations between public shell and merger
- SEC counsel and auditors. Designation
of securities attorneys and SEC qualified auditors that will represent the
private merger partner.
- Agreement Preparations of the share exchange agreement, stock purchase agreement, definitive
merger agreement, and all other documents necessary to complete the merger.
- Final preparation
of the 8K that is required to be filed with the SEC within 4 days of
closing the merger. However, this is required by Flex prior to
completing the merger. Please note: The 8-K must disclose the same
type of information that it would be required to provide in
registering a class of securities under the Securities Exchange Act of
Final Rule33-8587, pdf file)
Top of page
Form 211 to Receive a Trading Symbol
Rule 15c211 was designed to allow non-reporting
public company’s securities to be quoted on the National Association of
Securities Dealers’ (“NASD”) Over-the-Counter Bulletin Board (“OTCBB”)
by filing some simple disclosures.
Now, companies seeking to obtain a quote on the NASD
OTC/BB are required to file reports with the Securities and Exchange
Commission (“SEC”), under
Section 15D of the Securities Exchange Act of 1933 (the “Act”), as
amended, or section 12G of the 1934 SEC Act. A company who has filed a
registration statement with the SEC using an SB-1, SB-2, or Form 10, will
become a reporting company when the SEC declares the registration statement
effective. Once the company is reporting, it is eligible to have a market maker
file a Form 211 with the NASD. The 211 must be approved by the NASD, which
normally takes 3 to 6 months, before the company can trade its stock on
the OTC/BB. The NASD will require 40 to 50 shareholders and sufficient public float to
approve the 211 application.
If you need assistance in having a Form
211 filed with the NASD so that your company can trade on the OTC/BB, we
can help prepare that paperwork and introduce you to a market maker.
Contact us for
Top of page