In a reverse merger transaction, an existing publi

In a reverse merger transaction, an existing public “shell company,” which is a public reporting company with few or no operations,1 acquires a private oper- ating company—usually one that is seeking access
to funding in the U.S. capital markets. Typically, the shareholders of the private operating company ex- change their shares for a large majority of the shares
of the public company. Although the public shell company survives the merger, the private operating company’s shareholders gain a controlling interest in the voting power and outstanding shares of stock of the public shell company. Also typically, the private operating company’s management takes over the board of directors and management of the public shell com- pany. The assets and business operations of the post
merger surviving public company are primarily, if not solely, those of the former private operating company.
Why Pursue a Reverse Merger?
A private operating company may pursue a reverse merger in order to facilitate its access to the capi-
tal markets, including the liquidity that comes with having its stock quoted on a market or listed on an exchange. Private operating companies generally have access only to private forms of equity, while public companies potentially have access to funding from a broader pool of public investors. A reverse merger often is perceived to be a quicker and cheaper method of “going public” than an initial public offering (IPO). The legal and accounting fees associated with a reverse merger tend to be lower than for an IPO. And while the public shell company is required to report the reverse merger in a Form 8-K filing with the SEC, there are no registration requirements under the Securities Act of 1933 as there would be for an IPO. In addition, being public may give a company in- creased value in the eyes of potential acquirers.

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