![]() The lack of transparency fees into the stock price. This is possible, but far less easy than with a public company. With a reverse merger, investors in the public company are effectively being asked to conduct due diligence into the acquirer - a private company. It has to be done, regardless of the kind of transaction. There is no getting around due diligence. The disadvantages of reverse mergers include: 1. Pump and dump scheme are just one of the disadvantages typically associated with reverse mergers. Aside from the ability to access liquidity faster (in theory), it should also raise the profile of the company, increase its ability to make other acquisitions (by using its shares as consideration), and the fact that public companies usually trade at higher multiples than their private counterparts. If the complexity of regulatory and compliance requirements isn’t too much of a burden, there are significant benefits to holding a public company. ![]() The original motivation for a reverse merger and still the strongest reason.The reverse merger offers a cheaper and faster way of accessing a stock market - no investor roadshows or looking for an IPO underwriter simply acquire an under traded (and hopefully, by extension, undervalued) company and hey presto - you’ve got a stock market-listed company. Advantages of Reverse MergersĪs mentioned at the outset, despite attracting negative publicity over a decade ago, a reverse merger can be a legitimate way of publicly listing a company.īenefits and advantages of reverse mergers include: 1. The low cost of the thinly-traded dormant listed companies being acquired in the reverse merger makes them liable for ‘pump an dump schemes’ (the practice of artifically ‘pumping up’ the price of stocks and then selling them for the inflated price to make extraordinary profit). It underlines why there was such a crackdown on reverse mergers by the SEC at the beginning of the last decade. This last point, about what a reverse merger does to the price of a stock, is important to understand. When the reverse merger occurs, the shares of these thinly traded companies that haven’t received any capital in years spike in value. a publicly listed company that has almost no assets to speak of, is thinly traded, and still files annual reports that for the most part, go unread by almost anybody. With reverse mergers on the other hand, the private company is acquiring a dormant listed company - i.e. Being a shell company, the SPAC has no previous history. In a SPAC deal, a listed shell company led by a management team looking for an acquisition raises funds to acquire a private firm and bring it public. A SPAC is similar to, and often confused with reverse mergers. SPACs are a less administratively cumbersome method of accessing the stock market than an IPO. An IPO involves the company directly listing on the stock market index, going through the 18-24 month process of SEC oversight, investor roadshows and corporate governance preparation. There are some distinct differences, however. A reverse merger is similar to IPOs and SPACs in the sense that the ultimate aim of all three is for the company to gain a stock market listing and the increased access to capital that comes with that.
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