WHAT IS A REVERSE MERGER?
A reverse merger is a way for private companies to go public.
How it works: A private company acquires the controlling interest of the public company’s stock thereby reversing into a public company and therein becoming a public company. That’s the simple explanation.
Example: A public company has virtually no business ‘BUT IS STILL FULLY REPORTING’. This company could still be trading at $.01. That’s called a trading SHELL. The Key words here are “fully reporting”. For my explanation, I will be writing about a Fully Reporting Shell.
Note: If not fully reporting you might as well register with the SEC and start all over.
In this scenario the private company has a book value of HALF A MILLION DOLLARS and reverses into a fully reporting public shell, trading at $.01. What do you think the stock would be trading after the reverse? You do understand public companies don’t usually trade at book value but in multiples of book. Sometimes more than 10 times book.
Here’s why: A private company that has a book value of $500,000.00 and 1 million shares outstanding, the share value is $.50. ($500,000/1,000,00 shares).
Consider the same value and shares of the private company for this example.
In most cases, the public company is only trading the shares it has registered with the SEC. These shares are called “the float” or “trading stock”. If the public company has only 150 thousand (15%) of the 1 million shares outstanding in the float and a book of $500,000.00, the share would likely be trading at $3.33 ($500,000/150,00 shares “float”) or could be 10 times book at $5.00 a share.
That’s just one reason, but there are more. The Public shares are more liquid, your stock is now bankable and can be used for acquisitions, there are more means for raising investment capital, and management can use stock incentive plans in order to attract and retain employees.
SO WHY A REVERSE MERGER
a. And the process can take more than a year.
There are certain requirements that must be met by the private company.
If a reverse merger interests you and you would like to know more, talk to me, I can help.
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