Going public is a long established method to raise capital, but not everyone realizes that going public and issuing an IPO (initial public offering) are not one and the same. While an IPO can only be done by a public company it’s done in conjunction with going public. Subsequently, an increasingly popular option for a private company to go public is by performing a reverse merger.
The reverse merger or reverse takeover (RTO) is a streamlined, fast track alternative to the standard IPO registration method of going public. It occurs when a privately held company takes control of a public shell company, usually for the purpose of going public. The private company merges into the public one and assumes control of this new public entity. At this time the name of the company is often changed to reflect its new identity.
A public shell company is a shell corporation that has minimal or no business activity prior to the merger. They typically have no or few employees and little or no assets, hence the name public shell company. These public shells are frequently created with the express purpose of finding a private company who seeks to go public via a reverse merger. These types of shells are favored as a going public vehicle by investment bankers, attorneys and CPAs due to their ease and speed in going public, often as fast as two weeks. This is in contrast to the standard IPO which often takes upwards of six months’ time to complete.
Today the reverse merger is utilized by everyone from established corporations to startup companies who may or may not have substantial income or assets. In either instance, once a company does go public they can take action in the area of raising capital. Therefore when getting to market is of the essence, as in the case of a new product, invention or simply to gain a step on competitors, a reverse merger is a popular method to highly accelerate the procedure of going public and allow the process of raising capital to begin.
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