Acquiring a latent public company or we can call it a shell company, through merger, a private company can turn into a public company itself. This process is called reverse merger. While considering a reverse merger as a way to fund your startup, it’s equally important to note that the foundational structure of your business plays an essential role in its success. If your startup is based in the Empire State, understanding how to set up an LLC in New York can provide an excellent foundation before exploring more complex financing options.
It works best when the private company is well established and already make millions of dollars of revenue and profits annually. Moreover, it follows all the basic and commonly accepted accounting rules and principles and can provide the financial reporting requirements of Securities Exchange Commission.
With even a slight upward curve in the economy, swell of private companies, and startups, for an adequate amount of funds lookout constantly for new methods such as crowdfunding and as well as the old one the reverse merger.
In an urban environment, the law firm has securities practice. It most likely has at least one partner who has a silent public company to be sold through a reverse merger. Chances of that potential shell company to be on the list of national security exchange like NASDAQ or New York Stock Exchange is zero, but its trading happens more directly between buyers and sellers without the help of an exchange such as in OTC Bulletin Board.
A law firm, accountant and financing consultant can give guidance throughout the process of reverse merging. Through the monitoring circles that end by filing the SEC Form 8-K to disclose the business to the general crowd.
Choose A Shell Company with Good Rep: As a lot of shell companies have tainted reputation because of many real-time stories of investors’ lawsuits. Choose a company, with the help of a financial and stockbroker organization with higher success rate and works thoroughly and diligently, as they would be able to give thorough background check of the potential dormant public company.
Being a public company comes with a high price: going public needs a lot of sweat and dough to make it big. If the private company doesn’t make millions of dollars of profit annually and won’t follow all the basic and commonly accepted accounting rules and principles and can’t provide the financial reporting requirements of Securities Exchange Commission, it’s not going any far. Public companies endure the burden of at least $1M a year.
A higher rate of risk: as the company grows, so is the risk factor. With amplified exposure and opportunity, the risk to the company and Board of severe civil and criminal penalties if not handle the situations accordingly. These constant restrictions can turn the startup dream into a living nightmare, just to increase the funds.
Reverse merger can’t guarantee to make it on NASDAQ: Most of the public shell companies which are ready to be sold, are not listed on NASDAQ or other national securities exchange as one might assume, but they trade more directly between buyers and sellers as in OTC Bulletin Board. With a lot of time and money, it can make the list of NASDAQ but drives away the benefits it was brought in first place.
Motivating the shareholders: just by buying a public company doesn’t mean it can bring the shareholders along with their funds to your company. A determined and motivated team of workers is going to be a constant to successfully bring the shareholders and public investors. Reverse merging might lack you from investing all the profits into the company as you will have to share it with public investors.
To summarize this, reverse merging or going public should not be considered as only a way to gain capital for the new businesses. It requires thorough consideration and a proper strategy as it may bring more capital, but it might also change the basis and focus of the business. Is going public worth the risk?
