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Reverse Mergers

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Reverse Mergers

Taking a Company Public Without an IPO

Bloomberg Press,

15 min read
10 take-aways
Audio & text

What's inside?

Want to take your company public but can't do an IPO? Consider a reverse merger. Here are the pros, cons and how-tos.

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Editorial Rating

8

Qualities

  • Applicable

Recommendation

Only a few years ago, it seemed that nearly every company was going public with an IPO. Now many quality companies are locked out of the IPO market, but companies have other ways to go public. One of the most popular paths is a "reverse merger." In this transaction, your private company merges into a public company (often a "shell") and controls it, giving you a public stock with which to raise capital. This may sound shady, but it’s not: many well-known companies have gone public through reverse mergers, including Warren Buffett’s Berkshire Hathaway, Turner Broadcasting System, Occidental Petroleum and Blockbuster Entertainment. Experienced Wall Street securities attorney David N. Feldman takes you through the reverse merger process in detail. The book is wonderfully clear and thorough, and should become the definitive textbook on reverse mergers. It is, however, a dry read. A profusion of technical rules and especially acronyms (SPAC, SOX, Form 10-B, Rule 419, Regulation A, SB-2, PIPE) make the book slightly MEGO (My Eyes Glaze Over) for the uninitiated - but then, they are not its target audience. getAbstract enthusiastically recommends this book to sophisticated investors, lawyers, accountants, investment bankers and executives who want all the details on this increasingly popular financing technique.

Summary

Going Public

If your company had a publicly traded stock, would you be better off? Maybe. Public companies can raise money more easily than private companies. Having a publicly traded stock gives investors and company founders a way to "exit" the business by selling their stock. Publicly traded stock can be used to fund growth through acquisitions and partnerships. Your company can do deals by exchanging its stock for a share of, or partnership with, another company, allowing you to preserve cash. A publicly traded stock allows you to offer attractive stock options to your employees - options that, when vested, are liquid. You can use options in lieu of compensation, and they directly tie the compensation to performance. Finally, having a publicly traded stock requires numerous public disclosures. Having access to this information boosts investors’ confidence.

So is going public an unalloyed good? No, which is why many companies stay private or go private after being public. Each advantage has a flip side. Take disclosure to the Securities and Exchange Commission (SEC). Good news travels fast, but so does bad news. Disclosing your business’ information to the SEC means...

About the Authors

David N. Feldman is a securities lawyer, and the founder and managing partner of a New York City law firm. Contributor Steven Dresner is the founder of a media company, and the co-author and editor of PIPEs: A Guide to Private Investments in Public Equity.

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