A reverse merger shell company is a company that is used to help a small, private entity go public. The shell company’s history and records are all used to bolster the private company’s standing in the marketplace. As one of the fastest ways for the private company to go public, reverse mergers are quickly becoming commonplace.

What is a reverse merger shell?

There are two companies involved in a reverse merger: the shell company and the private company. The shell company is a relatively inactive company with little operational activity occurring. The shell company may not be traded publicly on the exchange. Some shell companies have an impeccable history while others may have a less than perfect history. The shell company’s history and longevity in the public arena is what makes the company an attractive opportunity for the private, acquiring entity. The private company has to align itself with the larger company on paper and in area of products and services prior to the merger completing.

What happens to the shell company once the merger is complete?

The shell company no longer exists once the reverse merger is completed. The new company operates under the private company’s name. The private company actually acquires the public company through purchasing substantial shares, which would be the equivalent of controlling interest. The shell company’s shares are traded with the private company to accomplish this.

What are the main advantages to using a reverse merger?

There are key advantages to using the reverse merger to complete the transaction. The process is extremely quick in comparison to the IPO option. The process can be completed in a matter of weeks in some cases. Once the merger has completed, it becomes easier to raise capital. There is no underwriting required, which does save time. Stock incentives can be issued to employees as a part of the process. The new company will also find it much easier to make future acquisitions with the ability to issue stocks, instead of borrowing working capital from companies like PayPal and Ondeck.

How long does a reverse merger take?

A reverse merger can take up to several months to complete. Simple mergers can take a few weeks to complete. The delays in the process can be tied to regulatory requirements that must be met prior to completing the transaction. Performing due diligence will prevent any hiccups along the way that could potentially prevent the merger from completed. The deal has to be structured properly to facilitate the process of issuing quotes, so that the stock prices cannot be affected by either the public or private entity’s investors. If the shareholders are not on board with the acquisition, the process could be delayed. Flawed recordkeeping and litigation challenges can impede the merger process.

IPO vs. Reverse Merger

IPOs take longer to complete than reverse mergers. IPOs require that time be invested in building the stock’s value for the purpose of attracting investors where reverse mergers don’t require that effort. The banking institution works to identify the correct pricing for the stock and will devote time toward building interest in stock. IPOs are more expensive than the reverse merger. The investment bank’s underwriting services increase the costs of a company going public.

What becomes the new company after the reverse merger is completed?

The new company formed basically becomes the public company. The shell company no longer exists once the merger is completed. The public company becomes what the private entity once was. Operating as the private entity once did, the public company’s practices are now operationally and financially aligned with those of the acquiring entity.

A reverse merger occurs when a private company acquires a shell company solely for the purpose of going public. The company acquired could be a failed startup or an actual company with no operational activity. The company could be actively traded or simply be listed with limited trading activity. The public company becomes the smaller company, and the shell company is no longer active.