Reverse Merger

A Reverse Merger is when a private company “reverse merges” into a public company. Basically, the private company is taking over the public company for the purpose of using its public status which is very valuable to a company trying to raise capital through the capital markets. If the public company was operational and was buying the private company, it would simply be an acquisition being made by the public company. There is actually a very active market for these types of transactions and companies should examine this as an important funding option.

An important component of such a transaction is Reverse Merger Funding. The capital that is provided to the private company soon to go public through this process, is important for a number of reasons. It may be used to pay down debt, purchase additional equipment or even complete an acquisition of another company.

The public company or "Shell" as it is referred to may no longer be viable or operational for a number of reasons, such as: bankruptcy, or the business model failed (but they avoided bankruptcy). This public “Shell” company still has some value however, simply because it is public, has a stock symbol, has a shareholder base and because it can more easily raise capital by issuing stock that is registered or can be registered with the United States Securities and Exchange Commission (SEC).

Reverse Mergers are a fairly acceptable way for entrepreneur's and private companies to access the capital markets. Proper due diligence is required as well as good legal advice. With prober due diligence and representation however, the goal of obtaining a public listing and accessing the capital markets, such as Wall Street, Hedge Funds and private investors can be achieved in a relatively short period of time.

Hedge Funds and other investors actually track which new companies are going public and recieving a new stock symbol. In the microcap arena these investors actually research and call new companies to see if the meet certain funding requirements for an investment. Companies with market capitalization under $300,000,000 are considered "microcap" companies. Market Capitalization is the dollar amount you get when you multiply the number of shares of common stock a company has outstanding by that company's current stock price.