Reverse Mergers

A reverse merger is merging a private company into a public shell. It seems each week I receive a call from someone asking for information about a reverse merger. Though there may be appropriate circumstances to warrant this type of maneuver I have yet to see one that I thought made sense to me. To begin with you have to give up a certain ownership percentage because at least 15% of the company is going to be owned by other people. Once you have completed the maneuver, at best, you are listed as a bulletin board trading stock. Most financial institutions will not grant your stock any value unless it's trading over five dollars a share. The minimum price level to trade on NASDAQ. Also, most brokerage firms won't allow their clients to purchase bulletin board stocks. As a bulletin board company you must comply with disclosure responsibilities required of a public company. This will add accounting personnel and additional overhead of at least six figures. So before you go down this road I strongly recommend you speak to a number of resources to make sure that you understand everything a reverse merger entails. I also warn you that it rarely provides any value to raising money either with investors or banks. You need to understand about the "haircuts" banks will apply to any stock collateral. Again, this is one of many different options that you can consider but I wouldn't make a decision until your (pre) private placement memorandum is completed. See IPO Initial Public Offering.

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