Michigan businesses may be interested in an alternative method to take a company public. This method allows the company to save time and money while gaining access to a much greater pool of capital than when the company was privately owned.
When a private company wishes to go public, one option is to go through the expensive and time-consuming process of an initial public offering. However, an alternative to the IPO exists in the business world. This alternative is known as a reverse merger.
A reverse merger is the act of acquiring a dormant public company, often traded on a lesser-known exchange like the OTC Bulletin Board. This sale of a business to the private company allows the newly merged company to become public simply through the transaction. There are securities law issues that must be dealt with in order to keep the reverse merger legal, such as filing an 8K statement with the SEC. This more streamlined procedure allows a private company to reap the benefits of going public, while potentially saving months or years of time over the IPO route.
There are a few downsides to choosing a reverse merger, however. There is a history of potential shareholder fraud in connection with the process. The deal must be structured carefully so that the original owners retain control over the merged company. Also, while the cost is less than that of an IPO, it may still run the private company up to half a million dollars.
A reverse merger is a complex transaction, and each client's situation is very different. Therefore, this article should not be taken as legal advice. An attorney with experience in reverse mergers, dissolution or other complex business transactions may be able to guide a client through this process and help stay in compliance.
Source: Entrepreneur, "A First Take on Reverse Mergers", December 05, 2014