A Reverse IPO is the purchase of a public company by a private company enabling the private company to immediately become a public company. This purchase allows the private company for forgo the expensive and laborious task of going public by traditional methods (IPO).

Private companies primarily undertake a Reverse IPO because there are far more financing options available to public companies than private ones including additional share distribution and bond offerings.

A reverse takeover is simple to understand.

– Shareholders of the private company purchase control of a shell company. (Recall that a shell company does not have any assets or liabilities. The company only remains in organization structure).

– The private company is then merged with the public company and the private company bypasses the review process by state and federal regulators since this process was already completed with the original company.

Other points of interest in this process:

– The private company shareholders receive proportional shares of ownership in the new company.

– The transaction is easy, simple, and takes less than three months to complete.

In order to protect investors, even though the merger makes the private company a public one, the merged companies are required to file audited financial statements and extensive legal disclosures (K8) immediately following the reverse merger.

All public offerings can be divided into two functions.

1. Going public.

2. Raising capital.

In a Reverse IPO the raising capital part of the public offering is either eliminated, or at the very least, delayed. Instead, the entire goal of the Reverse IPO is to take the company public.

Often, private company stockholders require that the shell company stock holders— who will receive new company stock— not sell the new stock for up to a year or more.

Actual Transaction

The transaction is between two companies, even though controlling interest is being held by the private company investors. Therefore both companies are able to negotiate terms of agreement such as stock sharing, exiting of employees, etc.

At Closing

– The private company pays for the shell company by contributing their stock to the shell company

– The private company obtains majority control of stock and the board of directors, and

Benefits

– A Reverse IPO (Reverse Takeover) can be completed in 30 days.

– Costs much less than other forms of “going public.”

– There is less stock dilution than with other public offering methods.

– It is less risky than IPOs, because market conditions do not affect the price of stock –since capital is not being raised through the sale of stock.

Disadvantages

1. The shell company:

– May have kept poor records.

– Shell company stock holders may be along for the ride and want to liquidate their stock as fast as possible.

2. Private company stock is only liquid in a public market, or a private one, if an interest in the stock exists.

3. A reverse IPO takes time to develop and finding the company to purchase can be difficult. The company must be seasoned and meet the necessary requirements by the federal trade commission.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Category: Business
Keywords: Finance,Business Funding,Venture Capital