George Carris has raised $500m+ for biotechnology, electric vehicle and medical device companies while holding several executive roles. He has also worked to bring companies back from bankruptcies and oversaw several reverse merger scenarios. Below, George William Carris clears up some of the mystery surrounding reverse mergers and explains why companies sometimes choose to go that route.
Sometimes private companies want to go public without paying the cost of hiring an investment bank to underwrite its stocks and shares. If they’re willing to go through a few extra regulatory measures, they can cut costs by entertaining a reverse merger. This way, they can go public without losing the time and financial investment of a conventional IPO listing.
George Carris explains reverse mergers allow private companies to go public by acquiring the majority of a shell company’s shares and combining them with the private company’s assets. Although this tactic transforms the private company into a publicly traded business, it comes with its own pros and cons.
In this quick overview, George Carris will explore how a reverse merger works and discuss some of its advantages and disadvantages. Let’s look at how it works.
What is a Reverse Merger?
George Carris explains that a reverse merger is a strategy used by private companies to go public without paying an investment bank to underwrite conventional IPO shares. Instead, the company simply buys up the majority of shares from a shell company and combines them with its own assets. As long as the shell company is listed under the SEC’s register, this purchase propels the private entity into the public domain.
How Reverse Mergers Help Companies
This approach is often an attractive option for many smaller private businesses. They come with a few key advantages, including:
- Easier Processing – By going through a reverse merger, private companies can go public without first raising capital. This simplifies the process, cutting out time and financial requirements. A reverse merger can be completed in as little as a few weeks.
- Lower Risk – George Carris explains that conventional IPOs do not always result in the company going public. Businesses may end up spending thousands of dollars and hundreds of hours on a conventional IPO only to have their stock underperform at the market. Reverse mergers are far more likely to succeed, guaranteeing the company goes public.
- More Stability – Compared to conventional IPOs, reverse mergers are not affected by the current market conditions. A private company undergoing a reverse merger doesn’t have to acquire capital, making it far less susceptible to market fluctuations during the processing time.
Reverse mergers can be a good option for smaller companies looking to go public without the burdens and risks of a conventional IPO.
When a Reverse Merger Is Not the Best Choice
Reverse mergers may seem simpler and less risky, but they do come with their own downsides. These often include stricter regulations, including:
- Required Due Diligence – George Carris reports that private companies must closely vet who’s invested in a public shell company. If the company has been used for nefarious purposes, it can ruin the private company’s efforts to go public. They must go through all possible liabilities with a fine-toothed company, requiring more transparency and disclosure with financial institutions.
- Post-Merger Stock Dumps – Even if a private company purchases the majority holdings in a shell company, the other investors are likely to jump ship and sell their stocks. This can greatly reduce the company’s stock price, tanking the initial investment. Private companies should incorporate required holding periods into the merger agreement to prevent stock dumping.
- Less Demand for Stocks – After a merger, investors may no longer want to invest in the company’s stocks. If a private company is too small, going public can ring its death toll, as they may lack the operational or financial scale to run a public company. Therefore, a company must have a sound foundation before undergoing a reverse merger. Otherwise, it will likely go bust.
- The Burden of Regulations – Private managers and corporate officers are often inexperienced in the variety of regulatory requirements set on publicly traded companies according to George Carris. The burden of training staff in regulatory requirements can be costly and time-consuming, cutting into the business operations. Private companies should make a concerted effort to train managers and officers before undergoing reverse mergers to prevent underperformance.
Although reverse mergers can throw some obstacles at unprepared private companies, taking the necessary steps to train staff, build interest in the company, and incorporate protective measures into the merger agreement can prevent failure.
Final Thoughts
George Carris reports that reverse mergers are sometimes seen as a smart tactic for private companies to go public without paying an investment bank to underwrite its stocks and shares. Reverse mergers are often safer and faster than traditional IPO listing. However, private companies must take time to train its staff and prepare for upcoming regulations, stock dumps, and underperformance. Without adequate planning and preparation, reverse mergers can fail.
