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Laura Anthony, Attorney
Legal & Compliance, LLC
330 Clematis Street, Ste. 217
West Palm Beach, FL 33401

Toll Free: 1.800.341.2684
Phone: 561.514.0936
Fax: 561.514.0832


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Reverse Merger Process

Reverse Merger ProcessThere are five basic elements to completing the reverse merger process.

Five Elements of the Reverse Merger Process

1. Decide Why the Company is Going Public

It is essential for officers and directors of the Company going public to have realistic expectations of what it means to run a public Company and a clear understanding of their advantages of going public. Short and long-term objectives should be clearly spelled out. If the new public Company is seeking a capital infusion from the public market then their equity strategy must be carefully designed.

There are four basic reasons to go public.

  1. Gain access to capital markets by offering liquidity to investors
  2. To incentivize employees by offering equity interests that can increase in value and offer liquidity, including stock options
  3. To use capital stock as currency in transactions, including mergers and acquisitions
  4. Achieve the perceived stature of being a public entity.

In the event that the company is seeking a capital infusion, officers and directors of the company going public should have a clear plan as to how they will raise capital once the reverse merger is complete and a plan for meeting expenses prior to the funding.

Regardless of the reason for initiating a reverse merger with a public shell, expectations and objectives must be realistic.

2. Identify a Clean Public Shell Company

A clean public shell that is suitable for a reverse merger is one that is current in all SEC reporting requirements, free of debts, liens, encumbrances, obligations, operations, assets, regulatory problems, tax liabilities and shareholder disputes. Once a clean public shell has been located then a deal must be negotiated between the officers of the company going public and the remaining officers or control persons of the public shell. In order to surrender control of the public shell the officers or control persons may require cash, equity (shares of stock in the new public company) or both.

3. The Company Going Public Must Complete PCAOB Audits

The Securities Exchange Act of 1934 Act (“Exchange Act”) specifically requires that any merger or acquisition candidate comply with all applicable reporting requirements, which include providing audited financial statements to be included within the numerous filings relevant to complying with the Exchange Act. Moreover, a Form 8-K containing all the same information on the private company going public as would be included in the Form 10, including audited financial statements, must be filed with the SEC within four (4) days of the closing of the reverse merger transaction.

4. Securities Attorneys are Retained

The involvement and guidance of an experienced securities law firm is necessary at every stage in the reverse merger process. A securities attorney is necessary for undertaking due diligence on the public shell to be acquired, negotiating the terms of the transaction and drafting transaction documents, finalizing the closing, and preparing and filing post-closing Exchange Act reporting requirements.

5. Transaction Documents

The private company then enters into a contractual agreement with the public company and often the control persons of the public shell. Depending on the circumstances, the contractual agreement may be labeled a reverse merger agreement; reorganization agreement; merger agreement; share exchange agreement; or stock purchase agreement. The final contractual agreement is often preceded by a non-binding or partially-binding Letter of Intent (LOI), otherwise known as a Letter of Agreement (LOA).

The contractual agreement clearly sets forth the parameters of the transaction including the preconditions to closing; the due diligence process and timing; the closing methodology; representations and warranties; the consideration to be paid (cash, stock or a combination are most common); and post-closing obligations; changes of control provisions for the officers and directors; termination and break-up fee provisions; and general contractual provisions such as venue, attorneys fees, authorizations and merger clauses.

Merger consideration is generally comprised of a combination of cash and securities. New classes of common or preferred stock are often created to accommodate the merger terms. A properly completed reverse merger can greatly benefit the seller of the shell as well as the buyer (the private company going public) alike.

In addition, FINRA must be noticed regarding the name change of the public company and so that a new trading symbol can be issued.



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