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Reverse mergers explained

On Behalf of | Oct 30, 2020 | Business Law

A reverse merger happens when a private company that is usually smaller takes the steps necessary to acquire a company that has gone public. The use of the word “reverse” to describe these types of transactions refers to the fact that it is not as common to see a private company acquire a publicly traded business. Business people and entrepreneurs in Kentucky should know a few things about reverse mergers before getting involved with one.

What is a reverse merger

Private companies that wish to go public will need to contend with several issues before completing the process. These companies will need to hire an investment bank, complete a mountain of paperwork, and make sure they follow all aspects of business law that governs the process. However, reverse mergers represent a faster way for private companies to achieve their goal of going public.

When a reverse merger takes place, the private company becomes the majority shareholder for the publicly traded company. The resulting reorganization of the larger company often includes new boards of directors, a shift in business operations, and a change in the use and distribution of assets.

Pros and Cons of reverse mergers

Reverse mergers complete the process of going public much faster than would happen with traditional Initial Public Offerings. The reverse merger process also costs the company less in accounting and legal fees.

It is also important to note that reverse mergers do not require the raising of capital that is necessary with an IPO. This fact makes IPOs a better alternative for companies that need to raise cash to fund operations upon going public.

Reverse mergers are a complex business process that includes nuances of business law with which most novices are not familiar. Individuals with questions regarding reverse mergers or other aspects of business law may find it useful to direct these questions to an attorney familiar with the process.