Reverse Mergers – Advantages and Disadvantages - YouTube

I am attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate,

securities, and business transactions law firm.

Today is the continuation in a LawCast series talking about reverse merger transactions,

and in particular, today I will talk about the advantages and disadvantages of a reverse

merger.

First, the advantages of a reverse merger.

The primary advantage of a reverse merger is that it can be completed very quickly.

As long as the private entity going public has its ducks in a row, a reverse merger can

be completed as quickly as the attorneys can complete their due diligence and the paperwork.

Having your ducks in a row includes having all of the information to complete a Super

8-K organized and available, including completed audited financial statements for the prior

two fiscal years and reviewed financial statements for the quarters up to date, or from inception

if the company is less than two years old.

From the public company standpoint, a data room should be set up that includes all necessary

due diligence on the company and its shareholders.

Another benefit is the existence of a shareholder base.

A shareholder base is necessary for any company to have active trading and liquidity in its

stock.

The more shareholders generally the more active the trading in a stock and the less volatile

the stock price will be from ordinary buying and selling pressures.

In addition, a minimum number of shareholders is necessary to qualify to list on an exchange

such as NASDAQ or the NYSE MKT.

Existing shareholders also are often an overlooked, but great source for capital raises via shareholder

rights offerings.

Another benefit is the existence of a trading symbol.

Generally, in an IPO process onto OTC Markets, a trading symbol is not issued until the S-1

process has been completed and closed out and a market maker completes a 15c2-11 application

process with FINRA.

The 211 process can be lengthy.

A trading symbol is a necessary precondition to a secondary trading market and a precondition

for many active capital investors.

Similarly, a trading history can be seen as beneficial.

Although, really, any pre-reverse merger trading history should not be indicative of future

trading activity it does show how active the public vehicle shareholder base is, and experience

shows that it is easier for an active trading market to develop where one has previously

existed.

Finally, since a reverse merger is a going public transaction, the newly public company

will have all the benefits of being public, including the ability to use stock and stock

option plans to attract and keep higher-level executives, the ability to use stock as currency

to make acquisitions and of course to access capital markets and capital investors.

Now, Disadvantages of a Reverse Merger.

The primary disadvantage is the restriction on the use of Rule 144 where the public company

is or ever has been a shell company.

Rule 144 is not available if the public company is a shell until 12 months after the filing

of the Super 8-K and then only if the company is current in its reporting obligations.

Even if the public vehicle is not a shell at the time of the reverse merger, if it ever

was a shell in its history, it carries the stigma forever and Rule 144 will only be available

if the company remains current in its reporting obligations.

Of course, there is also the issue of potential undisclosed liabilities, lawsuits or other

issues with the public shell.

Accordingly, due diligence is a very important aspect of the reverse merger process, even

when dealing with fully reporting companies current that are audited.

The third primary disadvantage is that the reverse merger is not a capital-raising transaction,

whereas an IPO or DPO is.

An entity in need of capital will still be in need of capital following a reverse merger.

Next, a reverse merger disadvantage is the immediate cost.

The private entity generally must pay for the public shell with cash, equity or a combination

of both.

Another disadvantage which was also in the advantage column is the trading history and

can be both an advantage and disadvantage – an inactive or volatile trading history.

An active or volatile trading history or inactive trading history may repeat itself.

Next, is consideration of the seasoning rule.

The National exchanges including NASDAQ in the NYSE MKT prohibit a reverse merger company

from applying to list until the combined entity had traded in the U.S. over-the-counter market

for at least one year following the reverse merger transaction, and has filed at least

one annual report and remained current in its reporting obligations.

Finally, FINRA can be difficult when applying for a new trading symbol following a reverse

merger.

They will look at the transaction in depth.

Also, concurrently with obtaining a new symbol or completing a name change DTC may request

an updated eligibility letter which may not be able to be rendered if the public vehicle

is a shell company and is not Rule 144 eligible.

I am securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer

of LawCast.

Should you have any questions about today’s topic, please visit SecuritiesLawBlog.com

and LawCast.com, or contact me directly.

Inquiries of a technical nature are always encouraged.