Reverse Mergers – What is a Reverse Merger? - YouTube

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

securities, and business transactions law firm.

Today is the first segment in a multipart securities LawCast series discussing reverse

merger transactions.

What is a Reverse Merger?

A reverse merger is the most common alternative to an initial or direct public offering for

a company to go public.

A reverse merger allows a private company to go public by acquiring a controlling interest

in a public operating or shell company.

The SEC defines a shell company as a publically traded company with no or nominal operations

and, either no or nominal assets or assets consisting solely of cash and cash equivalents.

In a reverse merger process, the private operating company shareholders exchange their shares

of the private company for new shares of the public company so that at the end of the transaction,

the shareholders of the private company own a majority of the public company and the private

company has become a wholly owned subsidiary of the public company.

At the closing, the private company has gone public by acquiring a controlling interest

in a public company.

For tax reasons, a reverse merger is sometimes structured as a reverse triangular merger,

where the public company forms a new subsidiary to complete the transaction with the private

company.

The end result is the same.

The private company shareholders own a majority interest in a public company and the formerly

private company is now public.

The public company must file a Form 8-K with the SEC reporting the reverse merger transaction.

Where the public company was a shell company, that Form 8-K contains Form 10 registration

statement information on the private company and is commonly referred to as a super 8-K.

Like any transaction involving the sale of securities, the issuance of securities to

the private company shareholders must either be registered or exempted from registration.

Generally, the issuance relies on Section 4(a)(2) or and or Rule 506 for such exemption.

Now, moving onto the transaction.

A reverse merger is a merger transaction with the difference being that the target company

ultimately ends up owning a majority of the acquiring company.

Generally, the first step in a reverse merger transaction is to execute a confidentiality

agreement and letter of intent.

The initial confidentiality agreement generally: contractually binds the parties to keep all

information confidential so that due diligence can be exchanged; may contain provisions prohibiting

solicitation of customers, suppliers or otherwise prohibiting the use of proprietary information

learned in the due diligence and negotiation process; and may contain standstill and exclusivity

provisions so that the parties don’t concurrently negotiate with other parties for the same

or similar transaction.

The Letter of Intent, or LOI, is generally non-binding and spells out the broad parameters

of the transaction.

The LOI helps identify and resolve key issues in the negotiation process and, hopefully,

narrows down outstanding issues prior to spending the time and money conducting due diligence

and drafting the transaction contracts and supporting documents.

Along with an LOI, the attorneys prepare a transaction checklist which includes a to

do list along with a who do identification.

Following the LOI, the parties will prepare a definitive agreement.

The next Securities LawCast in this series will pick up discussing the definitive agreements

used in a reverse merger transaction.

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.